The European Defence Industrial Strategy: What does it mean for Belgium?

By Gregory Kegels*

*Special thanks go to Du Bois C., Buts C. and Ølykke G. for their useful comments.

5 April 2024

On 5 March 2024, the European Commission published a European Defence Industrial Strategy (EDIS) containing new measures for joint procurement and support to the Defence Technological and Industrial Base (DTIB). The strategy was accompanied by a proposal for a new regulation forming the European Defence Industry Programme (EDIP) to establish many of the measures outlined in the EDIS.

Although the EDIS in its current form is unlikely to be fully accepted and the proposed budget for the accompanying regulation is still limited, the strategy moves in the right direction and outlines measures that could be an important facet for the readiness of Belgian Defence and to further support the Belgian Defence Technological Industrial Base.

Why do we need a European Defence Industrial Strategy?

The EDIS first and foremost aims to increase European production of critical defence goods as well as to “procure European” to decrease dependence on non-European suppliers.  Thereby it contributes to ensuring structural defence readiness for credible deterrence. The EDIS proposes that, by 2030, 50% of Member States’ defence procurement should be European. An even higher target of 60% is proposed for 2035. Most notably, the EDIS emphasises the dangers of EU Member States’ excessive reliance on US supplied critical defence goods.[1] Recent events have highlighted this risk, providing the impetus for such a strategy.

First, the Ukraine crisis has emphasised that reliance on US suppliers severely hampers the EDTIBs ability to produce even the most critical defence goods (e.g. ammunition) in times of need. Years of subdued and volatile EU demand for products from European producers, resulted in little financial incentives to maintain stock or excess production capacity.  It also made European producers more export oriented. This resulted in an increase in export contracts to non-EU countries, a lack of ramp-up capabilities, long-lead times, and an inability to adequately respond to EU defence needs.[2]  

Second, some of the EU’s NATO members question the US’ willingness to always assist sufficiently. Trump’s dubious stance on the need of NATO and his view that NATO members which do not spend 2% of their GDP on defence should not necessarily be protected by article 5 of The North Atlantic Treaty is understandably worrisome for several of the EU’s NATO members.[3] Yet, similar worries persist even if Trump does not win the next US presidential elections. In case of a Chinese invasion of Taiwan, the US will likely focus most of its attention there, in accordance with its national interests. Depending on the severity, the US may not be able to supply the required goods to the EU, even if it is willing to.

The EDIS’ main pillars and their implications for Belgium?

The EDIS outlines 5 pillars to achieve its objectives, i.e.: increasing joint European investment and coordination (1); supporting innovation, production capacity and security of supply within the EDTIB (2); securing financing for the proposal (3); expanding access to finance and to existing EU instruments through including defence readiness, security and resilience as an objective across Union funding programmes (4); and working effectively with partners, most notably NATO and Ukraine (5).

At the heart of the EDIS is a proposal for a new regulation forming The European Defence Industry Programme (EDIP), which expands the joint procurement logic of EDIRPA and ASAP. The EDIP aims to establish joint programming and procurement functions, a pilot project for a European Military Sales Mechanism, European defence projects of common interest, e.g. using defence contracts and framework agreements of other Member States. These measures are particularly interesting to be employed by Belgium within the framework of its close defence cooperation with the Netherlands and France.

The EDIP also proposes measures to increase the responsiveness of the EDTIB, such as bridging the commercialisation gap left at the end of defence-related R&D projects and setting up a Fund to Accelerate defence Supply chain Transformation (FAST) to respond to urgent financing needs.

Operating within a framework of scarce resources[4] and a need to increase defence expenditures and support for its DTIB to contribute to EU and NATO defence readiness, potentially the most interesting measures in the EDIS for Belgium facilitate support to the DTIB by means of already existing EU funding mechanisms and financial instruments.

First, the EDIS suggests that Member States steer EU funds stemming from cohesion policy, such as the European Regional Development Fund for industrial development and the European Social Fund for skills, towards the EDTIB. Second, while the EDTIB can in theory already employ financial instruments contained in InvestEU, lending practices of financial institutions are often limited to dual-use technologies. In response, the EDIS proposes a revision of the European Investment Bank’s lending policies, that can subsequently permeate the entire financial ecosystem.

However, Belgium does not have to wait for the adoption of the EDIP proposal and thereby for most of the EDIS measures to take effect. The EDIS devotes an entire section to the misinterpretation of the EU's sustainable finance framework and the need to correct it. Contrary to how banks and financial institutions wrongly interpret the framework, it does not in itself restrict investment in the defence sector, as these rules are not sector-specific.[5] Belgium should already start discussions with Febelfin, the association of Belgian banks and financial institutions, regarding adjustment of their lending rules to align them with the arguments in the EDIS.[6]

Why is the strategy unlikely to be accepted in its current form?

While the EDIS outlines several support mechanisms, the proposed Regulation establishing EDIP, which would establish most of the outlined measures, requests a budget of only 1.5 billion EUR from 2025-2027. Nevertheless, questions remain regarding the funding of EDIP within the ongoing Multi Annual Financial Framework (MFF).

The rather low impact of the proposal is directly linked to the limited competencies the EU has concerning defence-matters. Defence and defence industrial strategy remain firmly entrenched national competences within EU law. Article 4(2) TEU, for instance, specifies that “national security remains the sole responsibility of each Member State”. It is likely that some Member States will call upon this provision to claim that several sections of the EDIS and EDIP go too far and therefore infringe on national powers. Hence, we should probably expect several changes before final adoption.

Despite the EDIS’s limited impact and a likely further watering down of the strategy due to opposition of several Member States, its announcement nevertheless remains significant. While the requested budget for the accompanying EDIP proposal may be small, it updates mechanisms that Member States can employ for joint procurement outside of the procurement directives and expands the funding tools as well as access to finance for the DTIB. The strategy also presents another slow but meaningful step towards changing the fabric of the EU. Slowly but surely, the economic and soft power bloc can begin to take shape as a real actor on the world stage, even if the Treaties’ defined competencies limit the breadth and speed of change.

[1] While the overreliance on US defence goods has been mentioned in previous EU documents, such as in the defence investment gap analysis from 2022, the language is notably more direct and the issue can be interpreted as a core facet of the EDIS.

[2] The EDIS itself notes that since the start of the Russia-Ukraine war, the EDTIB has increased its production capacity in artillery ammunition by 50% and should be able to produce 1.4 million artillery rounds by the end of 2024. However, it presents this increase as a success. An increase of 50% over the course of 2 years is not a measure of success, especially given it is not even close to able to produce the minimum requirements for Ukraine and is being outcompeted by Russian production.

[3] Trump deems that members not spending 2% of their GDP engage in a form of contractual breach; hence the US should not be beholden to those that do not fulfill the criteria. However, even if all NATO members shore up their expenditure to 2%, Trump admitted that the door is open for the US to interpret article 5, severely undermining the credibility of the collective defence deterrent of article 5.

[4] Belgium’s forecasted budget deficit (4.9%) and debt-to-GDP ratio (106%) for 2024 are well above the EU’s deficit (3%) and debt thresholds (60%). The Commission, in an opinion on the 2024 budgetary plans of Belgium, stresses for Belgium to accelerate structural changes to its fiscal environment.

[5] The latter does contain a caveat, given that production of critical defence products is an industrial process and therefore more polluting than many other activities. This once again shows the flaws of non-sectoral rules. Do we want to make all polluting activities dependent on non-European investments or push them outside Europe where there are less stringent rules? Or do we want to innovate and make these activities greener compared to the status quo? It seems like a non-question, but one that unfortunately has yet to be clearly answered.

[6] As proposed in the EDIS, this could be done in cooperation with EDA-managed ‘Governmental Expert Network on ESG’ (see: p25) ;  According to industry and other stakeholders, Febelfin provides negative lending guidance for any company that has more than 5% of its turnover from defence market-related activities, yet it is left ambiguous what it considers part of these activities. The result is that even companies acting as suppliers of components are reluctant to be open about their activities within the defence market out of fear of losing access to finance or receiving less favourable loan terms.