On Tuesday 5 March, the European Commission and EU High Representative Josep Borrell presented a European Defence Industrial Strategy (EDIS) and a European Defence Industry Programme (EDIP), aimed at strengthening the industrial pillar of the EU’s defence readiness and creating the conditions for the EU defence industry to be able to respond to demand from Member States (see EUROPE 13360/1).
“This Strategy tries to match supply and demand, through procedures to invest more, better, together and European. We have to overcome fragmentation by cooperation”, summed up Mr Borrell.
The strategy calls for, by 2030, at least 40% of defence equipment to be procured in a collaborative manner, for the value of intra-EU defence trade to represent at least 35% of the value of the EU defence market, and for Member States to procure at least 50% of their defence procurement budget to be spent within the EU (60% by 2035). The objective is an ambitious one, given that since the start of the conflict in Ukraine and up to June 2023, the Member States have spent more than €100 billion on defence procurement, of which almost 80% outside the European Union. According to the High Representative, in 2022, only 18% of purchases were made in a cooperative manner.
In particular, the Commission and the EU High Representative are proposing a joint programming and procurement function, performed through a new European Defence Industrial Readiness Board. It will be composed of Member States, the Commission and the High Representative, and will help draw overall priorities, and inform how Europeans use the different EU instruments. EDIP will enable the direct joint procurement of defence products using the advance purchase agreement model (as in the case of Covid-19 vaccines) or the off-take purchase agreement model (as in the case of gas).
The development of facilities that are in a continuous state of readiness - as was the case for vaccines - and the possible reallocation of civilian production lines, should the need arise, are also proposed.
Speaking to the media, Defence Industry Commissioner Thierry Breton called for a European-style Foreign Military Sales(FMS) mechanism. “To meet the increased and unanticipated needs, 68% of the equipment in Ukraine was purchased from the United States, because they have an FMS mechanism. When the Americans place an order, they have the capacity, at the same time, to order an additional reserve to stockpile, in case there is an additional need for the army or an Ally”, he explained. The Commission is proposing to test such a mechanism through a pilot project, with a view to co-building a fully-fledged mechanism with Member States and industry from 2028.
The Commission will also create a legal framework, the ‘Structure for European Armament Programme’, as a means of supporting defence cooperation throughout the lifecycle of capabilities and enabling Member States to benefit from a VAT exemption.
It also proposes setting up European Defence Projects of Common Interest to help secure access to strategic areas and contested spaces, and supporting the production of results from prototypes developed with the European Defence Fund, with reimbursable grants.
While the EU wants to strengthen its defence industrial base, it is also emphasising cooperation with its partners. Under this programme, Ukraine is considered as a quasi-Member State and will be able to participate in joint procurement contracts and its defence industry will be supported. The EU is to host an EU-Ukraine defence industry forum in 2024. Finally, it wants to strengthen the structured dialogue between NATO and EU staff “on subjects of common interest”.
Initial funding of €1.5 billion
EDIP will mobilise €1.5 billion from the EU budget for 2025-2027. “It’s not a lot”, acknowledged the Commission’s Executive Vice-President, Margrethe Vestager, although she felt that this sum would serve as an incentive for Member States to pool their resources to acquire or develop arms production in Europe.
In particular, the EDIP budget could be used to create a fund to accelerate the transformation of defence supply chains (FAST), targeting in particular SMEs and mid-cap companies through debt and/or equity.
EDIP could potentially draw additional funds from the windfall profits from Russia’s tied-up sovereign assets, in order to strengthen EU defence industrial cooperation with Ukraine and support the development of Ukraine’s defence industrial and technological base. Legislation would be needed to achieve this.
The Commission is also calling for more funding for the defence sector from other players. It calls on the EIB Group to modify its lending policy by the end of 2024 to facilitate access to finance for the defence sector. It also wants to boost access to finance for the defence sector through a high-level dialogue with banks and investors, and to strengthen support for defence readiness, resilience and security through the Cohesion Fund and Invest EU.
See EDIS: https://aeur.eu/f/b54
See EDIP: https://aeur.eu/f/b53
ASD welcomes EDIP and EDIS
Jan Pie, Secretary General of the Association of European Aerospace, Security and Defence Industries (ASD), welcomed the focus on the European defence industry in preparing Europe’s defence and the fact that EDIS and EDIP address many of the concerns expressed. “The success of EDIS and EDIP will now depend very much on Member States’ reaction”, he added in a press release, pointing out that speed and financial resources would be crucial to implementation. (Original version in French by Camille-Cerise Gessant)