Financing the European Defence Industry: Current Challenges and Strategic Steps Forward

The European defence industry, encompassing a range of large multinational companies, mid-sized firms, and over 2,000 small and medium-sized enterprises (SMEs), has faced substantial financial constraints over the past few decades. This situation has been exacerbated by national budget decisions and policies that were shaped in a different geopolitical climate, particularly following the end of the Cold War. The resulting underinvestment has significantly limited the European Defence Technological and Industrial Base (EDTIB), making it difficult for the industry to secure essential funding.

The purpose of this publication is to provide an overview of the current financial challenges faced by the European defence industry, examine key initiatives and policy responses aimed at addressing these challenges, and outline strategic steps needed to enhance the EDTIB. Special emphasis is placed on the implications of the ongoing conflict in Ukraine and the necessity for a robust, well-funded European defence framework to ensure resilience and strategic autonomy.

Background and Current Challenges

Historically, defence spending by EU Member States has fallen short of optimal levels, contributing to challenges in financing the EDTIB. The industry’s fragmentation, especially outside the aerospace and missile sectors, has further impeded competitiveness. This issue is compounded by EU Member States' preference for purchasing defence equipment from non-European suppliers, undermining internal market coherence and creating dependencies.

The onset of Russia's full-scale invasion of Ukraine marked a pivotal shift, underscoring the urgent need for bolstered defence capabilities. This conflict exposed vulnerabilities in Europe’s defence supply chains and production capacity, as stockpiles of ammunition and essential equipment dwindled. Ukraine has relied heavily on European and international support to sustain its defence against Russian aggression, highlighting the importance of a robust and well-funded EDTIB. Despite increased defence budgets – rising to a collective €290 billion in 2023 – many Member States have continued to procure from outside the EU, with approximately 78% of defence acquisitions between February 2022 and June 2023 originating from non-EU sources.

Key Initiatives and Policy Responses

To address these gaps, the EU has launched several initiatives aimed at strengthening the EDTIB and ensuring more collaborative investment in defence capabilities:

  1. European Defence Industrial Strategy (EDIS): Adopted in March 2024, this landmark strategy outlines measures to enhance defence industrial readiness. It calls for Member States to “invest more, better, together, and European,” leveraging tools like Permanent Structured Cooperation (PESCO).
  2. European Defence Industry Programme (EDIP): Proposed as a key element of the EDIS, the EDIP aims to bridge the gap between short-term emergency measures and long-term strategic funding. If adopted, it will allocate €1.5 billion from 2025 to 2027, acting as a precursor to a more comprehensive multiannual financial framework (MFF).
  3. European Defence Fund (EDF): With an initial allocation of nearly €8 billion for 2021-2027, the EDF supports research and development to boost the competitiveness of the EDTIB. A mid-term revision has bolstered this fund by an additional €1.5 billion, raising the total budget to €16.71 billion.
  4. European Peace Facility (EPF): Established outside the EU budget, the EPF has provided critical support to Ukraine, with €11.1 billion allocated thus far. This off-budget approach circumvents the limitations imposed by Article 41(2) of the Treaty on the

    European Union, which restricts EU budget expenditure on military operations. The EPF has been instrumental in supplying Ukraine with lethal and non-lethal military equipment, reinforcing its capacity to resist aggression and maintain territorial integrity.

Financing Solutions and Proposals

Despite these initiatives, challenges persist. Access to private financing for defence SMEs remains limited due to stringent regulations, complex procurement procedures, and cautious environmental, social, and governance (ESG) criteria adopted by financial institutions. In response:

  • European Investment Bank (EIB): Following the strategic European Security Initiative (SESI) launched after 2022, the EIB has committed up to €8 billion to support dual-use research and infrastructure projects. The bank’s recent policy adjustments aim to better accommodate defence financing needs while maintaining restrictions on direct funding for weaponry.
  • Defence Equity Facility (DEF): Introduced in January 2024, this €175 million facility, combining EDF and EIF contributions, is designed to catalyze €500 million in total investments to aid SMEs in defence innovation.
  • Common Issuance of EU Bonds: There have been calls, notably by Commissioner Thierry Breton, for debt-financed funding mechanisms akin to the pandemic recovery fund. Such a strategy could mobilize substantial capital, potentially up to €100 billion, for collaborative defence procurement and development.

The Path Forward

While progress is evident, achieving strategic autonomy will require deeper and more consistent investment. EU leaders must continue to prioritize collaboration, mitigate fragmentation, and increase intra-EU procurement. The forthcoming proposal for the post-2027 MFF is expected to include significant funding boosts for defence, aligning with the strategic goal of reducing non-EU dependencies.

The conflict in Ukraine remains a stark reminder of the need for a resilient and united European defence framework. Continued support for Ukraine, both financially and through direct military assistance, will be crucial in maintaining stability at Europe’s borders. EU Commissioner Breton and President von der Leyen have emphasized the urgency of adapting policies to safeguard Europe’s security and defence landscape. As geopolitical challenges persist, the EU’s commitment to “more, better, together, and European” must be matched by decisive financial and legislative action.

This publication is drafted based on the Briefing text of the European Parliament on the topic “Financing the European defence industry” (PE 762.383 – September 2024).

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