How to Come Off De Fense

European defense has come a long way since February 2022 – but nowhere near far enough given the Zeitenwende that Russia’s war against Ukraine represents. More than 20 EU member states have since announced defense spending increases, but there are signs that some Western European states, in particular, may not meet their pledges. The overlap in EU and NATO membership is growing, but there are few indications that this will truly boost coordination between the two organizations. The EU has tabled innovative measures to spur joint procurement and industrial ramp up, but these are underfunded, and member states routinely miss their collaborative spending target. Europeans seem to be stuck between the status quo ante and the transformation of defense cooperation that the current situation warrants.

Europeans cannot afford to sit on the fence and wait for a Zeitenwende 2.0 before embarking on an ambitious reform path. The global security environment is darkening, and Russia is not the only revisionist actor seeking to undermine the rules-based international order. The US will inevitably shift its attention toward the Indo-Pacific. If Europeans fail to reverse course now, they will jeopardize their ability to defend themselves, become unable to support Ukraine over the long term, and risk marginalization in NATO. As a result, European citizens would be much less secure.

The crucial capability gap in European defense is still political leadership. While both EU High Representative Josep Borrell and Commission President Ursula von der Leyen have been driving EU support for Ukraine and defense cooperation, key member states are missing in action. Under the Scholz government, Germany has faced recurrent criticism for its absence in EU defense questions.^[1] Meanwhile, France is seen as pursuing narrow industrial rather than collective European interests. Their initial dithering on arms donations to Ukraine and energy sanctions, exacerbated by a history of neglecting Central and Eastern European views on Russia, has caused lasting damage to their credibility – and to that of European defense initiatives – in Warsaw, Tallinn, and beyond. The onus lies on Germany and France to win back trust. Macron’s speech in Bratislava in May 2023, in which he confessed to have previously “lost an opportunity to” Central and Eastern Europeans, was a good start.^[2] At the same time, all EU member states need to suppress national sovereignty reflexes and look beyond narrow industrial interests.

European policymakers have the levers to significantly strengthen European defense in times of war. Some of those levers need to be pulled now, others require more time. Policymakers should consider these five recommendations:

There is no peace dividend anymore. As agreed in Versailles last year, Europeans must – now and in the future – “resolutely invest more and better in defense capabilities and innovative technologies.”^[3] At the moment, they are still missing NATO’s overall defense spending commitment as well as the EDA’s targets on defense innovation and collaborative equipment spending. Even if Europeans were to realize the announced defense spending increases, they would still collectively fail to meet NATO’s two percent goal by 2028 (not to mention the actual target date of 2024). There is currently a vivid discussion within the Alliance on redefining the two percent as a bottom rather than a ceiling. A further increase of NATO’s spending pledge would put even greater pressure on European laggards. Making matters worse, several states have already backpedaled on their commitments. Special funds like the German Sondervermögen can be helpful cash injections (assuming they are actually dispensed), but regular defense budgets must be increased now to signal to adversaries, allies, and defense industries that Europeans are serious about their promises. As media attention on Ukraine will inevitably wane and inflation continues to bite, this will require steadfastness.

European policymakers should also use the current reform of the Stability and Growth Pact to stimulate defense spending and cooperation. In recent Conclusions on the topic, the Council endorsed a proposal by the Commission to classify defense as an EU strategic priority, investments in which would qualify for an extended period to reduce the accumulated debt.^[4] Member states should be bolder and exempt collaborative EU defense spending from the Stability and Growth Pact altogether. This could represent an incentive for joint procurement and development in addition to those detailed below.

In light of the lessons from Ukraine, Europeans also need to dedicate sufficient funds for innovation. The defense innovation gap between Europe and the rest of the world is widening, which not only undermines Europe’s relative military strength but also puts its interoperability with technologically advanced US forces at risk. Upgrading the data connectivity of European armed forces and preparing them for the proliferation of drones and loitering munitions should be a priority.

Spending better together will require identifying a limited number of cooperation priorities which have the potential to generate significant economies of scale, provide important European public goods, and enhance the EU’s role as a strategic enabler of NATO. In an ideal world, cooperation priorities would be agreed top-down, based on fully harmonized EU and
NATO planning processes. NATO could take the lead in setting capability targets and answer the question of what should be done. The EU, in turn, could lead on the question of how to do what needs to be done and use its growing toolbox (CARD, EDF, PESCO, EDIRPA, EDIP) to incentivize cooperation. This ideal vision faces two obstacles. First, while NATO and the EU’s
members and priorities overlap, they are not identical. The long-standing blockades between Greece and Cyprus on the one hand, and Turkey on the other continue to hamper formal cooperation and information-sharing. Second, defense planning remains a national prerogative, and both EU and NATO planning processes have suffered from a lack of compliance.

The growing overlap in membership should nonetheless lead members of both organizations to push for more synergies. Forthcoming EU and NATO documents represent an opportunity in this regard. The NATO Defense Production Action Plan, announced for July 2023, could provide industry with the necessary long-term demand signal it needs to ramp up production. The EU could then support the ramp up of European capacities with subsidies under ASAP and later EDIP. Furthermore, both planning processes should be more attuned to each other. NATO could complement national requirements with multinational ones to set a political incentive for collaboration.^[6] The EU’s Capability Development Plan, to be agreed upon in the fall 2023, should take relevant NATO priorities on board. The priorities in both documents should then be taken up by regional or functional defense avant-gardes. While this idea is far from new, NATO’s announced regional plans could provide an additional push for specialization. These defense avant-gardes will have to be led by Europe’s largest defense industrial players, but they should also include smaller, notably Central and Eastern countries with relevant capabilities.

Taking inspiration from the NDPP, EU members could also decide to reform the CARD process to allow for naming and shaming and more peer pressure. This could be done by including comparative national data instead of aggregate numbers in CARD reports. Greater transparency could raise the pressure on EU member states to actually meet the more binding PESCO commitments – in particular collaborative and national spending targets – by 2025, as stated in the Strategic Compass. Finally, the EU and NATO should better coordinate their innovation initiatives (HEDI, EUDIS, and DIANA) rather than succumbing to bureaucratic beauty contests.

While the jury is still out on its effectiveness, the Ammunition Initiative provides an innovative model to incentivize further arms donations to Ukraine, jointly and swiftly procure their replacements to fill capability gaps, and potentially support increasing production capacities. As the EPF can only contribute funding for assistance to third countries, the model only applies to equipment donated to Ukraine (and, theoretically, other third countries). The equipment thus needs to meet three criteria: 1) Ukraine requires more of the equipment in question; 2) EU member states want to replenish their stocks; and 3) production capacities in Europe are currently insufficient (though one could also just focus on the first two tracks).

The EU’s Defence Joint Procurement Task Force has identified seven areas of common and urgent procurement needs, ranging from medical equipment to air-defense missiles. NATO’s Defense Production Action Plan is also expected to identify short-term procurement targets. Assuming that Ukraine shares some of these procurement needs, these priorities should guide future initiatives. When jointly procuring ammunition or other goods for short term use in Ukraine, the priority should be speed of delivery, not whether orders exclusively benefit the European industry.

Where the Ammunition Initiative could serve as a short-term model for Ukraine-related procurement, EDIP is meant to be the EU’s long-term instrument to incentivize joint procurement and subsidize European defense companies to increase their production capacities to meet this demand. Unlike EDIRPA, EDIP should almost exclusively benefit European companies to consolidate Europe’s defense industrial base. Indeed, increasing and sustaining European production capacities is a prerequisite for joint procurement. Another requirement for strengthening European defense industries is to reduce critical dependencies. EDIP should model the ASAP regulation of the Ammunition Initiative. Therein, the Commission suggested drawing up a list of defense-relevant products, including raw materials and components, which are or could in the future be affected by disruptions to the single market. It proposes continuous monitoring, based on information from the industry, which would enable it to draw up emergency responses to current or future shortages.

The EU’s initiatives to incentivize joint procurement and ramp up production are already breaking erstwhile taboos. For these changes to be more than symbolic and make a structural difference to EU defense cooperation, the EU needs to muster additional funding. Policymakers can use three complementary channels to increase European defense instruments.

First, the regular EU budget could be used to fund EDIP. Its mid-term review, due later this year, could be an opportunity to redirect current funding streams. Yet, the current budget has little, if anything, left to spare. Like ASAP, EDIP could cannibalize other EU funds, such as the EDF or even EDIRPA, but these are likewise not all that flush with money. Hence, the most realistic option would be to significantly increase the budgetary provisions for defense – that is, for EDIP but also the EDF and the Military Mobility initiative – in the next cycle (2028–2034), negotiations for which will start soon enough. Policymakers must resist the pressure to cut the budgetary provisions for defense like they did in the last negotiations.

Second, policymakers can increase existing intergovernmental funds or create new ones to fund EDIP. The EPF, coming with the abovementioned limitations, is one such example. A more ambitious proposal would see the EU create something akin to its debt-financed Covid recovery fund to rearm Europe.^[7] In light of increasing interest rates, there is currently little appetite among many EU member states to take on more joint debt.^[8] But like other erstwhile red lines vis-a-vis the war, this one could be crossed in the medium term with sufficient political leadership.

Third, EU finance ministers could decide to loosen the European Investment Bank’s lending policy to support European defense industry, also to attract further private capital. This could help defense companies better access the necessary capital to ramp up production and serve as an incentive for green and circular economy approaches in the sector.^[9] At the moment, the Bank is restricted to funding dual-use goods only.

In the medium to long term, European leaders need to move toward a true single market for defense. This has at least three important dimensions.

The first is greater standardization. The EU and NATO have been pushing for standardization and interoperability for many decades, but the effects of their largely voluntary approaches have been limited.^[10] The lack of compliance mechanisms only leaves financial incentives and political pressure as levers. The EDF makes the co-funding of joint development projects dependent on the definition of common technical specifications. The impact on standardization will be limited for now as EU co-funding currently only applies to a small share of multinational defense projects, but this could change with a larger volume for the EDF in the EU’s next budget (see recommendation 4). For the bulk of funds, it will be up to the member states to push their industries toward greater harmonization by replicating or joining successful models, such as the German-Norwegian or Dutch-Belgian naval cooperations. 

Second, addressing the excessive use of the national security exemption (Article 346 (1b) TFEU) will be key for establishing a level-playing field among European industrial players. Experts have suggested more transparent reporting on statistics for awarding contracts and stricter monitoring by the Commission, coupled with a more forward-leaning approach to infringement procedures.^[11] Another option would be narrowing the scope of the national defense exemption. According to Article 346 (1c) TFEU, the Council can decide unanimously, on a proposal from the Commission, to amend the list of arms, munitions, and war material to which paragraph 1(b) applies.^[12] The member states could agree on a gradual liberalization of Europe’s defense market for products that are not considered national key technologies. A more radical step would be to abolish the national defense exemption altogether.^[13] This could be done through a limited treaty change, as had been done with the European Stability Mechanism (ESM) during the sovereign debt crisis. Treaty revision is, however, a thorny affair and even changing two sentences, as was also the case for the ESM, can take several years.

A third important step toward a single market for defense would be to harmonize Europe’s patchwork of national arms export control regulations. Greater consistency would level the playing field for Europe’s defense industry, which is heavily export-dependent. Two general policy options are on the table. The first would be an EU regulation that holds members to the 2008 Common Position on arms exports. Although this option is inter alia supported by the German government, France has traditionally rejected it, fearing that it would lead to a highly restrictive regime. Limiting the scope to products developed jointly in an EU framework, as the Compass suggests, could make it politically more feasible. The 2021 EDF regulation already empowers the Commission to carry out ex-ante arms export assessments for products developed with its support. A new EU arms exports control regulation could establish an independent EU risk assessment body, which could draw up a blacklist of countries in light of the 2008 Common Position and ensure continuous monitoring.^[14]

The second option consists of the broadening and institutionalization of intergovernmental agreements. The German government suggested strengthening and extending the tripartite agreement on arms exports with France and Spain, concluded in the context of FCAS, to other nations. The three parties agreed that they would not prevent each other from exporting jointly developed goods unless immediate interests or national security were affected. Both options should be pursued in parallel but Europeanization from the bottom up seems to be more feasible in the short term.

The transformation of European defense will not happen overnight, but it must start now. Some steps, notably those outlined in recommendations 1-3, should be taken in the short-term and before the end of the EU’s current legislature. Others, including substantial increases in EU funding for joint procurement and industrial ramp up and steps toward a single market for defense, might take more time. Discussions should, however, start now. The 2024 European Parliament elections provide an opportunity for an in-depth debate on the future of the EU, the needed reforms, and potential treaty changes. EU leaders and institutions should then start the new legislative term with a revision of the Strategic Compass to agree on an ambitious reform agenda for European defense, which should also be reflected in the EU’s next multi-annual financial framework.