Bastian Giegerich & Ester Sabatino
When Russia attacked Ukraine in February 2022, defense budgets started rising across EU member states.
Some of these new defense Euros will be eaten up by spiraling inflation rates—high in the general economy, even higher in the defense sector.
Others will be spent inefficiently on longstanding national priorities without much consideration for possible collaboration with other Europeans or shifting requirements in light of the return of conventional war to Europe.
While EU member states donated military assistance and equipment to Kyiv, Russia’s invasion provided yet another pressure point for more and better coordinated defense investment. It is not a given that this will happen.
As highlighted in the defense investment gap an-alysis published in May 20-22 by the European Com-mission in coordination with the European Defense Agency, stockpiles, hardly adequate before the war, need to be replenished urgently. For some EU member states this is an opportunity to flush out Soviet-era equipment from their inventories.
As part of the modernization push, volumes—the sheer size of inventories—and technological advancement will be on the minds of decisionmakers. Gener-ating a European defense industrial capacity to deliver at acceptable speed and in required volumes necessitates a structured dialogue among member states. That includes European defense industries and EU agencies.
There is no shortage of EU plans and instruments, such as the Capability Dev-elopment Plan (CDP), Per-manent Structured Cooper-ation (PESCO), and the Eu-ropean Defense Fund (EDF).
Yet, defense acquisitions still mainly occur at the national level and in 2020, joint procurement represented only 11 percent of the total armament acquisition of EU member states.
Why such a low percentage? For several reasons. There are differences in EU member states’ strategic cultures. There is the desire to protect national defense industries and champions. There is the temptation to spend money on off-the-shelf products that are at the cutting-edge of technology. And there is the imp-ulse to cement defense partnerships beyond the EU. These factors contribute to the current situation.
The upshot is that progress and more cooperation in this field will require significant investment and incentives that stretch across financial, industrial, and political arenas.
To reduce barriers to co-operation, in July the Co-mmission announced the European Defence Industry Reinforcement through co-mmon Procurement Act (E-DIPRA). The aim is to provide incentives for joint pr-ocurement through cost sa-ving and financial support.
The €500 million ($500 million) fund for 2022–24 may be used for technical and administrative costs and should include an “appropriate amount to create the incentive effect necessary to induce cooperation” among at least three member states.
The mechanism, accessible also to Norway, follows the regulatory logics of the EDF and PESCO. It will take into account the Defence Joint Procurement Task Force’s work—the latter being a recent initiative to help speed up the replenishment effort resulting from armament transfers to Ukraine.
By the end of 2022, the Commission will also present the EU Defence Investment Programme (EDIP) regulation that should further reduce barriers to joint procurement through a VAT exemption. The exemption should be granted only to those procurement programs presented by a European Defence Capability Consortium of at least three member states to procure capabilities developed collaboratively within the EU.
Through these initiatives, the European Commission is expanding its responsibilities in relation to defense industrial policy in Europe. Joint procurements are meant to lead to a higher volume of orders for the selected industry, or consortium of industries, thus potentially reducing the unit costs companies have and customers pay. If there is more than one European producer, selecting who to effectively subsidize with EU money might be tricky.
Although the inclination of EU industrial policy has been to go with the most competitive option, this solution does not necessarily lead to a consolidation of the market unless governments reduce their preference for products that also sustain the national industrial base.
Particularly in areas a government considers to be of key strategic importance, this will be difficult to do, and some observers have suggested a permanent agency for joint procurement may be necessary to effectively deal with different national priorities.
The opportunity for better EU-NATO alignment presented by the upcoming CDP revision in 2023 and the start of a new NATO Defence Planning Process (NDPP) could help as well.
Beyond planning, the EU Defence Innovation Scheme and the Hub for European Defence Innovation are suitable mechanisms for improving research and development, technology, and skills in defense.
The plethora of new initiatives has the potential to change the current European defense industrial landscape. But they are unlikely to succeed unless member states commit to being guided by shared considerations regarding defense industrial strategy. A long string of exceptions and case-by-case decisions is likely to undermine their intended effects.
Governments and companies would have to consider the trade-offs of technology and product specialization to generate savings. Such savings would need to be reinvested in technology and skills, to further improve competitiveness.
This theoretical promise of European defense cooperation is not new. What is new are some of the EU-level incentives and the size of the challenge. Will that be enough?
