European defence industry strategy – any opportunities for small EU state?

On March 5, a new European defence industry strategy was officially presented, which could provide up to 100 billion euros in funding. The strategy presents a clear, long-term vision of how it is planned to achieve readiness in the defence industry for future security challenges of the EU. The strategy provides for the following goals:

• To promote cooperation between EU member states in the acquisition of defence capabilities through initiatives such as preparing the Capability Development Plan (CDP), implementing the Coordinated Annual Defence Review (CARD), and Permanent Structural Cooperation (PESCO).
• Ensure that all types of defence equipment are available to users and the security of arms supply chains in the EU is increased.
• Ensure that the EU defence industry is financed with the help of national and EU budgets.
• Review the European Investment Bank lending policy to strengthen the EU’s defence.
• Promote cooperation between the EU and the Ukrainian defence industry.
• To cooperate more closely with NATO and international partners.

The most important goals set in the strategy for 2030 are: 1) EU member states to purchase together > 40% items of defence; b) for EU member states > 50 per cent of defence equipment has to be bought in the EU (60 per cent in 2035)..

The strategy envisages the establishment of the Defence Industry Readiness Council at the highest level of the EU, where representatives of the member states will coordinate joint arms acquisitions. The council will include representatives of the European Commission, the European Defence Agency, and the European External Action Service. European defence industry groups will be created for thematic consultations with defence industry representatives. The establishment of two coordination forums will facilitate communication, unify interest groups, and allow faster implementation of the strategy.

The strategy identifies that the EU defence industry must follow NATO standards in producing military weapons and equipment. This is a significant development, as recently, there were thoughts of creating a separate standard for EU defence products.

To solve the problems related to certification, the European Commission is committed to finding measures that will speed up the product certification and testing processes, mainly if the products are jointly produced in several countries.

There is an intent to continue and make the activities of the currently operating European Defence Fund (EDF) and PESCO more efficient, allowing members to cooperate throughout the entire life cycle of defence capabilities. For this purpose, a new system called Structure of the European Armaments Program (SEAP) is planned. SEAP is intended to allow member states to benefit from joint defence programmes. Member States can utilise the increased co-financing rate and simplified public procurement procedures. It is planned that Member States will not pay VAT when making joint purchases through SEAP. In the event of a common agreement between member states on exporting a jointly developed weapon system, SEAP will provide a premium. SEAP will work as an international organisation, creating conditions for member states to receive credits for financing long-term armament programs. It is planned that SEAP will also provide grants for transferring the prototypes developed under the EDF program to mass production.

The European Commission proposes to use the European defence industry reinforcement through common procurement act (EDIRPA) more intensively to strengthen the European defence industry by expanding the scope and possibilities of financing instruments. By this time, EDIRPA has already allocated 0.3 billion euros to compensate EU member states for part of the value of the military equipment transferred to the Ukrainian Armed Forces.

It is planned to increase the awareness of military technologies developed by the EU by sharing information among members and creating a common catalogue of goods and services.

The European Commission encourages member states to enter into contracts and preliminary agreements with other member states to acquire armaments based on purchase agreements already concluded by other states.

The European Commission proposes to expand the scope of the program implemented by the Act in Support of Ammunition Production (ASAP) to include not only the increase in the production of 155 mm ammunition and surface-to-surface missiles but also to accelerate investments in other currently lacking defence measures. The first ASAP results of the call, valued at 0.5 billion euros billions, are known. We can note that the State Defence Corporation of Latvia, managed by the Ministry of Defence of Latvia, together with the companies NAMMO, NEXTER and SIMMEL, will implement the expansion of the production of propellant/powder for artillery systems, including the construction of a new factory in Latvia. The consortium will receive a 41.3 million euro grant from the EU to implement this project.

In addition, there are plans to create a Defense Supply Chain Transformation (FAST) fund to facilitate access to financing for small and medium-sized enterprises (SMEs).

The European Commission’s institutions will support the organization of hackathons that address the challenges faced by the Ukrainian Armed Forces. The EU innovation office will be opened in Kyiv to implement this and further support the Ukrainian defence technological and industrial base.

The European Commission will consider financing the stockpiling of strategic vital components and raw materials used in defence systems to ensure the security of EU defence industry supply chains.

The European Investment Bank’s policy on financing the defence industry will be reviewed later this year, thus facilitating access to the necessary financial capital. Furthermore, the EU institutions will include defence and security requirements in many ongoing EU programs (e.g., ESF+, InvestEU, Cohesion Fund), which will allow for increased financing of this sector.

Of course, this proposal of the European Commission will still have to be approved by the European Parliament and the Council, and it may take up to a year. Many of the aforementioned planned measures have a long-term implementation horizon, i.e., they will enter into force only in the next financial program (2028-2034). Regardless, small EU states can prepare for this change to strengthen the national armed forces and ensure that the defence and security industry has full-fledged conditions to develop competencies and increase exports.

What’s in it for small EU member states?

Considering that the defence and security industry in most EU small states consists of SMEs and that no tangible actions have been taken to establish or expand state-owned companies developing certain military technologies, it would be appropriate to encourage the participation of SMEs in EU-funded initiatives.

It is necessary to promote the creation of start-ups and research institutions in the defence sector in the short and medium term because when this strategy is implemented, the mentioned start-ups will already have outgrown their shirts and can apply for EU funding available to SMEs and medium-sized companies.

Increase the national networking of the EU small state’s defence and security ecosystem to ensure a faster exchange of information. There will be many initiatives, and it will take more work for the participants to prioritize their activities.

It is necessary to decide on implementing national programs that promote the development of this sector, especially in those areas that are not or will not be covered by EU or NATO initiatives.

It would be very beneficial for existing and future participants in the national defence and security ecosystem to start looking for EU partners, as funding will be allocated to jointly implemented projects.

Before the formal start of implementing this strategy, it would be appropriate to communicate with partners from the USA, Canada, Australia, Israel, the UK, Japan, Turkey, South Korea, Brazil, or Singapore and encourage them to transfer the production potential of defence technologies to EU small state because, in this way, the EU market would be opened to them.

The representatives of the Ministries and the Government must be ready to constantly defend the national interests of the participants in the national defence and security ecosystem and represent them in coordinating the practical implementation programs of this strategy to maximize the benefits compared to the contributions to the general EU budget. In the same way, national defence and security industry participants must agree on which EU projects they would need most to strengthen their competencies and competitiveness.

Using SEAP in the future, EU small states can avoid paying VAT and receive credits for defence program financing. Within the framework of other initiatives, small states can already purchase weapons according to the weapons purchase agreements concluded by other EU member states. This would allow us to expect better prices if the desired weapons and equipment specifications match.

Comment author. Donatas Palavenis, researcher fellow in the Baltic Institute of Advanced Technology (BPTI).