As the situation in Ukraine deteriorates and U.S. elections draw near, Europe faces mounting pressure to improve its military posture. This week, European Commission (EC) President Ursula von der Leyen unveiled the EU’s first-ever defense industrial strategy. This is the EU’s attempt to move on from its initial emergency responses to Russia’s invasion and to improve European defense industrial readiness for the long term. Emerging as a capable crisis manager from the coronavirus pandemic, the EC has rarely been more powerful, and as member states are realizing the depths of their defense industrial vulnerabilities, the timing for this ambitious EU advance into defense industrial policy has never been better. Yet success is far from guaranteed: even if countries can agree to the shape of the EC’s proposed industrial policy, without secure long-term funding, the strategy is fated to fail.
Why a Defense Industrial Strategy?
EU defense spending reached a record 270 billion euros ($295 billion) in 2023, yet significant capability gaps remain—Europe lacks ammunition supplies and intelligence, surveillance and reconnaissance capabilities, for instance. Defense economists and planners have long advocated for European governments and defense companies to cooperate more. In theory, cooperation offers economic benefits such as reduced equipment duplication, increased production, and lower costs. In practice, national interests and protectionism, coupled with operational and bureaucratic inefficiencies, have historically impeded effective collaboration. Between 2021 and 2022, only 18 percent of the total equipment investment in Europe was collaborative.
The EU’s treaties prevent the use of its funds for military expenditure. Europe’s defense industries, however, fall under the EC’s domain. The EC has tried in the past to regulate the defense equipment market and mitigate national inefficiencies. Its efforts were largely unsuccessful. Concerns over duplicating NATO and reluctance from member states to delegate decisionmaking sovereignty over defense matters meant that the EC was never permitted to exercise any meaningful authority over defense industrial policy.
But when Russia invaded Ukraine, and Europeans, keen to send military aid, were faced with depleted ammunition and equipment stocks and long production lead times, the EC saw an opportunity to intervene. In its early response to the war, the EU’s initiatives focused on facilitating common procurement and refilling European stocks. Two stand out: the European Defence Industry Reinforcement Through Common Procurement Act (EDIRPA), which seeks to help fill capability gaps by using EU financial incentives (300 million euros over two years) to offset the risks associated with joint procurement. And against the backdrop of Ukraine’s most urgent needs, the Act in Support of Ammunition Production uses EU funding (500 million euros over two years) to increase ammunition production.
These measures, limited in their impact by their budget and time horizon, served as test balloons for the EC’s plans to expand its reach into defense industrial policy. Now the EU wants to build on this breakthrough. NATO remains the foundation of European collective defense, and operational decisions remain the purview of governments. But as a regulatory market power with its own budget, the EU can contribute to European defense readiness.
What Is in the Strategy?
The strategy aims to increase European defense industrial readiness through collaborative EU-based investment, research, development, production, procurement, and ownership. In short, the EC wants member states to buy weapons together, and to buy them in Europe.
More than three-quarters of the defense acquisitions by EU member states between the start of Russia’s invasion and June 2023 were made from outside the EU, with the United States alone representing 63 percent. But buying from third countries involves minimal European technology and intellectual property content and poses a risk to local skills and knowledge. It can also be harder to justify before European taxpayers who are asked to accept higher defense spending. The strategy envisions that by 2030, at least 50 percent of member states’ procurement budget (60 percent by 2035) should go to EU-based suppliers and that at least 40 percent of defense equipment should be procured in a collaborative manner.
Concretely, the EC wants member states to identify European defense projects of common interest and work to produce them in Europe. It envisions that these projects could fill capability gaps in integrated European air and missile defense, space domain awareness, cyber defense, or maritime and underwater protection. To that end, the EC proposes a bold new European military sales mechanism, inspired by the U.S. foreign military sales model, where Washington signs contracts directly with other governments. The EC wants to financially support the buildup of reserves of critical defense equipment, maintain a centralized overview “catalog” of EU-made defense equipment (fed voluntarily by industry) and change its procurement regulations to make it much easier for countries to join existing procurement contracts. It also wants to continue financing research and development ongoing under the European Defence Fund—a creation of von der Leyen’s predecessor Jean-Claude Juncker—looking especially to fund commercialization for prototypes coming out of the fund.
All these measures are aimed at incentivizing European governments to collaborate—and prevent them from looking outside the EU when they buy arms. Today, European governments purchase ready-made equipment from the United States because this is considered faster and more predictable than relying on European defense cooperation and a good way to secure U.S. interest in European security.
The EC cannot do much about the fact that European countries still look to the United States for protection. Although the new strategy does point out the fragility of this arrangement, that same tenuousness might be even more reason for some governments to try to curry favor in Washington. The EC can, however, work to increase European defense supply chains’ reliability. Now that war has returned to the continent, defense planners want to make sure their own militaries have access to all necessary defense equipment in times of crisis. The EC is keen to establish European security of supply, irrespective of the member state in which suppliers are located. It wants intra-EU defense trade to represent at least one-third of the value of the EU defense market.
To that end, the EC wants to map the key suppliers and supply chains of defense production in the EU—fairly controversial already, as this requires access to sensitive information from member states and defense firms. To prevent supply shortages, the EC also proposes using EU funds to stockpile critical products, such as electronic components and raw materials used in defense systems. The strategy even introduces the possibility of priority-rated orders, which would allow member states and the EC to redirect production to prioritize military deliveries over civilian ones in times of crisis. And, to ensure that EU-based defense firms are in future able to increase production capacity more rapidly, the EC also suggests investing in “ever-warm” factories (kept running even while demand is low) and in the possibility of repurposing civilian production lines, with the EU providing funding for personnel, tools, and training.
Will the Strategy Succeed?
The EC’s first interventions in defense industrial policy in the 2000s were purely regulatory and largely ignored by member states. When it moved on to providing financial subsidies and incentives instead, it found a more receptive audience in capitals. Now, it wants to do both. But these are contentious proposals. Countries and EU officials are at loggerheads over how much power the EU should have over defense industrial policy in the first place. They also disagree over the shape and objectives of industrial strategy, and over the financing of the EU’s ambitions.
With the strategy, the EC intends to cement its role in defense industrial policy. This is in line with the recent proposal by von der Leyen at the Munich Security Conference to name the EU’s first-ever defense commissioner. A strong candidate in that post could further strengthen the importance of the defense dossier, currently housed under Internal Market Commissioner Thierry Breton, and signal that the EC’s reach into defense industrial policy is here to stay. Under von der Leyen’s leadership during the coronavirus pandemic, the EC has grown strong. But defense policy is even more sensitive to national policy planners than health policy, and in the wake of the strategy’s publication, some member states have accused the EC of overreach, claiming that the EU is trying to use the Ukraine war for a power grab.
It doesn’t help that countries are divided over the proposals’ protectionist tilt. The strategy clearly calls on countries to prioritize EU-based defense firms over non-EU suppliers. With the notable exception of EU accession candidate Ukraine, which features prominently in almost all proposed measures of the strategy, the EC’s proposals do not try to bring in third countries—not even the UK, until recently an EU member state and a strong defense industrial player in Europe. Not all countries share the view that this is necessary to preserve the EU’s defense industrial base. Tensions over just this issue have recently been stalling a much needed top-up of the European Peace Facility, which reimburses member states for their military aid to Ukraine. And the same conflict also bogged down the European Defence Fund and EDIRPA, when member states could not agree to what extent these programs should be open to outside suppliers.
Most importantly, the strategy can only succeed if it is well funded. The EC this week proposed to initially fund some of the strategy’s initiatives through the European Defence Industry Programme with a budget of 1.5 billion euros, redeployed from a recent increase of the European Defence Fund. The program is subject to negotiations between EU member states and the European Parliament and would likely not come into effect before 2025. EU officials know that this is not nearly enough money to fulfill the strategy’s ambitions, and hope for a significant increase in EU defense spending in the next seven-year budget, starting in 2028.
EU budgetary negotiations are notoriously difficult, with each member state government vying for its own strategic priorities and parochial interests. It will be hard, for instance, to persuade those member states paralyzed by farmers’ protests to cut EU agricultural spending in favor of defense, or those member states without big defense firms that they will benefit from the EU’s initiatives. But long-term EU funding for defense is the only way forward. No ad hoc solutions can provide the predictability required by European industry—and by Ukraine. The fate of the European Peace Facility is a prime example: funded through direct government contributions outside the EU budget, it was an attempt to funnel money into Ukraine military aid more quickly. But thismechanism relies on member states’ willingness to keep topping off the facility’s fund, and it can be blocked by individual member states, which happens often.
So where will the money come from? Von der Leyen recently floated the idea that European countries could use windfall profits from frozen Russian state assets to jointly purchase military equipment for Ukraine. The defense industrial strategy also asks the European Investment Bank to review its current policy, which does not allow it to invest in ammunition or weapons. But the most potentially lucrative idea is to use joint debt to finance the EU’s defense ambitions. This would follow the model of the 750 billion–euro coronavirus recovery fund financed through common debt issuance. The EC argues that the Ukraine war warrants a similar crisis response, with Breton proposing 100 billion euros in fresh debt. Some leaders, including Estonian Prime Minister Kaja Kallas and French President Emmanuel Macron, agree. More fiscally conservative governments, such as those in Germany and the Netherlands, are more skeptical, arguing that financing defense expenditure is a response to structural challenges, rather than a crisis response, and does not warrant common debt.
The EU’s new defense industrial strategy outlines an ambitious path toward greater integration and cooperation in defense procurement and industrial policy, with the goal of transforming Europe’s defense crisis into an opportunity for strengthening collective security and resilience. Its success will hinge on overcoming long-standing issues of national sovereignty, funding, and the balancing of strategic priorities. But in the face of war, member state positions have in recent months become less entrenched. For the first time in decades, there might just be political space in Europe for an ambitious rethink of defense industrial policy. It has a chance of success only if it is funded.
