In early March, the EU released its first-ever European Defence Industrial Strategy (EDIS), accompanied by a proposed regulation establishing the European Defence Industry Programme (EDIP). The aim is to boost defence capabilities in Europe through greater and more efficient spending. In particular, the strategy seeks to reverse recent trends, whereby 78% of defence acquisitions by EU countries since Russia’s full-scale aggression against Ukraine were made with non-EU producers, with U.S. firms accounting for 63%. It also addresses recent concerns by the defence industry over ESG constraints on obtaining private financing.

The ultimate benchmark for success, as recounted by one EU foreign minister, is whether these measures will help deter Russia and other adversaries. Nonetheless, it reflects greater operational focus of the EU on defence and security issues, and what in practice the European Commission and other EU institutions can do to bolster capabilities in a policy area that will remain the primary prerogative of EU Member States.

Plugging Defence Gaps

Since the end of the Cold War, European defence has suffered from perennial underinvestment and lack of policy support for the defence industry. Whereas Europe collectively spent on defence over half of the U.S. totals in the early 1990s, it now spends about one-third compared to the United States—arguably at a time of much greater security threats to Europe compared to America. There are simply not enough soldiers, tanks, planes, ships, missiles, guns, and ammunition in Europe, nor domestic facilities to produce the necessary weapons systems and materiel. Moreover, EU countries have procured defence products at a national level, exacerbating fragmentation within the European market. This fragmentation has led to the creation of national industrial silos and numerous defence systems that often lack interoperability.

In this context, the Commission argues for a paradigm shift, advocating for significant investments and joint EU procurement. To facilitate this, defence companies, which typically do not engage in substantial self-funded industrial investments, require regulatory support to address issues like access to skilled personnel and raw materials. By providing grants to mitigate industrial investment risks and by adding new structures to facilitate cooperation for joint procurement, the Commission aims to enable faster adaptation to ongoing market changes.

The new EU defence industrial strategy also seeks to balance pooling defence capabilities within EU institutions while respecting existing military organizations like NATO. In particular, the strategy refrains from pushing for an EU army, focusing instead on industrial aspects for which the EU is competent through its internal market. It would also treat Ukraine as a de facto member of the internal market, eligible to participate in EU joint procurement with Ukrainian companies eligible for EDIP funding.

Enhancing European production could come at the expense of non-EU firms, as the Commission outlines three non-binding targets for 2030:

• Intra-EU defence trade should represent at least 35% of the EU defence market value.
• At least 50% (by 2030) and 60% (by 2035) of member states’ defence procurement budgets should be allocated to acquisitions from EU firms, increased from around 20% since the Ukraine invasion.
• At least 40% of member states’ defence equipment should be procured collaboratively.

Unless the overall levels of spending are increased substantially, shifting the majority of European procurement to EU producers could require decreasing procurement from firms based in the United States, United Kingdom, Canada, and South Korea, among other non-EU suppliers. Notably, the UK’s Labour Party, which seems likely to win the General Election at the end of the year, views enhanced cooperation with the EU in the defense and security sectors as a core element of its plans to try and rebuild relations between the UK and the EU. The Labour Party would be keen to create a role for the UK and to ensure that EU defense initiatives do not come at the expense of a greater role for the UK’s defense sector.

Financially, the proposed EDIP regulation, with a limited budget of €1.5 billion, is designed to complement existing EU instruments and provide additional funding over the next two years. Over the medium-term, the strategy calls for an ambitious defence budget in the next Multiannual Financial Framework (2028-2034) to support the successors of the European Defence Fund (EDF) and the proposed EDIP. Some EU officials, such as Commissioner Thierry Breton and MEP Natalie Loiseau, have even called for €100 billion for new EU defence spending, financed by EU-backed loans. Moreover, EDIS urges the European Investment Bank to revise its lending policies to allow investments in defence, currently not permitted.

Finally, the Commission addresses the recent debate over whether there are ESG constraints on private funding for the defence sector. It argues, contrary to widely-shared perceptions, that under “the EU sustainable finance framework, no EU rule, or any EU planned rule, impedes private investment in the defence industry.” To alleviate ongoing concerns, it proposes further consultations with the defence and financial sectors, and underscores that “the defence industry enhances sustainability, given its contribution to resilience, security and peace.”

Fostering Intra-EU Collaboration

The strategy is accompanied by a proposed regulation establishing the European Defence Industrial Programme (EDIP), aiming to address the defence funding gap until 2027 and enhance the EU’s defence readiness. The regulation proposes financial assistance and new structures to bolster the Defence Technological and Industrial Bases of both European and Ukrainian entities operating in the sector. It outlines five key advancements.

First, it includes measures to reinforce the European Defence Technological and Industrial Base, such as the creation of a European Military Sales Mechanism to streamline access to European defence products and a dedicated €1.5 billion package for the 2025-2027 period. Additionally, defence projects would become eligible for other EU financial instruments, and the Commission would be able to identify European Defence Projects of Common Interest. The regulation also suggests allocating windfall profits from seized Russian assets to defence projects. While the text does not go as far as proposing to issue EU defence bonds, it does open the door to Member States teaming up with each other to jointly issue defence bonds.

Second, the regulation proposes a cooperation programme with Ukraine to aid in the reconstruction of its Defence and Technological Industrial Base.

Third, the text introduces a new legal framework, the Structure for European Armament Programme (SEAP), to facilitate and scale up Member States’ cooperation on defence equipment, in full complementarity with the Permanent Structured Cooperation (PESCO) framework. Concretely, SEAP would encompass ad-hoc structures created through implementing acts at the request of Member States to aggregate the demand for defence products.

Fourth, the regulation outlines a comprehensive legal framework to ensure security of supply, remove obstacles, and support defence product production. This includes measures to facilitate joint procurement, accelerate permit-granting processes, and require Member States to adopt a list of national certification authorities. It also proposes mapping key market actors and the defence supply chain, as well as monitoring EU manufacturing capacities, with financial penalties for non-compliance.

Fifth, the regulation proposed to establish a Defence Industrial Readiness Board within the Commission, supported by a high-level European Defence Industry Group serving in a consultative role.

Although the EDIP will now go through the legislative process in the Council and Parliament, which could take up to one year, it is clear that the evolving geopolitical landscape is prompting the EU to increase its involvement in defence, particularly in coordinating public procurement efforts.

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The team at Covington, which cuts across a wide range of regulatory areas, is well placed to advise you on these policy developments, and how to engage with the relevant decision-makers on these questions.