EU-led defence integration: An EU-NATO coordinated European defence industrial base
By Samuel Dempsey
“When I see some countries increasing their defense spending to massively buy non-European products, I simply tell them: You’re laying the ground for tomorrow’s problems.”
– French President Emmanuel Macron[i]
As the Russian invasion of Ukraine continues, there is a greater push for advancing Europe’s defence capabilities; yet, private industry says they are unable to do so without long-term binding deals from governments. Despite the creation of the European Defence Fund (EDF) and the European Peace Facility (EPF) as joint financing efforts for defence, national and foreign industry still dominate the European market. While the war has galvanised a defence conversation, many of the problems in European defence have only been further solidified, with a fragmented and underinvested European defence industrial base. At the Vilnius Summit, NATO underlined defence investment as a national responsibility and agreed to boost force readiness to 300,000 personnel. However, it did not specify a plan to achieve the infrastructure for such a goal.[ii]
With defence spending going up but cooperative investment decreasing, the EU must address the lack of EU-level incentives for industry, address the many visions for an EU defence vision, and reframe the transatlantic status quo that has left the EU vulnerable and dependent allies.[iii]
To start, the EU must recognize defence technology as a “force enabler” in developing a resilient defence infrastructure and capabilities.[iv] The High Representative of the Union for Foreign Affairs and Security Policy and Vice-President of the European Commission, Josep Borrell, has said the EU needs to “learn the language of power” in regard to defence and innovation. This should begin with developing a shared defence industrial base that can compete in global markets and that sits at the core of a common European defence policy. Belgian Prime Minister Leo Tindemans first introduced this idea in 1976 to the European Council, where he described defence as a “two-way street” in transatlantic defence relations.[v] While the EU has been discussing the creation of "substance" in defence capabilities since the St. Malo Declaration in 1998, a Delors Institute paper calls the state of European defence today a “chasmic gap between ambition and implementation.”
Right now there is a change in the “common defence consciousness,” but the EU has still, as the Centre for European Policy Studies (CEPS) articulates, fallen victim to replenishing supply gaps rather than innovating future technology which, in the end, will still lead to future EU dependence on third countries.[vi] To meet the demands of the times and ensure a united European and transatlantic political vision for defence, the EU must establish a framework for future investment endeavours based on a large-scale borrowing package that establishes a firm connection with NATO to produce and procure critical defence capabilities in Europe that enable independent resilience.
The European Defence Industry
The EU Strategic Compass, published in March 2022, was the first time the EU produced a bloc-wide security strategy.[vii] Neither the Common Security and Defence Policy (CSDP) nor the Common and Foreign and Security Policy (CFSP) define a common defence strategy but instead provide a “diplomatic umbrella” for initiatives pertaining to “European values” and a means for managing crises and providing foreign aid.[viii] Whilst the EU has long left European security to NATO, the European defence industry, at a continent-wide level, primarily stems from either EU-led initiatives or NATO-led initiatives.
EU-Led
The various EU mechanisms for defence procurement are as follows: the EU Defence Innovation Scheme (EUDIS) and the Hub for EU Defence Innovation (HEDI), the two main innovative institutions; the European Defence Fund (EDF), which has a budget of €7.95 billion for the period 2021–2027 and was established by the European Commission to finance defence cooperation and research and development (R&D).[ix] The European Defence Agency (EDA), founded in 2004, is the EU arm that is designed to develop wider interoperability. The European Defence Technological and Industrial Base (EDTIB), founded in 2007, was the first attempt at an EU-wide defence industrial base, yet unfortunately, positive results are limited to France, Italy, Spain, Germany, and Sweden,[x] as these countries dominate the private defence market. The Act in Support of Ammunition Production (ASAP) and the European Defence Industry Reinforcement through Common Procurement Act (EDIRPA) have a combined budget of €700 million for common ammunition and technology acquisitions.[xi] The 2021 EU Action Plan on Synergies Between Civil, Defence and Space Industries established by the European Commission, created the current wider plan for defence cooperation between states, but mostly between the public and private sectors.[xii]
EU focus on joint defence investments as a product of the EDF has increased over the past few years, especially following Russia’s full-scale invasion of Ukraine; yet, clear deliverables have not yet come to fruition.[xiii] The European Peace Facility, founded in July 2021, is an off-budget mechanism for the EU to produce defence materials within industry. It has been used to supply Ukraine with arms post invasion.[xiv] The EU has also established the European Chips Act and the Critical Raw Materials Act to overcome supply deficiencies in the European defence market.[xv] One of the only means for wider EU military integration and interoperability is the Permanent European Structured Cooperation (PESCO), which includes all EU states except for Malta. PESCO regularly increases defence budgets and commitments to innovation projects. As a result, 68 multinational projects in the strategic areas of space, cyber, land, air, and sea have been developed.[xvi]
NATO-Led
NATO primarily uses three mechanisms: (1) the Science and Technology Organisation (STO), the research and technology arm of NATO; (2) the NATO Innovation Fund (NIF), the €1 billion venture capital fund to finance NATO projects; and (3) the NATO Defence Innovation Accelerator for the North Atlantic (DIANA), the structural framework for NATO’s defence innovation projects.[xvii] However, the NATO mechanism that still produces the greatest incentive for advancing the European defence industry is the required 2% of GDP spending for defence established at the Wales Summit in 2014. Including Sweden, 23 of the 27 EU countries are guided by these NATO standards.[xviii]
Policy Impact on the Private Sector
Despite the NIF and EDF working in parallel to each other to incentivize greater cooperation, national industries still largely surpass the Europe-wide sector. EU member states spend a combined €200 billion on defence per year.[xix] In comparison to competitors, this is four times greater than Russia and roughly the same as China. Yet, in the past decade, Russia has increased defence spending by 300%, China by 600%, and Europe by only 20%.[xx] Europe’s defence readiness is not a funding issue but a cohesion issue. Industry is full of redundancies and discombobulated initiatives.[xxi]
The EU has a few large multinational defence companies and over 2,000 small and medium-sized defence enterprises, which the EDA estimates generated €84 billion in 2021 and indirectly employed 315,000 people.[xxii] Of the top 100 global defence companies, 17 are in the EU, 46 are in the United States, and seven are in China. In 2021, U.S. companies created more than double the revenue of EU-based companies, at €193 billion.[xxiii]
As efforts are present but uncoordinated, the Commission hopes a future European Defence Investment Programme (EDIP) can serve as an “anchor for future joint development and procurement projects of high common interest.” As Daniel Fiott discusses, this would probably be in addition to current efforts and the recent Defence Joint Procurement Task Force (DJBT) to attempt to revitalise the EU defence market.[xxiv]
The Challenges
As evident in the overview, the European defence market faces a variety of challenges. All of which can be placed in one of the categories of either fragmentation, coordination, politics, and/or underinvestment.
Fragmentation
Systemic fragmentation in the European market has led to an underdeveloped supply chain and, worst of all, European defence companies perceiving each other as “rivals rather than collaborators.” As a result, EU member states quarrel over market opportunities.[xxv]
In many instances, defence products are entirely not available in Europe, leading to 60% of the EU defence procurement spending happening in third countries.[xxvi] These off-the-shelf solutions have, in large part, left the EU dependent on the United States. Yet, many systems operate beyond just U.S. equipment. The EU operates five times more armament systems than the U.S., including in key technologies such as fighter jets, battle tanks, ammunition, and submarines.[xxvii] As Politico observes, currently, Poland has US $10 billion in U.S. contracts to buy Abrams tanks and F-35 fighters, alongside a US $10 billion contract for South Korean military equipment, while Denmark and the Netherlands are purchasing Israeli weaponry.[xxviii] The examples could go on, but it is all to say that European defence has, as of now, prioritised national contracts dependent upon third-country providers over the development of a sustainable European market. As a result, many EU states do not follow through on their PESCO commitments, with the Council calling it a “culture of non-compliance.”[xxix]
Coordination
Despite the current incentive of the €500 million EDIRPA for common procurement until 2025, even within Europe, this is a weak mechanism for creating coordinated spending and procurement efforts. It only acts as a “short-term solution to stock depletion” or a “band-aid.”[xxx] The German government alone, for example, has ignited a stronger push for the defence industry at the national level with the “Special Fund” of €100 billion for military procurement.[xxxi] However, unsurprisingly, a year later, progress is slim for the project. Rather than kicking off a greater German defence industrial base, Germany is barely restocking supplies sent to Ukraine, and its defence budget shrank by €300 million in 2023.
All of this highlights the inability of current mechanisms at the national or EU level to revamp the defence industry. Bureaucracy is too immense, and the private sector does not have the ability to rely on government institutions for sustained, prolonged efforts.[xxxii]
Industry lacks mass-coordinated spending efforts or the ability to streamline which technologies to develop. The EDA in 2021 marked only 18% of total defence procurement as joint efforts, well below the 35% target.[xxxiii] While NATO does coordinate force mobility, it does not integrate planning or procurement. The EU, on the other hand, can, but it has thus far fallen way short. Europe operates with “29 different destroyers, 17 tanks or personnel carriers, and 20 fighter planes—compared with four, one, and six, respectively, for the United States.”[xxxiv] The Commission found that if the mark of spending 2% of GDP on defence was met by all members from 2006 to 2020, it would have generated an additional €1.1 trillion. The European Parliament Research Services pointed to the lack of coordination and spending as the Achilles heel in backing the Strategic Compass, or CSDP.[xxxv] One expert explained that “the European industry cannot ramp up production without a long-term prospect of sustained demand.”[xxxvi]
This situation is made possible through Article 346 of the Treaty on the Functioning of the European Union (TFEU), which allows member states to prioritise national security risks over joint efforts like respecting the Common European Procurement Law, a policy reality that has allowed European countries to move €26 billion and €130 billion in defence spending overseas that would have otherwise gone to the European market.[xxxvii] As Daniel Fiott points out, many analysts believe that to reverse this coordination issue, between €150 billion and €400 billion would be needed in the new EDIP joint effort to link capability requirements with industry capacity.[xxxviii]
Politics
Politics is a key issue in the EU’s joint procurement efforts. However, politics are taking effect both within the EU and at an external level, predominantly with the United States.
At the European level, in the context of war on the continent, there is a greater push for joint efforts, yet there is diversity within the EU regarding its visions for this plan. This takes the form of member states acting on protectionist instincts to ‘support local industry’; however, this is obviously not working, as seen in the case of Germany.[xxxix] There are also EU-level concerns, as many states fear the EDIP could give more weight to the Commission’s influence in defence than national influence coming from the European Council.[xl]
Outside of the continental struggle, the big political hurdle is the transatlantic one. The premise of a mechanism like the EDIP could damage transatlantic relations.[xli] Post-WWII, the U.S. prioritised access to European defence funds not only to support American business but also out of fear of undermining the value of NATO.[xlii] As such, the U.S. has historically pushed for greater defence spending rather than a greater defence infrastructure. When the EU announced the EDF, Trump’s Secretary of Defense Jim Mattis pushed back and lobbied for U.S. companies’ access to EU funds.
While we are dealing with a new, more transatlantic-oriented Biden administration, the sentiment still stands and has made many EU members “skittish” about joint efforts to not scare off Europe’s only security guarantor.[xliii] Following the Russian invasion of Ukraine, the U.S. role is more solidified. EU-made arms account for only 22% of acquisitions.[xliv] The status quo is so rooted that despite EDF and PESCO regulations on third-country projects, which allow for limited instances of wider cooperation, clearly the exception has superseded the rule. Some at RUSI argue there should be a clear line in the Commission’s ASAP to allow these projects to only exist within the European Economic Areas (EEA).[xlv]
With greater pressures in Europe and the risk of future conflict elsewhere, such as in the Indo-Pacific, the U.S. and the EU must reshape the status quo. This could begin with the U.S. encouraging a more ingrained European defence industrial base to allow for greater resilience across geographically spread protentional threats.[xlvi] A clear way to do this would be for U.S. embassies to lobby for deeper joint efforts in Europe.[xlvii]
Underinvestment
After the Cold War, much of Europe aimed to move past realpolitiks, reducing defence spending and prioritising an open economy. Combined with the 2008 financial crisis and the massive growth of foreign defence infrastructure, Europe has struggled to keep pace with the rising cost of defence technologies.[xlviii] European defence underspending is so severe that companies spend less on R&D than either software or tech.[xlix] Germany’s ammunition supply could only last for a few hours or days in combat.[l] Now supplying Ukraine, Europe is depleted. Of the “300” German Leopard 2 tanks, 130 are operational, with 18 in Ukraine. One-third of French howitzers are in Ukraine, which will take 18 months to replace, and Denmark has sent almost all its artillery to Ukraine.[li] Underinvestment combined with conflict has left Europe scarcely supplied and vulnerable.
EU-NATO Cooperation
As Daniel Fiott describes, there is a “short-term paradox” that more spending equals less cooperation. Given the political factors and multifaceted integration needs, one study suggests that “much closer defense planning and industrial cooperation between NATO and the EU [is required] to ensure that investments are tailored around concrete operational needs and are being sufficiently and appropriately channeled toward critical defense capabilities.”[lii] As there are already efforts between the EU and NATO stemming from the early 2000s as well as the 2023 declaration, which advocates for more cooperation in “defence industry and research,” a project like the EDIP is not only necessary to corral Europe’s defence industry, but it must be done in a way that establishes specific offices that connect EUDIS, HEDI, and DIANA to ensure bloc-wide and transatlantic coordinated efforts that address the current supply chain limitations and include all key political players.[liii]
Current Efforts
Current efforts incentivizing EU industry are, of course, the EDIRPA and the EDF, both of which lack the funding punch required. This is in part because these plans were created prior to the invasion of Ukraine. As advocated for by the Centre for Strategic and International Studies (CSIS),[liv] given the state of play in Europe, the EU Commission could develop a massive funding campaign through borrowing, like the response to the COVID-19 pandemic. The EU borrowed €750 billion to offset the economic dip from the global pandemic.[lv]
Such efforts could be possible given the greater political momentum in Europe for joint efforts. Estonian Prime Minister Kaja Kallas called for a joint procurement of roughly €4 billion of 155-millimetre artillery rounds through the EPF, which was supported by Commission President Ursula von der Leyen, who referenced the urgent need presented as similar to the requirements of the COVID-19 pandemic.[lvi] CEO Ralf Ketzel of the German manufacturer KMW said he and industry have the capacity for further production of defence materials but are waiting for the signal to ramp up manufacturing.[lvii]
In line with the needed course of action but still falling short, the Commission has suggested increasing financing to consider lending, strengthening funding for the EDF by €1.5 billion, and creating a defence innovation plan to include more innovators from industry.[lviii] One key suggestion that the CEPS has put forward is to raise the bar of entry to the EDF to allow for wider cooperation and inclusion.[lix]
Conclusion
Amidst Russia's invasion of Ukraine, Europe's defence industry faces production challenges due to slow contract materialisation, a weakened industrial base from decades of underinvestment, and displacement by established non-European players. In the context of shifting attitudes surrounding European strategic autonomy, the European defence industrial base must be re-evaluated, to determine what is required to ensure independent resilience. European defence still relies on the U.S. market due to the EU’s fragmented procurement efforts. European private industry grapples with low defence spending and the need for a common market. In conjunction with U.S. opposition to European defence integration initiatives, which prioritise access to Europe's defence funds over coordinated procurement efforts, Europe's sustained resilience is weakened.
Without comprehensive, unified government procurement initiatives that ensure substantial, long-term industrial investment, private industry faces limitations in increasing production. If the EU begins a mass borrowing campaign, it has the opportunity to integrate and coordinate European defence spending within the NATO alliance. The United States should lobby for such structural reform that enable higher funding. EU-led defence integration initiatives such as the EDIP can work within NATO if they generate enough funds to incentivise a market shift. Such a shift is vital for producing and procuring critical defence capabilities in Europe.
About the Author
Samuel Dempsey is a Project Assistant at the Trans European Policy Studies Association (TEPSA) and the Director of Policy at European Horizons. He focuses his research on the transatlantic relationship, the challenges it must confront in the context of rising multipolarity, and the outlook for modern reforms to interregional cooperation amidst a changing digital and technological environment. He is currently an incoming U.S. 2023 Presidential Management Fellow at the Department of State, the premier citizen scholar leadership programme of the U.S. government. He has experience across the U.S. government (Department of State, Congress, and International Trade Administration) and in the European private sector. Dempsey holds an M.A. in geopolitics and strategic studies and a B.A. in journalism and communications, which he obtained respectively in Spain and the Czech Republic. Alongside his native English, Dempsey is proficient in Spanish and has elementary knowledge of Czech and French.
Notes
[i] Laura Kayali, Lili Bayer, and Joshua Posaner, “Europe’s Military Buildup: More Talk than Action,” POLITICO, June 15, 2023, https://www.politico.eu/article/europe-military-industry-defense-buildup-war/.
[ii] Daniet Fiott, “Purchasing Power: Towards Joint Procurement and Planning in European,” Purchasing Power: Towards Joint Procurement and Planning in European Defence? September 22, 2023, https://csds.vub.be/purchasing-power-towards-joint-procurement-and-planning-in-european-defence; Max Bergmann and Sophia Besch, “Why European Defense Still Depends on America,” Foreign Affairs, June 26, 2023, https://www.foreignaffairs.com/ukraine/why-european-defense-still-depends-america.
[iii] Paula Alvarez-Couciero, “Europe at a Strategic Disadvantage: A Fragmented Defense Industry,” War on the Rocks, April 24, 2023, https://warontherocks.com/2023/04/europe-at-a-strategic-disadvantage-a-fragmented-defense-industry/.
[iv] Raluca Csernatoni, “The EU’s Defense Ambitions: Understanding the Emergence of a European Defense Technological and Industrial Complex,” Carnegie Europe, December 6, 2021, https://carnegieeurope.eu/2021/12/06/eu-s-defense-ambitions-understanding-emergence-of-european-defense-technological-and-industrial-complex-pub-85884.
[v] Ibid.
[vi] Sebastian Clapp, “Reinforcing the European Defence Industry - Europarl.Europa.Eu,” EPRS | European Parliamentary ResearchService, June 2023, https://www.europarl.europa.eu/RegData/etudes/BRIE/2023/749805/EPRS_BRI(2023)749805_EN.pdf; Csernatoni, “The EU’s Defense Ambitions.”
[vii] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[viii] Ibid.
[ix] Bernadett Petri and Imre Porkoláb, “Fostering Innovation for Strategic Autonomy: The Crucial Role of Defence Innovation Support in Hungary and Europe,” www.euractiv.com, September 21, 2023, https://www.euractiv.com/section/global-europe/opinion/fostering-innovation-for-strategic-autonomy-the-crucial-role-of-defence-innovation-support-in-hungary-and-europe/.
[x] Clapp, “Reinforcing the European Defence Industry - Europarl.Europa.Eu.”
[xi] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xii] Petri and Porkoláb, “Fostering Innovation for Strategic Autonomy.”
[xiii] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xiv] Clapp, “Reinforcing the European Defence Industry.”
[xv] Ibid.
[xvi] Ibid.
[xvii] Petri and Porkoláb, “Fostering Innovation for Strategic Autonomy.”
[xviii] Clapp, “Reinforcing the European Defence Industry.”
[xix] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xx] Clapp, “Reinforcing the European Defence Industry.”
[xxi] Andrés Ortega, “More Europe, More Dependent on the US,” Elcano Royal Institute, April 19, 2022, https://www.realinstitutoelcano.org/en/blog/more-europe-more-dependent-on-the-us/.
[xxii] Clapp, “Reinforcing the European Defence Industry.”
[xxiii] Ibid.
[xxiv] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xxv] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[xxvi] Clapp, “Reinforcing the European Defence Industry.”
[xxvii] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[xxviii] Kayali, Bayer, Joshua Posaner, “Europe’s Military Buildup.”
[xxix] Clapp, “Reinforcing the European Defence Industry.”
[xxx] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[xxxi] Ibid.
[xxxii] Ibid.
[xxxiii] Bergmann and Besch, “Why European Defense Still Depends on America.”
[xxxiv] Ibid.
[xxxv] Clapp, “Reinforcing the European Defence Industry.”
[xxxvi] Ibid.
[xxxvii] Csernatoni, “The EU’s Defense Ambitions.”
[xxxviii] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xxxix] Csernatoni, “The EU’s Defense Ambitions.”
[xl] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xli] Ibid.
[xlii] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[xliii] Bergmann and Besch, “Why European Defense Still Depends on America.”
[xliv] Fiott, “Purchasing Power: Towards Joint Procurement.”
[xlv] Clapp, “Reinforcing the European Defence Industry.”
[xlvi] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[xlvii] Bergmann and Besch, “Why European Defense Still Depends on America.”
[xlviii] Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[xlix] Csernatoni, “The EU’s Defense Ambitions.”
[l] Bergmann and Besch, “Why European Defense Still Depends on America.”
[li] Ibid; Alvarez-Couciero, “Europe at a Strategic Disadvantage.”
[lii] Fiott, “Purchasing Power: Towards Joint Procurement.”
[liii] Clapp, “Reinforcing the European Defence Industry.”
[liv] Ibid.
[lv] Bergmann and Besch, “Why European Defense Still Depends on America.”
[lvi] Ibid.
[lvii] Ibid.
[lviii] Clapp, “Reinforcing the European Defence Industry.”
[lix] Ibid.
Image: https://eda.europa.eu/news-and-events/spotlight/spotlight-of-the-month/permanent-structured-cooperation-or-pesco
