Commission Adopts European Defence Industrial Strategy Proposing Additional Funding for Defence Responsiveness | K&L Gates LLP
[co-author: Edoardo Crosetto]
Introduction
On 5 March, the European Commission (Commission) adopted the European Defence Industrial Strategy (EDIS) and proposed a regulation establishing the European Defence Industry Programme (EDIP).
The main objective is to shift from the current ad hoc emergency response mechanism to a more proactive, prepared, and competitive European defence framework.
The EDIS includes measures to: (a) enhance EU defence readiness through increased coordination of member states’ demands, (b) strengthen the production and supply chain of defence goods, (c) develop financial means for the defence industry, (d) introduce a defence industrial readiness culture across all EU policies, and (e) foster collaboration with external partners.
The EDIP, framed within a proposal for a regulation (which will be directly applicable in all member states), is a practical tool to increase investments in the defence sector. It builds upon existing defence initiatives to support the competitiveness and responsiveness of the European Defence Technological and Industrial Base, an existing European body set up in 2007 integrating national defence technological and industrial bases to better coordinate political, economic, and industrial national defence policies.
While EDIS provides a comprehensive set of political initiatives to enhance EU defence responsiveness, EDIP includes legal provisions bridging short-term emergency measures into a more structural and longer-term approach, with the objective of fostering defence industrial readiness and investments.
Key Elements of the Defence Framework
Coordinating Measures to Improve EU Defence Readiness
With the EDIP regulation, the Commission aims to establish a Defence Industrial Readiness Board, bringing together member states, the High Representative of the European Union for Foreign Affairs and Security, and Commission representatives. It should notably allow to perform EU defence joint programming and will be charged with identifying potential European defence projects of common interest that would benefit from enhanced resources. Importantly, the Defence Industrial Readiness Board will be accompanied by a European Defence Industry Group, which will meet under specific configurations (e.g., in relation to a specific sector) and will represent a privileged channel to consult industry representatives in the defence area.
To ensure interoperability of armed forces’ material and equipment, the Commission promotes the use of agreed civil or defence standards, such as the North Atlantic Treaty Organization standardization agreements. In parallel, to allow mutual recognition of national certifications during crisis times, the Commission encourages swift cross-certification among member states. A new legal framework, the Structure for European Armament Programme (SEAP), will allow EU member states to benefit from standardized procedures for initiating and managing cooperative defence programs, while benefiting from a value-added tax exemption for equipment procured through this framework. In practical terms, member states willing to cooperate and jointly develop, procure, use, and maintain defence equipment will be able to benefit from SEAP provisions to implement such cooperation.
To facilitate the availability of defence products, the Commission aims to establish a European Military Sales Mechanism. The mechanism ensures member states benefit from defence industrial readiness pools, enabling the quick and efficient delivery of defence equipment. In particular, the Commission proposes to financially support the purchase of additional quantities of defence capabilities in order to create strategic reserves that could quickly be made available to member states. Additionally, an EU-wide security-of-supply regime mandates the Commission to identify and monitor critical supply shortages within specific defence supply chains, to ensure that components and raw materials can be rapidly delivered to member states at all times. The Commission also highlighted a policy proposal to support the production of drones within the European Union and possibly jointly with Ukraine, in line with the European Drone Strategy 2.0.
Initiatives to Foster Investments in the Defence Sector
The EDIS comes with increased funding, allocating €1.5 billion for investment in the European defence industrial sector. In addition, should the Council of the European Union agree to transfer extraordinary cash balances of central securities depositories from Russian-immobilized sovereign assets to the European Union, the Commission could finance the purchase of military equipment for Ukraine through these resources.
The additional funding is enshrined in the EDIP regulation and is accompanied by the creation of the Fund to Accelerate Defence Supply Chain Transformations. This new instrument will help leverage, de-risk, and speed up investments needed to increase the defence manufacturing capacities of small- and medium-sized enterprises by providing blending operations, including debt or equity support. The objective is to ensure flexible, faster, and leaner funding cycles and facilitate better connections with military end-users and investors. The Commission also intends to offer a competitive framework for public-private partnerships to accelerate innovation of defence equipment. To that end, the EU Defence Innovation Scheme will propose, under the current multiannual financial framework, supporting services for single entities, including through matchmaking with investors, partners, and end-users. Additionally, companies wishing to produce and commercialize prototypes will benefit from repayable grants through EDIP, and a defence accelerator is expected to be launched in 2024 in order to channel further investments into this sector.
Both the EDIS and the EDIP include provisions facilitating access to finance for the defence industry. The Commission underlines that, under existing financial legislation, the defence sector can benefit from private investments without violating any EU rule. Furthermore, defence industry’s environmental performance and access to finance should not be limited by its exclusion from the European Union’s environmental taxonomy. The Commission stresses that the defence industry enhances sustainability, as it contributes to resilience, security, and peace, and it should thus benefit from private investments under existing sustainable finance rules.
Together with the European Securities and Markets Authority, the Commission aims to provide guidance on the application of the EU sustainable finance framework in the defence sector. The Commission also invites the European Investment Bank to adapt defence-related exclusions within its lending policies, allowing the defence sector to fully benefit from existing EU financial instruments.
Importantly, the defence industry will benefit from EU funding programs designed for technological and industrial development: Producers of defence goods could thus benefit from EU financial support through the cohesion policy funds, the European Regional Development Fund, or InvestEU. The Commission aims at making defence readiness, security, and resilience an explicit strategic objective under future EU funding programs and to include defence industrial readiness considerations in its political initiatives.
Next Steps
To bring these objectives to fruition, the EDIP regulation must undergo the ordinary legislative procedures, requiring agreement from both the European Parliament and the Council of the European Union. However, finalization is expected after the upcoming European Parliament in the new EU institutions’ cycle.
Interested parties and other stakeholders that wish to benefit from the proposed initiatives should closely monitor developments in this area. The Commission will adopt further initiatives to implement the EDIS and will outline additional funding opportunities for companies active in the defence industry.
