EU’s future defence industrial strategy to face difficult debates

The EU’s new defence industrial strategy and subsidy programme are set to face tough negotiations with the bloc’s member states and the European Parliament over the next few months.

After decades of under-investment, following the end of the Cold War, the European Defence Industry Programme (EDIP) and the over-arching European Defence Industrial Strategy (EDIS) presented by the European Commission on Tuesday (5 March) aims to re-industrialise Europe’s military-industrial complex and prepare for any disruption in supply lines.

Key proposals involve tax breaks and subsidies to help match supply and demand across the bloc and change the market’s organisation.

Funds will be spent on motivating joint procurement, building stockpiles, ready-for-use production lines, re-purposing orders for the defence market, mapping bottlenecks, and lists of available arms to purchase, including Ukraine as a full EU member, giving the European Commission purchase rights.

But the strategy proposals are set to face difficult negotiations and serious amending by EU member states and the new European Parliament.

Against the proposal of €1.5 billion earmarked until 2028, Estonia, France, Poland, and the Netherlands, have already expressed interest in raising additional funds. Asking for a larger budget to respond to the re-industrialisation needs of the continent, is an issue the new strategy and regulation aims to resolve.

Additional funding opportunities post-2028 will require time-consuming discussions on new legal bases and financial mechanisms, including accessing the extraordinary revenues from the frozen Russian assets, a role for the European Investment Bank (EIB), bond issuance, etc.

Also the European Parliament, in line with its previous stances on earlier defence policy programmes, is poised to request a higher budget.

In response to the new initiatives, the head of the  European Association for Defence Industry (ASD), Jan Pie said in a statement, “Speed and financial resources will be crucial for their implementation.”

However, the proposals may run into opposition from budget-conscious member states and those with small military industries, reluctant to spend EU funds on companies that will bring neither economic growth nor jobs to their countries.

In addition, the proposed strategy and regulation also go beyond the earlier programmes to subsidise the defence industry and incentivise joint procurement, which were aimed at supporting Ukraine’s urgent war effort.

This time, the goal is to reshape the organisation of the bloc’s defence market for the long term.

European Commission officials, aware of the potential sensitivities of national governments, have already pushed back on accusations of a “power grab”, where the EU executive would be encroaching on member states’ prerogatives.

Responding to the accusations, Internal Market Commissioner Thierry Breton said “This is not true”, adding the proposal is in line with the EU treaties and will not replace the competence of governments.

Among the “evidence” listed by diplomats and industry representatives to call out a “power grab” is the EU’s executive proposal to handle the joint purchases on behalf of the member states in the style of the Covid-19 vaccine procurement.

Plus, according to ECFR Senior Policy Fellow Nick Witney, major players in the industry may enjoy the subsidies. But, “they may be less enthusiastic about such proposals as a centrally-coordinated defence export system on the lines of the US’s Foreign Military Sales; or a ‘defence joint programming and procurement function’ in Brussels”.

This hub may undermine the industries’ and government’s independence in setting prices and closing contracts.

In the same vein, member states are still asking for the EU executive to present an impact assessment, which would explain why the proposed measures would solve the identified issues.

Since the proposal features a series of sensitive issues, and given the classified nature of information relating to the defence industry and national security, it is unclear whether the Commission would have access to a wide enough picture to draft such an assessment.

The proposed programme also includes ideas that were rejected by member states in the framework of the ammunition production boosting scheme (ASAP) last year. At the time, they asked the Commission to present them again at a later stage.

These included the option to re-purpose production lines in case of crises, with fines on the non-compliant industry.

The mapping of supply chains and bottlenecks in the bloc and easing licence grants for intra-EU transfers also faced opposition at the time.

It is for now unclear whether those measures would be considered more relevant in the framework of a larger strategy, than when the member states were negotiating the ASAP umbrella.

Other questions are set to arise around the European buying preference, of which France has been a staunch supporter, calling for the EU countries to step up their strategic autonomy.

But as the European Commission underlines in the strategy, 80% of the purchases over the past two years were made outside the EU, including around 60% to the United States.

Reversing that trend, as proposed in the text, will be difficult. Member states have been used to replenish their stocks and replace old armament by putting American protection — or their national businesses’ competitiveness and survival — before the continent’s independence and cooperation.

In addition, EU countries without an existing defence business such as Malta are likely to oppose the proposal because they would see little benefit from subsidising an industry, in which they don’t compete.

The same base is used by some industry representatives to argue against the case of Ukraine joining the funds and benefiting from the programme without pitching in, or following the same rules as the bloc’s companies do.

[Edited by Alexandra Brzozowski / Rajnish Singh]

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