Significant proposals have been made by the European Commission for changes to European defence industrial policy. Our briefing summarises the proposed changes and draft EU legislation.

The draft EU Regulation establishing the European Defence Industry Programme and a framework of measures to ensure the timely availability and supply of defence products (the draft EDIP Regulation) was proposed by the Commission on 3 March 2024. The draft EDIP Regulation remains in the legislative stages and has not yet been enacted. The expected timeline for adoption, if it proceeds, is mid-2025.

1. Strategic context and background: the European Defence Industrial Strategy

The draft EDIP Regulation is the first legislative measure proposed to implement the European Defence Industrial Strategy (EDIS). The EDIS, published on 3 March 2024 (alongside the draft EDIP Regulation), sets out the Commission's vision for European defence industrial policy until 2035.

The EDIS has arisen in the context of increased awareness of the significant threats facing EU Member States and the gaps exposed in European defence capabilities by the stresses of the Ukraine war, as well as the urgent need to replace depleted supplies. The Commission states, for example, that:

"The long-term deterioration of regional and global threat levels requires a step-change in the scale and speed with which Europe's defence technological and industrial base (EDTIB) can develop and produce the full spectrum of military capabilities. The return of high-intensity warfare and territorial conflict to Europe has a negative impact on the security of the Union and the Member States and requires a significant increase in the capacity of Member States to reinforce their defence capabilities. As such, the EDIS is focused on improving the competitiveness and readiness of the European defence technological and industrial base."

The EDIS sets out the following overall goals:

• by 2030, the value of intra-EU defence trade should represent at least 35% of the value of the EU defence market;
• by 2030, at least 50% of EU Member States' defence procurement budget should be devoted to procurement from within the EU, and 60% by 2035; and
• by 2030, Member States should procure at least 40% of their defence equipment in a collaborative manner.

The EDIS proposes an extensive range of measures and initiatives to achieve these overall goals. One of these measures entails the creation of a European Defence Industry Programme (EDIP), with an initial budget of €1.5 billion (to end-2027).

The draft EDIP Regulation is the first legislation introduced to effect key aspects of the proposals set out in the EDIS, including primarily the EDIP.

2. Summary of key areas covered in the draft EDIP Regulation

The draft EDIP Regulation has three main aims:

1. to strengthen the competitiveness and responsiveness of the European defence industrial and technological base;
2. to enhance the ability of the European defence industrial and technological base to ensure the timely availability and supply of defence products; and
3. to contribute to the recovery, reconstruction and modernisation of the Ukrainian defence technological and industrial base.

We give further details on the proposals for each below.

3. Strengthening the competitiveness and responsiveness of the European defence industrial and technological base

The Commission states that:

"…[t]he production capacity of [European defence] has been tailored to respond primarily to limited Member States' needs, mostly along national dividing lines, due to decades of public underinvestment. In such a scenario, defence companies often faced the need to reduce production rates in order to keep production lines afloat and maintain skilled personnel, while producing limited quantity of defence systems for national customers…

In the long run, this situation raises the question of defence industrial readiness in Europe, i.e. the capacity of the EDTIB to respond effectively (in time and scale) to changes in European demand for defence products. This is closely linked to the broader challenge of security of supply of defence equipment in Europe...

…the EU now needs to move from punctual emergency responses…to EU defence industrial readiness, from securing the availability of consumables in the requisite volumes during crisis times to ensuring the timely delivery of tomorrow's high-end critical capabilities in the coming years. This is the exact purpose of the EDIS…"

SEAP

The solutions identified to this, and included in the draft EDIP Regulation, include the creation of the Structure for European Armament Programme (SEAP). This would be a new legal framework for initiating and managing cooperative defence programmes, and is intended to allow for cooperation between EU Member States, Associated Countries and Ukraine on defence equipment from inception to end.

The SEAP is intended to standardise procedures to initiate and manage cooperative defence programmes. A SEAP will have the status of an international organisation, meaning that defence equipment jointly procured and owned via a SEAP will be VAT exempt.

Additional support

In addition, the draft EDIP Regulation envisages the provision of financial support for investment, including EU grants to incentivise cooperation on common procurement from the European defence industry and to de-risk investment in the European defence industry's production capacity.

Efforts are also envisaged to support defence products developed as a result of EU cooperation (e.g. via the European Defence Fund, which supports defence R&D) to production and commercialisation (as well as support for European defence SMEs and small mid-caps).

Note that beneficiaries of the envisaged EDIP (recipients of financial support) must be established in, and controlled by entities located in, the EU, Associated Countries or Ukraine. There are, however, possible derogations from this requirement, governed by the EU's Common Foreign and Security Policy. Similarly, defence products used in the EDIP should not be subject to "control or restriction" by non-associated third countries. "Infrastructure, facilities, assets and resources" of the relevant legal entities and used in the EDIP must be located in an EU Member State, an Associated Country or Ukraine.

4. Enhancing the ability of the European defence industrial and technological base to ensure the timely availability and supply of defence products

The draft EDIP Regulation envisages the creation of an EU-wide security of supply regime, involving the potential for sweeping powers for the EU in the event of key shortages in defence material – including vis-à-vis defence companies. The draft EDIP Regulation envisages a "comprehensive crisis management framework" to coordinate responses to supply crises, whether due to shortages of particular defence material or along supply chains. The Commission states that:

"…the steady degradation of the geopolitical context has already entailed a significant and lasting increase in the demand…for…certain defence products and their components in the Union. While certain Member States have taken or are likely to take measures to preserve their own stocks as a matter of national security, others are faced with difficulties of access to the goods needed to manufacture or acquire the relevant defence products. Sometimes, difficulties in accessing one raw material or a specific component hamper entire production chains…it is necessary to establish, in a coordinated way, harmonised rules for increasing the security of supply of defence products."

The Regulation posits the set-up of a Defence Industrial Readiness Board and envisages significant new powers for the Commission and Board to map and monitor supply chains in critical defence products (to be identified by the Commission). The purpose would be to recognise and address "market disruptions", based on reporting from national authorities. The European Council would then be enabled to activate "supply-crisis states" or "security-related supply-crisis states".

Where such emergency powers were activated, the draft EDIP Regulation envisages that the Commission would be enabled to require information from defence companies and take "appropriate measures…to address…disruptions or bottlenecks". Defence companies on the receiving end of such measures could be "required to accept and prioritise orders" of certain products. These orders would "take precedence over any performance obligation under private or public law except those directly related to military orders…"

The draft EDIP Regulation posits the use by Member States of defence/emergency provisions of national law to speed up regulatory applications for the set-up of defence production facilities. Emergency exceptions are also envisaged for procurement law. The Commission refers to the use of existing exceptions for emergencies in defence and security procurement, including shortened tender periods, but also posits the opening of existing framework agreements to Member States not party.

5. Contributing to the recovery, reconstruction and modernisation of the Ukraine defence technological and industrial base

The draft EDIP Regulation anticipates that participation in the EDIP would be open to Ukraine (including the SEAP, as above). This would involve joint procurement and cooperation on defence projects with Ukraine, and support extended to cooperation with the Ukrainian defence industry.

The draft EDIP Regulation also refers to the possibility of frozen Russian assets being used to fund such projects, though this would require a decision of the European Council.