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EU Commission plans to fund ‘sustainable, war-ready’ defence production

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The European Commission plans comprehensive measures to develop the bloc’s military-industrial complex and increase war readiness, with subsidies to boost production capacity, build reserves, and encourage investment, according to a draft text seen by Euractiv.

Underlining the EU’s growing concern about deteriorating security, the Commission is looking at ways to support collaboration in defence – from the moment of demand from governments to joint procurement and ownership – and direct support to boost the defence industry’s production capacities for all types of equipment.

The new strategy, according to the draft text, includes subsidies to motivate cooperation, support industrialisation, and the industrial ramp-up of the bloc, as well as a security of supply regime, as first reported by Bloomberg.

Internal Market Commissioner Thierry Breton even mentioned the possibility of mobilising “a hundred billion euros” of investment in the next 12 months when talking to reporters including Euractiv on Wednesday (28 January).

The European Defence Industrial Strategy (EDIS) and Programme (EDIP) come as Russia’s war of attrition with Ukraine highlighted Kyiv’s dependence on other countries in the supply of defence equipment, after years of under-investment and de-industrialisation across Europe following the Cold War.

After several short-term defence programmes, the Commission now proposes an over-arching scheme to allow a sustainable increase in production capacity, as EU and NATO officials have warned that the war in Ukraine is becoming a war of warehouses where production capacity will be key.

Europeans “need to change the paradigm and move into war economy mode,” Breton said.

“This also means that the European defence industry must take more risks, and we will support them to give them greater visibility – that is what the new defence industrial strategy is all about.”

European defence chiefs have in recent weeks warned, one by one, of the possibility that the Kremlin might try to harm Europe directly in the next few years. French President Emmanuel Macron was the latest European leader to publicly warn of such a possibility earlier this week. 

The draft text reads that “defence industrial readiness can only be achieved if member states are willing and enabled, to prioritise collaborative investment, thereby reinforcing both military capabilities and the defence industrial base on which the EU and its member states can rely”.

As expected, a large part of the proposed measures were already outlined in the EU executive consultation with the industry at the end of last year, such as a regulatory framework allowing for priority-rated orders and a VAT exemption, matchmaking offer and demand, and changes in the European investment bank’s (EIB) strict anti-weapons lending policy.

Breton said the EU executive would push for massive investment and criticised national leaders for not publicly supporting this.

“For a credible European defence, we must also have adequate budgetary ambition,” Breton said. “That is why I believe that we need to start preparing now, within the next 12 months, for the possibility of ad hoc and additional investment in defence – in the order of a hundred billion euros.”

“Apart from the [Liberal] leaders, Emmanuel Macron, Kaja Kallas and Alexander de Croo, I don’t hear enough from European leaders on this issue. It’s obviously the real issue,” he added, in reference to issuing eurobonds to fund defence.

Match-making

The scheme would set up an EU-level mechanism to facilitate procurement with a European military sales mechanism based on the US foreign military sales model (FMS).

The Commission would have a common European catalogue of EU-made defence equipment on hand, fed voluntarily by the companies, so governments know the buy-European options.

The EU executive is proposing subsidies for joint procurement but also a VAT exemption for joint ownership of capabilities. EU funds under the future EDIP could also be used as collateral for the countries’ bond issuance to fund said programmes, the text reads.

The EU scheme and funds would also support the stockpiling of critical products or components should there be a conflict.

Another idea is to have all defence contracts around the bloc open to joint procurement – which means any country could join a contract already passed by a lead nation, under the same conditions, instead of working on a new one.

The text also sets a target to procure a certain amount of defence equipment collaboratively, even though EU countries already pledged  in 2007 to spend 35% of their equipment budget on European collaborative procurement and still fails to meet that target.

By 2035, intra-EU defence trade should represent at least one-third of the value of the EU defence market, the text also says. 

The plans would also set up a European Defence Industrial Readiness board for planning and programming “as a forum to discuss the strategy of demand and supply”, to streamline initiatives across the continent, said one Commission official, who however was not commenting directly on the draft text.

And in a brand new move, Ukraine’s industry will be considered an integral part of the project, as suggested by European Commission President Ursula von der Leyen and the EU’s diplomatic service (EEAS). So far, EU defence programmes have usually been reserved for EU countries and Norway.

Procurement agent and guarantees of purchase

Going even further, the EU executive could also take up the role of a procurement agent between countries and industries.

Based on how the Commission secured the production of vaccines against COVID-19 during the pandemic and gas stockpiles, with advanced purchase agreements and take-off contracts, the Commission could pass defence contracts on behalf of member states before they do it themselves.

This would give the industry visibility and predictability, von der Leyen pitched, and help reduce investment risks.

The scheme also includes using EDIP funds to keep “ever warm” factories, ready to use, in a bid to avoid another case of de-industrialisation of Europe.

“This would be particularly appropriate where critical supply shortages were identified by member states,” the text of the strategy reads, with EU funding to cover machine tools and personnel.

For crisis times, the Commission will also “explore measures to rapidly mobilise production lines from civilian industry for defence production purposes and to ensure the requisite qualified workforce is available under such scenarios” ie with security clearance and training.

The scheme also involves the need for priority-rated order options, to ensure military deliveries take priority in times of crises, and for the Commission to map and monitor “certain defence supply chains” – two ideas previously rejected by EU countries.

And to ensure that the research and development projects ongoing under the European Defence Fund (EDF) since 2021 are not lost, the Commission could propose “repayable grants” – similar to loans with no interest – “linked with the productisation and commercialisation for prototypes stemming from EDF”, the text says.

“We would take the risk – and if the equipment is sold, part of the money would come back to the Commission and then again be used to fund other projects,” a Commission official also explained.

Towards the next EU budget

For the executive, the scheme is meant to anticipate the EU’s next seven-year budget starting in 2028 by setting up a framework.

EDIP will have at least €1.5 billion as a financial envelope before the next EU budget is in place, thanks to the increase in the European Defence Fund (EDF), the Commission official said but declined to speculate for the post-2028 period.

The financial envelope and the cashflow channels remain unclear for now.

[Edited by Alexandra Brzozowski/Zoran Radosavljevic]

Read more with Euractiv

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