Spending Together

The increases in European defense spending not only beg the question of what to spend the money on but also how to spend it. The status quo ante is untenable; the fragmented European defense market wastes scarce resources and thus risks eroding public support for more defense spending. It also undermines military interoperability and deepens dependencies on non-­European suppliers. Indeed, Europe’s initial responses to Russia’s war against Ukraine may even have exacerbated existing fragmentation as the need for speed often trumped unity. Substantial reforms of how Europeans procure and develop military equipment should therefore accompany the increases in defense budgets.

The EU has recognized the problem. In recent documents, the European Commission and the European External Action Service made several proposals aimed at deepening European defense industrial cooperation.^[1] More than one year on from the beginning of the war, there have been some notable achievements, but overall, the results are inadequate. Outside the EU framework, there are also alternative paths toward closer defense cooperation. NATO plays an important role in setting standards and capability demands, but its processes are insufficiently synergized with EU initiatives. European states have further sought to establish intergovernmental paths for defense cooperation, but there are still too few examples of best practice. Having recognized the need to reform but without committing to the transformation the security environment requires, European defense is thus currently stuck on the fence.

The Russian war on Ukraine could actually render cooperation on arms procurement even more difficult. European states are scrambling to replenish their stocks, replace the equipment they sent to Ukraine, and reinforce their militaries in this new adverse security environment. And they are seeking to do so fast. Polish military planners, for instance, assume that Russia will be able to regenerate its conventional forces within five years.^[9] European production capacities are currently insufficient to meet demand. Upon signing an agreement to purchase tanks, fighter jets, and howitzer artillery from South Korea, Polish Defense Minister Mariusz Blaszczak hence emphasized that “fast delivery” was a key factor in the decision, as acquiring German Leopard tanks would have taken significantly longer.^[10]

In a similar vein, the German Defense Ministry decreed in April 2023 that “with immediate effect, the factor time shall have the highest priority.”^[11] Accordingly, the German Defense Ministry placed the largest orders of the special fund for off-the-shelf American-made equipment – F-35 fighter jets and Chinook helicopters. Moreover, the war illustrated the practical ramifications of Europe’s diverging arms exports rules and cultures. Germany’s initial reluctance to allow other European states to provide Ukraine with German-made Leopard tanks caused much frustration and could deter states from joining cooperative arms projects in the future should Germany demand a veto over their subsequent exports.

The Russian war on Ukraine has thus exacerbated some of the obstacles to European defense industrial cooperation while simultaneously dramatically increasing the demand for joint action. The prioritization of fast deliveries is understandable but comes at the cost of further fragmentation of Europe’s defense industrial base at a time when it is already highly dependent on the US. Crucially, arms procurement decisions have lock-in effects. They imply long-term maintenance contracts with external suppliers. Moreover, the longevity of weapon systems means that they will likely delay or even deplete investment in next generation systems. For example, some worry about the adverse effects that Germany’s purchase of F-35 fighter jets from the US might have for FCAS.^[12] Thus, procurement decisions taken now risk preventing the consolidation of the European defense industrial base for years and potentially decades to come. Policymakers must thus walk the fine line of rapidly equipping their armed forces and Ukraine while strengthening the European defense sector in the long term.

Even before the war, the EU had taken various initiatives to foster defense industrial cooperation. These include the establishment of the European Defence Fund, which provides around 8 billion euros from the EU budget (2021–2027) for collaborative defense research and capability development. In 2017, 25 EU member states agreed to activate Permanent Structured Cooperation (PESCO) in defense and have launched 68 joint capability projects since. The EU also established CARD, a process monitoring national defense plans with the aim of coordinating spending and identifying opportunities for collaboration. While introducing a defense chapter in the EU budget for the first time was considered a small revolution in Brussels, the member states cut the EDF by 39 percent compared to the initial Commission proposal in the negotiations on the EU’s 2021–2027 budget.^[13] Moreover, the 2022 CARD Report noted that the EDF, PESCO and CARD “have not reached their full potential” and that “no improved coherence of the EU defense landscape has yet been observed.”^[14]

The Russian war on Ukraine has added a much greater sense of urgency to the quest to spend better together. The Strategic Compass, agreed shortly after the start of the war, stressed the need to become “bolder and faster in filling critical capability gaps, overcoming fragmentation, [and] achieving full interoperability.”^[15] The quick and substantial use of the intergovernmental European Peace Facility (EPF) to reimburse and coordinate military assistance for Ukraine has been an important and visible contribution to Ukraine’s fight. The EU has also launched a range of additional initiatives to boost industrial cooperation and joint procurement in the short to medium term (Figure 4.3).

First, the Commission proposed the European Defence Industry Reinforcement through Common Procurement Act (EDIRPA) in July 2022. This short-term financial instrument (2022–2024) is intended to consolidate states’ demand for the most urgent and critical capability gaps created or widened by the response to the Russian invasion. The fund is supposed to co-finance procurement carried out by at least three member states. The proposal is innovative, as it would, for the first time, allow the use of the EU budget for joint defense procurement. While Article 41 of the Treaty on European Union bans using the EU budget for military and defense expenditure, the Commission found a creative workaround and chose a legal basis focused on fostering industrial competitiveness. This means that the funds can only be used to cover the administrative costs related to the increased complexity of joint procurement. The contribution from the EU budget can amount to up to one quarter of the value of a procurement contract.^[16]

EDIRPA is, however, unlikely to have much of an impact because the instrument provides too little too late. First, its budget appears insufficient to offer a real incentive. The Commission has proposed a financial volume of 500 million euros – a drop in the ocean compared to the overall increase of member states’ defense expenditure.  Second, almost a year on, EDIRPA has yet to be formally adopted, undermining its short-term ambitions. It took the European Parliament four months to clarify the competences of its respective committees and another four to consolidate its position. The proposal is now supposed to be agreed by summer 2023 or shortly after, leaving a lifespan of only fifteen months.

The negotiations also illustrate the trade-off between strengthening the EU’s defense industry and other considerations such as speed and the integrity of existing supply chains. The question whether EDIRPA should subsidize equipment that contains components from non-associated third countries has proved controversial, with France pushing for an EU-only approach. Meanwhile, Germany as well as Central and Eastern European states have advocated for greater openness. The Council eventually settled on a 30 percent cap on third-country components whereas the European Parliament proposed 40 percent.^[18]

A second key measure is the Ammunition Initiative initially proposed by Estonia in February 2023. It aims at providing Ukraine with one million rounds of much-needed artillery ammunition within 12 months and has three complementary tracks:

•    Track 1 was agreed upon in March 2023.^[19] It foresees the donation of artillery ammunition to Ukraine from national stocks or from reprioritizing orders until May 31, 2023. An amount of up to one billion euros from the EPF has been set aside to partially reimburse donors. As of May 23, the EU had provided Ukraine with 220.000 rounds of ammunition.^[20] This figure is likely higher in reality as member states can submit invoices up to six weeks after the deadline.

•    Track 2 seeks to incentivize the joint procurement of ammunition from the European defense industry and Norway. The consolidation of demand should lead to economies of scale and provide the industry with the large, multi-year contracts it needs to ramp up production. Joint procurement can either be organized via the EDA or member state consortia with a lead nation. Track 2 will be supported by another billion euros from the EPF covering the partial reimbursement of ammunition procured for Ukraine.

•    Track 3 focuses on ramping up European manufacturing capacities for ammunition. In May, the Commission proposed the Act in Support of Ammunition Production (ASAP) with a volume of 500 million euros being redeployed from the EDF and EDIRPA for the period until June 2025.^[21] The instrument should help European companies address bottlenecks and shortages they face in the ramp up (e.g., skilled personnel, machines, supply chains, raw materials). Companies that signed up for procurement contracts under Track 2 would get preferential access to Track 3. In a bold move, the Commission also proposed freeing up funding from the cohesion funds and the Recovery and Resilience Facility to allow member states to redirect these to their defense industries. This is intended to attract additional funding, either from the European Investment Bank (EIB) or from private banks.

As it has done with EDIRPA, the EU has broken fresh ground with the Ammunition Initiative. While it is too early to judge its success, the initiative is innovative and could serve as a model for jointly procuring different weapon systems. Even so, some obstacles will endure.

Money will likely be a constraining factor. The EPF, used for Tracks 1 and 2, has been topped up several times based on what could be called the “Borrell method”: the EU’s High Representative has repeatedly announced increases in the media ahead of important meetings to exert pressure on the member states to agree (which they need to do unanimously). So far, the method has worked, but resistance among member states, including Germany as the EPF’s largest contributor, is mounting.^[23] The fact that Hungary vetoed the disbursement of a fresh 500-million-euro trance in mid-May to remove the country’s biggest bank from a sanctions list of international sponsors of Russia’s war, indicates how fragile the consensus is.^[24] The proposed funding from the EU budget for Track 3 is limited and the impact of other financing options remains questionable. Redirecting cohesion and recovery money would require renegotiating the respective national plans and programming with the Commission. Any new measures would also have to be consistent with these funds’ objectives. If cohesion money were to be used for ammunition production, for instance, socially or economically disadvantaged regions would have to benefit from it. The provision of EIB financing for anything beyond dual-use goods would, in turn, presuppose a loosening of the bank’s environmental, social, and governance criteria. There has been reluctance to do so for fear of the bank’s downgrading by rating agencies.^[25]

In addition, the Ammunition Initiative faced yet another controversy on third-country components. The French insistence that the joint procurement should exclude ammunition that is not entirely produced on EU territory held up negotiations for weeks. This stance frustrated others who argued that European firms relied on some external components to deliver the shells on time.^[26]

These challenges do not bode well for the EU’s longer-term initiative, the European Defence Investment Programme (EDIP), which is meant to build on EDIRPA and ASAP. According to the Commission, EDIP should establish “the conditions and criteria for Member States to form consortia […] that will jointly procure, for the use of participating Member States, defense capabilities that are developed in a collaborative way within the EU and would benefit from a VAT exemption.”^[28] Thus, it should serve as “the anchor for future joint development and procurement projects of high common interest” and support these financially as well as helping to ramp up production capacities.^[29] The Commission had initially promised a concrete proposal for the third quarter of 2022, which was then postponed to June 2023 and could be delayed even further, largely due to a lack of financing. The suggested fiscal incentive, the VAT waiver for collaborative projects, has already run into opposition from the German Finance Ministry, and could be dead on arrival.^[30] The dearth of unallocated funding in the EU budget means that support for the ramp up of production capacities would have to come from other pots, as is the case for Track 3 of the Ammunition Initiative. In addition, the controversy on third-country participation and components could easily haunt negotiations again. This could cause delays, which would put its adoption before the 2024 European Parliament elections at risk.^[31]

Overall, the EU’s initiatives are breaking taboos and setting important precedents, but the lack of both adequate funding and political ownership by member states will likely limit their practical impact.

The EU has, of course, no monopoly over fostering European defense industrial cooperation.  Indeed, national and NATO priorities have traditionally shaped defense planning in Europe.^[32] NATO’s principal role in this area is to set both standards and demands for the Alliance. Its sophisticated Defense Planning Process (NDPP) seeks to harmonize national defense plans to meet capability targets deemed necessary to fulfill NATO’s objectives.^[33] By identifying and subsequently apportioning concrete targets for each ally, the NDPP provides direction for European states on what to procure and can point to potential synergies.

NATO’s role as a demand and standard setter could be upgraded at its forthcoming summit in Vilnius in July 2023. The Secretary-General expects leaders to endorse a “NATO Defense Production Action Plan” to boost production capacities and investment.^[34] This plan could set procurement targets for specific types of equipment, e.g., ammunition, and issue guidelines for standardization and stockpiles. Like the EU measures, the plan’s adoption of a multi-year perspective is meant to provide industry with the longer-term demand signal it needs to invest in production lines, personnel, and supply chains.

This plan could also enhance NATO’s role as a coordinator and convener that fosters joint capability development. It remains to be seen whether it will merely allot national targets or also collaborative or even regional procurement objectives for specific groups of nations, which would constitute a shift away from the NDPP’s current methodology. Regional procurement targets could be in line with the regional defense plans NATO is developing as part of its new Force Model and promote greater specialization of tasks in Europe. Furthermore, the plan could strengthen the NATO Support and Procurement Agency (NSPA). The agency usually acts as an intermediary between Allies and industry on NATO’s High Visibility Projects – forms of multinational capability cooperation in areas like air-to-air refueling or ammunition stockpiling. NATO also convenes the Conference of National Armaments Directors to encourage greater procurement coordination and cooperation among allies. Unlike the EU, however, the Alliance lacks meaningful funds to incentivize cooperation, which effectively limits its role. There is potential for synergies where NATO takes the lead in setting targets and standards while the EU prepares the ground for European defense industrial cooperation. However, the planning processes of the two organizations are insufficiently intertwined to effectively divide the labor between them.

Alongside NATO, OCCAR has acted as an important coordinating body for several major multinational procurement projects in Europe. With a select membership of Germany, France, Italy, Spain, the United Kingdom, and Belgium (other countries can join projects on an ad-hoc basis), OCCAR serves as an avant-garde group of Europe’s most importance defense industrial players. Accordingly, many of Europe’s most important multinational projects were managed by OCCAR, including the Airbus A400M transport aircraft, the Boxer armored fighting vehicle, and the Eurodrone (MALE RPAS). This raises the wider question of how to guarantee that Europe’s manifold procurement institutions add value, ensure a meaningful division of labor, and avoid duplicating each other.

Most large multinational projects in Europe have been conducted on a purely intergovernmental basis. There have been many negative examples, characterized by clashing industrial interests, huge delays, and exploding costs. However, there are also positive examples that illustrate the potential of nationally-driven consolidation, integration, and task specialization from the bottom up.

One such example is the German-Norwegian naval cooperation. In 2021, the two nations agreed to jointly procure the same submarines and naval strike missiles. The German company Thyssenkrupp Marine Systems will provide six identical submarines, two for Germany and four for Norway. The Norwegian company Kongsberg Defence and Aerospace will in turn supply the respective naval strike missiles for both sides. The two nations thereby acquire capabilities that are key for securing NATO’s northern flank. The decision will not only lead to deeper bilateral industrial cooperation but also entail closer navy-to-navy cooperation, including on training, exercises, spare parts, and lifetime management of the submarines.

Another example of best practice is the Belgian-Dutch naval cooperation (Benesam). The two countries have agreed to harmonize requirements for the replacement of their M-frigates and minehunters in a common procurement process. The acquisition of near-identical models will allow them to fully integrate support functions. This specific example builds on many decades of successful naval cooperation between the two countries. In 2022, France joined the bilateral minehunter cooperation, a logical step considering that the French shipbuilder Naval Group was constructing twelve new vessels for the two countries.

Both examples illustrate the well-known benefits of harmonizing
specifications and requirements. A hallmark study from 1999 estimated that armaments standardization could lead to cost savings of up to 50 percent.^[35] According to the study, standardization lowers procurement costs, promotes interoperability, and facilitates integration or task specialization in support and maintenance. The latter aspect is far from negligible given that maintenance costs represent 30 to 70 percent of the lifecycle costs of any platform.^[36] Even so, most nations have their own maintenance facilities. The savings potential for large-scale projects such as the FCAS and the Main Ground Combat System (MGCS) would be immense.

The above examples, however, also indicate that mutual trust is a determining factor for partial defense integration and task specialization. These forms of cooperation always imply giving up a degree of national sovereignty and independence. This is why they take time to develop and are more prevalent in some constellations than others. Strategic cultures, geographic proximity and history play an important role in this regard.^[37]

Existing formats of joint development and procurement have not yielded sufficient benefits to convince European states of their merit vis-a-vis off-the-shelf purchases. While the EU has launched several initiatives that go beyond erstwhile red lines, the return of large-scale war to the European continent has not yet led to the transformation in defense industrial cooperation that is warranted. One reason is a lack of political leadership, notably by France and Germany. While France is perceived as instrumentalizing the EU initiatives for its own industrial interests, Germany is seen as missing in action and neglecting the European dimension in its response to the ­Zeitenwende.^[38] In addition, the EU initiatives are chronically underfunded when compared to Europe’s overall defense spending increases. The impact of alternative paths to cooperation, be it via NATO, OCCAR, or smaller intergovernmental formats, depends entirely on the political will of European states to overcome narrow national industrial interests and shed a degree of sovereignty. Further reforms and a change of mindset in national capitals are needed to set European defense cooperation on a new path.