New EU Regulation on defence-related investments - EU opens up additional funds for defence investments

Last week, the European Commission (EC) published its draft proposal for a Regulation aimed at incentivising defence-related investments within the EU budget, as part of the implementation of the ReArm Europe Plan (the Regulation). 

The proposed Regulation seeks to encourage such investments by providing targeted incentives, removing potential barriers, and ensuring greater flexibility and simplification. Rather than establishing new funding instruments, it introduces amendments to several existing EU instruments to better support defence-related projects, building on the framework previously outlined in our blog on ReArm Europe/Readiness 2030 strategy. The amendments to existing EU instruments are detailed below. 

Changes to existing instruments

1. DIGITAL

The Digital Europe Programme (DIGITAL) allocates €7.59bn to accelerate the digital transformation and support the green transition across various sectors. It focuses on strategic investments in areas such as artificial intelligence, cybersecurity, digital skills, and high-performance computing. In line with the objectives set out in this White Paper, recent amendments have broadened the programme’s scope to include dual-use technologies. Additionally, funding has been extended to support AI factories and gigafactories, key infrastructure capable of serving both civilian and military or security-related purposes.

2. Horizon Europe 

With the €93.5bn budget, the Horizon Europe Regulation established the framework for funding research and innovation from 2021 to 2027, setting scientific and technological objectives, financial rules and participation guidelines. Its overall aim is to strengthen the EU’s scientific base, competitiveness and strategic priorities, and to address global challenges such as the UN Sustainable Development Goals and climate change. The amendment to the Horizon Europe Regulation allows the support of technologies with dual-use and defence applications, including equity support for scaling up. Unused funds and returns from the Horizon Europe Regulation will be made available to such projects. Additionally, the funding will extend support to non-bankable SMEs and start-ups, which face higher financial barriers in the defence sector. 

3. EDF 

The European Defence Fund (EDF) was established to support the research and development of innovative products and technologies in the defence sector for the 2021–2027 period with a budget of nearly €7.3bn. It promotes cross-border cooperation among EU public and private entities, including SMEs, universities, and research organisations. The amendment to EDF introduces a more flexible approach, enabling the EC to directly support the development of disruptive defence technologies without prior public consultation. Additionally, it allows Member States to transfer funds allocated to them under shared management to the EDF. 

4. CEF

The Connecting Europe Facility (CEF) is a €20.73 billion funding instrument designed to support targeted infrastructure investments across three key sectors: transport, energy, and digital services. The amendment to CEF broadens its digital objectives to include and prioritize cloud infrastructure, AI and AI gigafactories projects, building on its existing focus on high-capacity networks like 5G. It also enables Member States to transfer funds allocated under the European Regional Development Fund (ERDF) and the Cohesion Fund (CF) to CEF.

5. ASAP

The Act in Support of Ammunition Production Regulation (ASAP) was adopted to financially ensure timely supply of ammunition and missiles in Europe. The amendment to ASAP allows additional financial contributions from various entities, including Member States and international organizations. Like the amendments to the EDF, it permits the transfer of resources allocated to Member States under shared management, with the EC implementing these resources directly or indirectly for the benefit of the Member State, thereby enabling additional funding beyond the existing €500m. ASAP is extended until December 2026, ensuring the support for the production capacities across the Union.

6. STEP

The Regulation on Strategic Technologies for Europe Platform (STEP) established programmes to boost the investment in critical technologies in Europe such as digital technologies and deep-tech innovation, clean and resource-efficient technologies, and biotechnologies. Although STEP supports the development and manufacturing of certain defence technologies, including AI, cybersecurity technologies or drones, the Regulation extends the scope of STEP by introducing a fourth strategic sector covering all defence-related technologies and products. STEP draws on resources from 11 EU funding programmes, including the aforementioned DIGITAL, Horizon, EDF, ERDF, and CF.

It is currently unclear whether these changes will require the amendment of the draft regulation establishing the European Defence Industry Programme (EDIP). As mentioned in our previous blog, EDIP is a new legislative initiative aimed at achieving the long-term defence industry preparedness of the European Union. EDIP foresees a budget of EUR 1.5 billion up until the end of 2027. This budget will also fund cross-border R&D projects and facilitate access to financing.

Business opportunities

The amendments introduced by the new EU Regulation represent a transformative opportunity for businesses in the defence sector. By providing access to previously unavailable funding and supporting dual-use initiatives, the Regulation not only enhances the ability of companies to innovate and grow but also aligns their efforts with the EU’s strategic objectives. Businesses are encouraged to explore these opportunities and consider how they can best position themselves to benefit from the evolving landscape. The Freshfields defence sectors experts stand ready to help you and your company to make best use of these opportunities.