The defence sector has never been more important for the European Union. The war in Ukraine has led to a heightened sense of urgency regarding the European Union’s preparedness in defence matters. The European Commission (Commission) created a new portfolio to lead this policy area and appointed Andrius Kubilius as Commissioner for Defence and Space. Commissioner Kubilius will lead the implementation of the first-ever European Defence Industrial Strategy and of a new legislative act that is now being discussed in Brussels – the regulation establishing the European Defence Industry Programme and a framework of measures to ensure the timely availability and supply of defence products (EDIP). The Commission published a report on EDIP which highlights the rationale behind this regulation, its objectives, and its impact on Members States and businesses.
Background
EDIP is a new legislative initiative aimed at achieving the long-term defence industry preparedness of the European Union. It lays down a set of measures, in the form of a regulation, to support the implementation of current defence strategies. The goal of these strategies is to ensure that the European Union maintains strategic autonomy, reduces its dependency on external suppliers, and addresses security challenges more effectively. Considering that close to 80% of Member States’ defence investments have been made with non-EU suppliers, ambitious non-binding targets have been set to strengthen the responsiveness of the European defence industry. Member States are invited to:
1. Procure at least 40% of defence equipment in a collaborative manner by 2030;
2. Ensure that, by 2030, the value of intra-EU defence trade represents at least 35% of the value of the EU defence market; and
3. Make steady progress towards procuring at least 50% of their defence procurement budget within the EU by 2030 and 60% by 2035.
How will EDIP impact businesses?
Budget: EDIP foresees a budget of EUR 1.5 billion until the end of 2027 (from 2025), which will support an increase of the defence industry’s production capacity within the European Union. This budget will also fund cross-border R&D projects and facilitate access to financing for SMEs. A separate and unspecified budget is foreseen to improve Ukraine’s defence capabilities through increased support for its defence industry.
Competitiveness: One of EDIP’s objectives is enhancing competitiveness. Before the war in Ukraine started, EU producers mostly focused on exports. Increased demand from the Member States represents a major change for both EU and non-EU producers. EU producers are encouraged to cooperate to maximise the opportunities offered by EDIP. Cross-border cooperation in R&D is a key criterion to receive funding under EDIP. Strategic investments in innovative technologies are geared towards long-term competitiveness.
Moreover, EDIP explicitly instructs Member States to simplify and accelerate the permit-granting process for the production of defence products and their market entry. While the concrete measures to be taken currently remain unclear, businesses will, in any case, profit from a more efficient and streamlined procedure.
Key market actors: Member States shall, moreover, identify key market actors, ie businesses with a high market share of specific key defence products. Although the consequences of such categorisation, again, remain unclear for now, it is likely that the European Union is planning to take additional action in order to secure such key market actors’ output.
SMEs: SMEs play an increasingly important role in the defence sector. However, access to financing has always been a hurdle. EDIP facilitates their access to financing and participation in defence projects to encourage innovation and competition. It specifically requires Member States to identify potential disruptive factors and decrease administrative burdens. In addition, EDIP establishes a specific fund, which aims to leverage, de-risk and speed up defence manufacturing capacities of EU-based SMEs and small mid-caps.
Support to Ukraine: EDIP particularly aims to strengthen Ukraine’s ability to defend itself by establishing closer cooperation in the defence sector. The European Union will support Ukraine in a manner extending beyond the mere delivery of weapons, as is currently the case, including regarding efforts to harmonise the law. For this purpose, the European Union and Ukraine shall enter into a specific framework agreement, which sets out the relevant obligations for Ukrainian businesses that will be receiving European Union funds.
Next steps
EDIP represents a crucial opportunity for business to influence the development of the European defence industry. The majority of EDIP measures rely on an incentives-based approach and do not introduce mandatory obligations. Only in response to a (security-related) supply crisis might EDIP involve mandatory obligations that will have a direct impact on the industry. EDIP seeks to simplify procedures, reduce risk, and increase funding opportunities. The time-sensitive nature of the issues tackled by the EDIP calls for an adoption sooner rather than later. The Commission has transmitted EDIP to the European Parliament and Council. The European Council has indicated that it will be adopted by mid-2025. The French MEP François-Xavier Bellamy from the European People’s Party will lead the European Parliament’s work on the EDIP Regulation. In the beginning of August, the European Economic and Social Committee published its opinion on EDIP, highlighting its support for the regulation. At the same time, it provided a list of recommendations to the Commission, which shows that EDIP’s current content is – at least to some extent – still open to discussion. Freshfields stands ready to help clients navigate these developments.
