Towards a European Single Defence Market?

Abstract  

Integration in the field of the European Defence Technological and Industrial Base (EDTIB) faces a dilemma. On the one hand, increased cooperation between European defence firms would undeniably reduce costs of research and production. On the other hand, due to the sensitivity of defence matters, states have traditionally protected their sovereign control of their national defence market, de facto limiting cooperation opportunities. The European Union (EU) might appear as the obvious solution to promote cross-border cooperation. Considering the need for optimisation of European defence spending, this article analyses the viability of the creation of a European single defence market and the approach through which the EU might foster it.  

Introduction 

After the end of the Cold War, most European Union (EU) Member States more or less consciously adhered to the thesis of the ‘End of History’ (Fukuyama, 1992: 1) by strongly reducing their defence spending and capabilities. This belief was that the model of liberal democracy had emerged as the dominating ideology worldwide and that some form of stability of the international system would gradually impose itself (Fukuyama, 1992). However, with the continuous Russian aggressions against Ukraine since 2014, which culminated with the invasion of the country in 2022, large-scale conflict hit the continent again. Most EU Member States have responded economically, diplomatically, and militarily by supplying significant quantities of defensive material to Ukraine (Besch, 2022). This military support has put rearmament at the centre of many EU Member States’ priorities. Most of this re-equipment, including a large part of Germany’s ‘Zeitenwende’ (Besch, 2022) commitment of €100 billion in support of Ukraine, is achieved by procuring (purchasing) weapons from the United States (Besch, 2022). This has been proven by the first major use of these funds being for the procurement of US-produced F35 fighter jets in a historic deal worth around €10 billion (DGAP, 2024). In contrast, this article analyses the prospects for increased EU cooperation in the production or procurement of material offers and how further integration may take place.  

In Europe and other democratic systems, national security is generally governed solely by the state, which is generally the only political authority directly monopolising, generating, and owning the tools of violence (Schilde, 2023). The EU Member States were, until the end of the twentieth century, no exception to this rule, each ensuring its defence needs either by procuring defensive hardware, producing it, or both. European governments strictly regulate the production and selling rights of their national defence firms. The European defence market was therefore best described as a set of independent national markets, each with a unique set of supply and demand arrangements with domestic defence firms. However, after the end of the Cold War, the combination of the process of greater European integration and the difficulty of sustaining indigenous defence industries led to an increased need for collaboration on a European level (Jones, 2018). These efforts first started between individual European countries, most notably with the creation of the Organisation for Joint Armament Cooperation (OCCAR) in 1994. Since 2004 and the creation of the European Defence Agency (EDA), most of the collaboration has taken place inside European Union institutions and agencies. This article starts by explaining the states’ decision-making and the obstacles to further cooperation. It then analyses the three ways in which the EU has attempted to facilitate cooperation and integration in the European defence sector. Finally, it delves into the potential of liberalising the European defence market. 

How to explain cooperation or the lack thereof  

Today, the decision-making method used by Member States to rule the EU defence sector remains mainly intergovernmental. Under articles 173 and 182 of the Treaty for the Functioning of the European Union (TFEU), the European Commission is allowed to promote coordination, while the European Council and Parliament can establish measures necessary to implement further cooperation (Perotto, 2023). However, the scope of these articles, in which the European Commission is given considerable responsibilities, is limited by Article 372. This legislation grants states a derogation from the previously mentioned provisions and will be detailed later on. This article therefore analyses cooperation by explaining EU Member States’ decision-making both politically and economically, arguing that for further cooperation to take place both economic benefits and limited political costs are required.  

So far, cooperation between European defence firms has taken two forms: joint procurement and the creation of common projects, both of which require the EU Member States to approve or promote said cooperation. Firstly, joint procurement is the only form that truly presents short-term advantages economically. By pooling resources and coordinating to purchase goods as a group of states and not as individuals, states can achieve economies of scale. Putting resources in common allows states to leverage their high purchasing power to negotiate lower prices and reduce transaction costs. This approach requires high levels of coordination as states must communicate their needs and preferences in terms of material to one another. This method has been used to obtain ammunition to supply Ukraine. Most notably, in October 2023, the EDA (2023) reported that seven EU Member States ordered 155mm ammunition as a single order, openly reporting that such action would result in economies of scale (Caranta, 2023). Joint procurement is therefore relatively risk-free in terms of political costs, as states only need to communicate their needs to one another, making it an accessible solution to enhance cooperation.  

Secondly, through collaborative projects, European Member States can save costs in production by reducing duplication. The European defence market is quite fragmented, which means that most states use different equipment. For example, the 27 Member States produce or use 12 different types of main battle tanks (Olsson, 2021), all of which have required unique research teams and industrial lines for their production and upgrades. Putting in place joint projects would save significant costs by harmonising the material used and sharing the costs of its development. Indeed, Member States could pool their resources to create only one production line or one research project, whose results would be shared between all contributing states (Heuninckx, 2008). The best example of such coordination is the current development of the MALE RPAS or Eurodrone. All four European countries using Medium Altitude Long Endurance (MALE) drones procured them from either the United States or Israel (Kunertova, 2019). This is due to the important costs associated with the research and development of these military assets. In 2015, France, Italy, and Germany, later joined by Spain, agreed to develop a common drone together (Kunertova, 2019). This collaborative process offered many advantages. It allowed the Member States to share the costs of production between participating countries and to take advantage of the expertise of each firm involved (Schilde, 2023). The European corporation Airbus, the French Dassault, and the Italian Leonardo collaborated on this project by notably sharing tasks based on their respective expertise. While the production is not finished and is expected for 2028, each participating country bought between four and seven of these Eurodrones, showing their commitment to the project (Kunertova, 2019). This project is accompanied by other efforts such as the creation of a European Patrol Corvette and various other projects under the supervision of the EDA (2024). It is important to note that this logic only applies to the production of defensive materiel and not to future trade prospects, which can have varying effects on a state’s economy depending on its specificities.  

Figure 1. Fragmentation of the European defence market in terms of main battle tanks (MBT) in 2021. The MBT market is relatively concentrated, especially when compared with others, but offers a good basis for comparison as most EU Member States use MBTs (Olsson, 2021). 

While these current efforts to cooperate can be explained by the economic benefits of defence industry cooperation, one must acknowledge the costs associated with it. One of the obstacles to further integration is said to be the reservations many EU member States have about further political cooperation, especially in the area of defence. This potential opposition is caused by the preference most EU member states have for maintaining sovereign control of their supply of defensive hardware. Of course, this observation is not universal and depends on both the domestic politics and the strategic culture of the Member State in question (Cornish & Edwards, 2005). For example, France has a history both of promoting European integration and of more interventionist foreign policy preferences, making it more prone to cooperate in this field (Kruijvert & Zandee, 2019). Smaller states, meanwhile, are more sceptical of defence collaboration, notably due to the importance of NATO for their security (Krupnick, 1996). Indeed, the growth in scepticism in the US concerning European defence cooperation, voiced notably by Presidents Donald Trump and Joe Biden, makes certain EU Member States question the compatibility of EDTIB integration with NATO (GEG, 2021).  

To convince doubtful Member States, NATO and the EU acknowledged the ‘value of a stronger and more capable European defence’ in 2023 in their third joint declaration (NATO, 2023: 1). This cooperation is understandable as both organisations promote capability development and interoperability between member states, making EDTIB integration a way of reaching NATO standards. These standards are formulated by the organisation and may be operational, administrative, and in this case material. For example, NATO dictates production codes of practice and recommends the use of certain defensive hardware to promote interoperability between different NATO members. For example, projects funded by the European Defence Fund (EDF) may be required to fit NATO standards. This applies to projects related to the production of ammunition, which need to comply with STANAG 4439, a directive focused on the interoperability of ammunition between NATO allies. Additionally, the Permanent Structured Cooperation (PESCO), a structure designed to enhance cooperation between Member States, started welcoming non-EU projects in 2020, after two years of only allowing European projects to be under its supervision (Moller & Rynning, 2021). Four third countries have been invited to take part in PESCO projects, all of which are NATO member states: Canada, Norway, the United Kingdom, and the United States (EDA, 2024). 

Market regulation as an integration and cooperation incentive?  

The EU has played a significant role in fostering a more integrated European defence market. Firstly, the European Commission has promoted cooperation in defence production and procurement to unlock potential economic benefits. Its first approach was the use of normative tools. Such measures started in the 2005 Code of Conduct on Defence Procurement and the 2006 Code of Best Practice in the Supply Chain (Sabatino, 2022). Their principle is quite simple: to recommend cooperation as a policy choice in the state’s own interest. Both codes described below outline objectives to reach and methods for states to use without being coercive. Secondly, the EU has attempted to put in place an approach based primarily on punishment. In 2009, the European Commission passed a directive on defence procurement that allowed it to start infringement procedures against states ‘unduly’ (Besch, 2022: 3) prioritising their national defence firms when taking part in procurement. Directive 2009/81/EC, as it is called, was widely recognised as ineffective. This failure can be explained by the special provisions present in the Consolidated version of the TFEU protecting a state’s control of its defence industry. Most notably, article 346 of the TFEU acts as a form of veto (Randazzo, 2014), allowing Member States to ‘take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material’ (Ibid: 2). This article guarantees that any measure related to EDTIB integration is non-binding. It was used 12 times between 1999 and 2014 in the European Court of Justice, including seven times in Community Custom Code cases (Ibid). To this day it remains a guarantee for states that they can maintain protectionist policies.  

Thirdly, as a response to the failure of coercive tools, the EU has attempted to put in place an approach based on incentivising cooperation and making it more desirable for states. The most obvious examples of such measures are the various funds created by the EU which encourage cooperation. Of these the most important initiative is clearly the EDF, a programme proposed by the European Commission in 2017 (Csernatoni & Oliveira Martins, 2019). In principle, this fund rewards collaborative defence projects between three or more European defence firms and can be used to fund both the research and production phases of development. Admittedly other funds exist, such as the European Defence Industry Reinforcement through the Joint Procurement Act (EDIRPA). However, the EDF has greater financial backing and strategic importance. Indeed, the EDF has to be used for the development of weapons and is not limited to procurement. It is worth €8 billion, compared with €300 million for the EDIRPA. Incentives for states to cooperate have also taken the form of structures created to reduce information and transaction costs and in general render cooperation more accessible. These include the creation of PESCO, which acts as a forum to facilitate coordination and cooperation between Member States.  

Liberalising the European defence market  

The efforts described above have been in many respects quite successful, as there are currently 68 projects developed through PESCO. However, further progress can be made to optimise Member States’ spending in defence, notably through the gradual establishment of a single defence market. In principle, this would consist in applying the specificities of the EU single market to the defence sector. To do so the EU would need to ‘harmonise internal market rules and taxation’ (Schilde, 2023: 1260). It would also need to offer greater ‘regulation on external market boundaries and monitoring of states’ defence spending’ (Schilde, 2023: 1260). As a result, the privileged situation in which states are both the regulator and main client would disappear. The EU would act as a regulator of the new European defence market without being the main client, which would be the Member States. In this hypothetical market, EU Member States would be less reliant on third states, and greater levels of joint procurement and collaborative production would take place. However, it would undeniably result in greater interdependence between EU states and a greater involvement of EU institutions in Member States’ defence supply.  

To achieve a ‘liberalisation’ of the European defence market, this article would recommend the continuation of the current incentive-based policy, which has proven to be more successful than the coercive approach mentioned previously. To do so, a greater part of the EU budget should be dedicated to VAT exemptions, grants, and loans to help match the supply and demand of the European defence market (Pugnet, 2024). These funds would be used to promote cooperation in the same vein as the EDF and EDIRPA but would be used to incentivise states to break down the protectionist structure of their internal market. The newly published European Defence Industrial Strategy takes steps in this direction, notably by putting in place a VAT exemption for states taking part in joint procurement (Besch, 2024; European Commission, 2024: 12). However, the scope of these efforts should be broadened and their funding increased to further promote this liberalisation. Finally, this article has not focused on matters related to domestic politics, but rather on the role of EU institutions. However, cooperation remains dependent on the willingness of states to cooperate, notably due to the presence of article 346 of the TFEU.

On this matter, the 2024 European elections are of high significance for the future of European defence.  

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