Financing the European defence industry

Summary:

Although the European defence industry is generally competitive, more than a decade of underinvestment has kept it from reaching its full potential. That has been the result of decisions made by Member States since the end of the Cold War regarding their budgets and policies in a completely different geopolitical environment. The significant under-investment in European defence is demonstrated by the severe difficulties the European defence technological and industrial base (EDTIB) has in obtaining finance. Member States' defence budgets will continue to be the EDTIB's main source of funding; however, more collaborative actions and spending would enhance output and efficiency. So far, EU defence initiatives relating to EU competences, such as the European Defence Fund, have been funded through the EU budget, which does not fund any operations that have military or defence implications. Weapons deliveries to Ukraine and other partners are therefore funded by the off budget European Peace Facility. The new initiatives directly benefit the EDTIB, but the funds have so far not been sufficient to address the investment gap and strengthen the EU's security and defence capabilities. In response, the first-ever European defence industrial strategy (EDIS) was adopted on 5 March 2024. In terms of defence financing, the EDIS proposals include: inviting the European Investment Bank (EIB) to review its lending policy in 2024; establishing a European defence industry programme (EDIP); and substantially increasing the funds for EU defence in the next MFF.

Separately, EU Commissioner for the Internal Market Thierry Breton has proposed a debt-financed €100 billion fund to boost joint procurement of defence products. At their meeting in June 2024, EU leaders invited the Commission, EU Member States and the Council to advance work on filling critical capability gaps in the EDIS and in the EDIP. Leaders also invited the High Representative and the Commission to present options for funding to strengthen the EDTIB and close critical capability gaps. Furthermore, they welcomed the EIB's security and defence action plan, while calling on the Bank to implement it promptly and continue to assess and further adapt, as appropriate, its defence industry lending policy. The EDIS, the EDIP negotiations, and finding ways to increase EDTIB financing will be major issues for the 2024-2029 legislature.

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