The Lost European Vision

Introduction

Russia’s full-scale invasion of Ukraine in February 2022 has caused a dramatic shift in the European security landscape, and European defense is now entering a new era. DGAP has initiated a project to provide a comprehensive analysis of the changes in the European defense sector triggered by the Russian attack.

During the first phase of the project, carried out in cooperation with the Friedrich-Naumann-Foun-dation, the analysis concentrated on changes in the perception of the defense environment and their implications for the future military order and defense cooperation.

The second phase of the EDINA (European Defense in A New Age) project focuses on the European Defense Technological and Industrial Base (EDTIB) in the new era of European defense. It highlights the impact of the Russian aggression on Europe’s defense industry and analyzes the structural drivers and constraints that influence the future trajectory of the continent’s industrial base.

The data base was generated in a similar way to the first phase of the EDINA project. In May and July 2023, DGAP brought together defense experts from European NATO members (Germany, France, United Kingdom, Spain, Italy, Greece, Türkiye, Poland, Hungary, Romania, Lithuania, Bulgaria) for two workshops (physical and online) to discuss the current situation and future development of the EDTIB. Prior to the workshops, the experts were asked to prepare country reports as their input to the discussions. The reports allowed to sketch out the industrial landscape in Europe and provided valuable insights into different positions on defense industrial cooperation, dependencies, and structural problems regarding the EDTIB. The reports were based on the following questionnaire:

• Industries/ RTO: What are current strengths in production and technologies (top 5-7 companies, revenue, employees, current major projects (timelines), role in the supply chain/product portfolio, cooperation partners, involvement in European projects)?

• How does your country assess the impact of cooperation, dependencies (import/export) and competition among Europeans but also vis-à-vis the United States and Asia on the future ability of the armaments sector to deliver needed output (quantity/quality)?

• Future Avenues: How will the national DTIB evolve over the next decade? What are important trigger points for such a development?

After the workshop, the authors had the opportunity to update their reports in the light of the discussions. For this publication, they were then slightly edited to meet grammatical and spelling standards. Any opinions expressed in the reports are those of the authors and do not necessarily reflect the views of the German Council on Foreign Relations (DGAP).

This project report starts with a presentation of key findings from the workshop and country reports. This section also presents the research team’s analysis of the current situation, a forecast of likely developments, and suggestions for measures to be taken to push the EDTIB forward. This executive summary is followed by the country reports.

Executive Summary

Russia’s attack on Ukraine in February 2022 marks the beginning of a new era in European security, and Europe’s response to the Russian aggression will shape the development of the European defense technological and industrial base (EDTIB) for decades to come. At the same time, there are important economic and political factors influencing the continent’s defense industrial development. Against this background, this report outlines the most likely development scenario for the European industrial base. It also describes the options open to European governments and the EU to maintain a highly capable defense industry and address current shortcomings.

A Snapshot of the European Defense Landscape

Europe’s defense industry produces the full range of conventional capabilities needed by its armed forces. However, this capacity comes with significant dependencies: On the one hand, given the many years of insufficient national demand, manufacturers have become increasingly dependent on exports to countries outside of the EU and NATO to maintain their skills and production lines. On the other hand, the economization of defense, meaning a growing pressure on prices, has created significant import dependencies on raw materials and key components like semi-conductors. Both elements are now coming under scrutiny as security of supply is becoming a key concern for European nations and their armed forces.

The EDTIB reaches far beyond the EU and its member states. Despite EU initiatives like the Permanent Structured Cooperation (PESCO), the European Defence Fund (EDF), and lately the European Peace Facility, the lion share of defense industrial investment undertaken by EU member states takes place outside the EU framework. Also, countries outside the EU – the United Kingdom as a defense industrial heavy weight as well as Norway and Türkiye – add significantly to the landscape, be it through cooperation or competition. At the same time, non-European companies have become part of the continent’s defense industrial ecosystem by contributing components or whole systems. This applies especially to the US industry but is also true for manufacturers for instance from South Korea.

Moreover, despite more than two decades of working toward closer cooperation in development and procurement within the EU, the EDTIB is still shaped by national choices taken decades ago – especially in the aftermath of the Cold War. These decisions were not primarily driven by defense considerations but influenced by broader domestic economic policies and philosophies, including on state ownership of defense companies. Thus, every country has its own story regarding its defense industrial base and ambitions. Eastern and central European countries had to address an extra challenge: Integration into NATO meant that their industries had to adapt to new standards for equipment and interoperability. With the dissolution of the Soviet Union and the Warsaw Pact, they also lost their supply basis and economic links. As a result, many companies ceased production or concentrated on the maintenance of legacy equipment or exports to former Soviet states and export destinations of Soviet-made weapon systems.

This brief look at recent history underlines the importance of the upcoming decisions for the EDTIB. Europe is entering a new historical phase. The Russian war of aggression is the key impulse that has put security of supply for the armed forces at the top of the political agenda. European countries, whether big or small, now realize the cost of their dependence on global supply chains. Their governments share an aspiration to generate security of supply nationally. But their understanding of what that entails differs significantly. In some cases, countries limit their definition of the supplies they consider essential at the national level to fairly basic elements like ammunition and maintenance. In other cases, governments strive to keep their country’s technological edge regarding components or entire weapon systems. On a broader scale, the choices to be made indicate that the armed forces may require a new mix of quantity and quality.

Clearly, not every aspiration and every demand can be supplied nationally, resulting in a trade-off bet-ween ambition and feasibility that could open a path to cooperation. Current practice seems to reflect a pragmatic approach: While countries see their national basis as an indispensable core of their defense efforts, they also maintain their engagement in EU or multinational cooperation. Whether this is a legacy practice or a conscious choice will become clear when economic and financial pressures force tougher decisions on the future path of the defense industrial base.

The Start of a New Era

There are three main factors that will shape the development of the EDTIB in this new era: The first is the transformation of the security environment, in particular through the dramatic changes brought about by the Russian invasion of Ukraine. Governments’ responses to the war have a direct impact on the defense industry and shape the expectations of companies in the sector. The second element consists of the economic interests of states and major defense companies. Both types of actors shape markets, trade, and production chains through their preferences. As preferences have not significantly changed, neither has the general direction of the EDTIB. As a result, economic preferences act as structural barriers to the fundamental change that the development of the security factors would call for. Third, there are the political visions of European integration, both in defense and in overall politics. They should be seen as an underlying long-term factor. The near absence of a discourse about more EU cooperation among EU member states seems to indicate that there is not much appetite to give the EU a larger role.

Security Concerns as a Momentum for Change

The current situation of Europe’s defense industries is primarily shaped by Russia’s war in Ukraine. The conflict has brought security interests to the forefront of politicians’ minds when considering defense decisions.

Arguably the most important consequence affecting the EDTIB is a significant increase in demand for military equipment. On the one hand, this is due to the massive amount of armaments that Europe is delivering to Ukraine (already worth more than €36 billion, including deliveries from EU institutions). As many countries do not have large reserves of materiel and ammunition, stocks depleted by deliveries to Ukraine need to be replenished. On the other hand, many European governments have realized that their past efforts were not sufficient to ensure a credible deterrence posture. Decades of austerity and underfunding have left major European players with “bonsai armies” that are no longer able to defend their territories in the event of a Russian attack. This leaves Europe extremely vulnerable. European governments are now making efforts to reverse this trend and close existing capability gaps. Several major modernization programs have been launched, and major procurement decisions have been taken, such as Germany’s purchase of F-35 fighter jets from the United States. To underpin this new level of ambition, many countries have significantly increased their defense spending. Poland’s increase of the GDP share devoted to defense to four percent and Germany’s creation of a €100 billion special fund stand out.

As a result, the overall size of the market has increased and is set to increase further. European governments now all agree that Ukraine will need support for the foreseeable future, as there appears to be little hope for peace any time soon. With security concerns undiminished, defense will continue to be a high priority across the continent, creating an energizing momentum for European defense contractors.

Currently, however, the EDTIB is not able to meet wartime demands. It successfully adapted to decades of peace, maintaining high profits despite relatively low levels of defense spending, but it lost the capacity to scale up production for wartime needs. Traditional European manufacturers will be able to partially absorb the new demand by establishing new production capacities, but this will not be sufficient either in terms of volume or of speed. Hence, third countries will benefit. Although the United States is an obvious alternative for supplies and US companies are certain to secure more contracts from Europe, American industry experiences similar bottleneck problems due to high demand.

Other players such as South Korea and Türkiye are ready to step in. South Korea has recently won major contracts from Poland for K2 battle tanks and artillery ammunition and is establishing partnerships with other European countries as well (e.g., Romania). Türkiye also looks prepared to take on a greater role. Its Bayraktar drones have proved their worth in several conflicts, including the war in Ukraine. The Turkish DTIB has benefitted from high levels of domestic defense spending, which has allowed the sector to modernize and grow. Several Turkish companies appear ready to become serious competitors to their western and northern European peers.

The war in Ukraine and the threat of further Russian aggression have given new urgency to efforts to fill capability gaps. Governments are prioritizing speed in new procurement programs. As a result, imports and off-the-shelf procurement are becoming more important. Since this usually means buying from non-European third countries (rather than setting up joint European development programs), there is a new momentum for European defense industrial cooperation. Even strong supporters of European cooperation have opted for imports, as demonstrated by Germany’s decision to buy F-35 fighters as nuclear carriers. This has caused friction in Franco-German relations, with France, a strong supporter of European cooperation, expressing disappointment over the German decision.

In central and eastern Europe, defense industry partnerships and purchasing decisions are driven by the desire to keep the United States as the main regional security guarantor, which means that central and eastern European states prefer to buy American rather than European. This is facilitated by the fact that eastern European industries rarely play a role in major European development or procurement programs. As a result, central and eastern European countries do not benefit economically from buying European materiel or from engaging in joint development. Their tendency toward purchasing US equipment could be reinforced as security pressures remain high, speed in deliveries seem more important than ever, and NATO’s position as the bedrock of European security is strengthened.

The outbreak of a major war in Europe also has consequences for the force structure of European militaries. There is a new focus on quantity. Major wars require more mass and deeper reserves and stocks than the external interventions that were the focus of the last two decades. Does this mean that Europe will focus less on innovation and that the EDTIB could fall behind in terms of technology? So far, this looks unlikely. Militaries and governments have defined requirements, and therefore innovation, years in advance, which means that for the next generation of systems, the innovation that industry needs to deliver has already been determined. Europe currently anticipates the production of cutting-edge technologies. However, there is a growing gap between current procurement plans and newly expressed demand in terms of volume. A new balance needs to be struck between mass production of current state of the art systems and high-end platforms designed to be built in smaller numbers.

Governments are increasingly aware of the importance of ensuring security of supply. Their ambition spans from spare parts and maintenance via components to entire platforms. As a result, central and eastern European countries are investing in building up their domestic industries to become more independent. While smaller industries (e.g., in Bulgaria and Romania) are trying to secure a share of the maintenance business, others aim to participate in the manufacturing process itself and benefit from technology transfers. Poland is a good example of a government with both the ambition and the funds to develop a strong industrial base. Poland and similarly ambitious players with sufficient financial resources will be able to continue their growth path and play a greater role in the EDTIB. But while they can become more independent from imports, including from their European partners, it is unlikely that they will turn into serious competitors to Europe’s top producers.

A key issue for the future EDTIB is the sustainability of the increase in defense spending. Building a defense technological and industrial base capable of meeting the new level of ambition requires a sustained high level of defense spending to keep funds from being diverted to other government functions in the event of an economic downturn or a reappraisal of policy priorities. Most European governments seem to understand that defense spending must be sustainable to produce results. They are not only willing to maintain their budgets at the current high level but also envisage further increases in the near future. With security pressures expected to remain high, defense will remain a priority across the continent. As a result, the defense market will continue to grow.

Economic Interests as a Barrier to Change

Although security considerations currently drive the general direction of defense policy in Europe, there are economic trends and considerations that strongly influence the development of the EDTIB. In peacetime, they were arguably more dominant, but even now, no government will take decisions that go against its economic and industrial interests, which are to nurture national arms producers. Any analysis of the defense sector therefore needs to take the industry’s political economy into account. Governments may claim that they are acting in the spirit of European integration or that their motives are exclusively security related, but that is rarely the case. All, even small countries, have bold ambitions for using the additional money and demand to boost their national DTIBs. All envisage to evolve from the current size and product portfolio of the national companies to the next level. Moreover, all countries assessed are keen to boost exports, based on strategies drawn up by the government or the industrial players. They either want to enter foreign markets or expand their role there.

What differs is the character of these industries, especially the role they play in the production chain. A striking feature of the EDTIB is the heterogeneity of the national industries it comprises. They can be categorized into four different spheres: core industries, traditional mid-sized industries, rising stars, and industries at the periphery.

The European defense industrial core is situated in western Europe (France, Germany, Italy, Spain, UK), where strong industrial bases capable of producing almost the entire portfolio of weapon systems across all domains have been developed and maintained. Their industries are the largest in Europe, producing technologically advanced products that are highly competitive. While all of them also have a strong export profile, a high proportion of the equipment they produce gets purchased by the armed forces of their home countries. France, Germany, Italy, Spain, and the UK are home to several of the top 100 defense companies. All the major pan-European defense companies are at least partly owned by stakeholders from these countries, and direct state involvement is not uncommon. The core countries also lead major European development programs such as Eurofighter, A400M, Tornado, and more recently Tempest and FCAS. With the exception of the UK, all are strong supporters of EU initiatives such as PESCO and the EDF.

Countries such as Sweden, Norway, the Netherlands, and Greece are home to some traditional mid-sized industries. They participate in European joint development programs for complex weapon systems without being able to lead them – the naval sector gradually becoming an exception. These countries are heavily dependent on imports from both Europe and the United States.

Some smaller manufacturers (or traditionally less important producers for the EDTIB) have embarked on ambitious growth trajectories. Companies in Poland and Türkiye have already achieved remarkable technological developments that set them apart from their regional peers. Türkiye’s industry, in particular, has undergone a major transformation in recent years. Turkish companies have achieved a leading position in the UAV market and moved to the forefront of technology in sectors that include turbojet engines and ballistic missiles. By some measures, Hungary can also be counted into this group, as there is considerable momentum with top tier producers opening facilities in the central European state. These countries are rising stars and can be expected to play a greater role in the future of the EDTIB.

Finally, there are countries with only small or niche industries. They constitute the periphery. This group consists mainly of former Warsaw Pact countries such as Romania, Lithuania, Estonia, and Bulgaria. While they can be competitive in niche sectors, their companies lack the overall technological edge to compete with the European core (let alone the United States). They have few or no system integrators. Most companies focus on component production and maintenance.

After the end of the Cold War, the state-owned industries of the periphery were partly privatized. As demand for standard Warsaw Pact components plummeted, they underwent a period of transition and reform which significantly weakened their DTIBs. NATO integration was another challenge, as many companies were unable to produce according to NATO standards and therefore could not be integrated into European supply chains. This means that in the periphery, the modernization of domestic armed forces does not necessarily lead to new orders for national DTIBs.

The differences in industrial portfolios translate into different approaches to industrial policy and procurement. Two approaches can be identified: a capability-driven approach and an industry-driven approach. The dividing line runs, broadly speaking, between western and eastern Europe, and between the core and traditional mid-sized industries on the one side and the rising stars and the periphery on the other. This is due to fundamental differences which are unlikely to change much over the coming decades.

Central and eastern European states tend to emphasize capability development over industrial interests (capability-driven approach) to address the security pressure resulting from their geographical proximity to Russia. Of course, they also take their domestic industrial base into account when establishing industrial partnerships. They will attempt to secure small work shares for their domestic companies, especially in maintenance (to be able to operate independently), and seek to benefit from technology transfers. All in all, however, they prioritize operational readiness and capability development over industrial gains. In terms of cooperation, they favor US products over participation in European development projects, which are notorious for cost overruns and delays. Third-country imports and off-the-shelf purchases (which often go hand in hand) are seen as less costly and more efficient than European co-development.

This tendency is reinforced by the fact that their industries are not in a position to contribute significantly to European projects. In some cases, they were even actively excluded from such projects as when Poland’s request to participate in the MGCS was rejected by Germany and France. As a result, rising star and peripheral countries see little or no economic benefit in participating in major European development programs. They are increasingly open to forging new partnerships with non-European producers such as South Korea if these promise rapid delivery and participation in maintenance (and sometimes even production).

Western and northern European core countries and countries with a traditional mid-sized industry take a different approach. When they take purchasing decisions, they accord at least the same priority, of not more, to the interests of their domestic industries than to their military needs. Governments try to get their domestic producers involved as much as possible when awarding contracts. As a result, their industries focus more on producing high-end systems that are competitive on the world market than on operational readiness.

At the same time, governments realize that the technological complexity of modern armaments systems means that a purely national production is no longer possible. In this situation, western and northern European countries (especially the industrial core) prefer joint European development programs to non-European imports because the former benefit their domestic producers more. This approach is very much in line with the concept of European strategic autonomy, which basically calls for all major platforms to be produced by European companies in Europe.

Yet that same rationale does not make joint projects run smoothly. Even when working together, core countries are wary of their economic competitors both inside and outside Europe. This causes problems of co-ordination in European development programs and can lead to the exclusion of potential competitors and the duplication of projects just to ensure a greater share of work for domestic companies (as in the case of Tempest and FCAS).

The core (and thus the EDTIB in general) is also marked by an element of risk aversion on the part of large companies, which is turning into an obstacle to innovation. There is not enough private investment to provide funds for research and development (R&D). In contrast to other sectors of the economy, innovation in defense is largely state-funded, which makes companies reluctant to use their own funds, as they know that eventually the government will pay for technological development.

In addition, major arms producers have been reluctant to ramp up production following Russia’s invasion of Ukraine. In part, this can be explained by ambivalent signals from governments about the sustainability of long-term financing. If companies are uncertain whether an investment will pay off in the medium and long term, they will be reluctant to make it. However, such investments would be crucial for production to meet wartime demand even if not all production capacity is used in peacetime. There seems to be a conflict between the security interests of states (i.e., creating enough capacity to ramp up production in wartime) and the economic interests of firms (avoiding overcapacity to maximize profits).

The Absence of Political Visions

Political visions are key to the long-term future of the EDTIB because they create coherence with regard to key design features, such as procurement and cooperation strategies. Even more importantly, they help generate a coherent idea of the vision that a European industry should serve and therefore the shape it should take.

The most influential vision of the last decade has been that of European strategic autonomy. The concept was prominently introduced through the EU’s Global Strategy, in which the EU outlined its ambition to become a more credible security and defense actor. A key element of strategic autonomy is the development of an integrated European defense industrial base capable of producing major weapon systems in Europe. According to this concept, the EDTIB should be able to provide European armed forces with all the weapons they need without having to rely on the United States or other third countries. In short, EU countries should buy European equipment from European producers. In domains where EU countries currently lack capabilities, they should set up joint development programs. The proponents of strategic autonomy see a self-sufficient EDTIB as vital to strengthening Europe’s security of supply and thus boosting its geopolitical weight in systemic competition.

However, the pursuit of strategic autonomy is by no means an undisputed vision. First, there is a debate about which countries the EU should cooperate with. Some governments, including those that are part of the core, wish to allow third countries such as the United Kingdom and the United States to participate in EU-funded programs. Others want to restrict access to EU funds to the European continent and EU countries.

Second, many peripheral and rising countries within the EU do not consider European strategic autonomy a priority, mainly because they do not see the benefit of it. On the contrary, they suspect that core countries with industries at the cutting edge of technology are pursuing their own interests under the guise of a supposedly impartial vision. As it happens, the strongest supporters of the concept of European strategic autonomy are the countries best positioned to benefit economically from European development projects.

Another factor weighing against the concept of strategic autonomy concerns the difficulties associated with joint European development programs in the past. Projects such as the NH90 helicopter, the A400M aircraft, or the Eurofighter were notorious for cost overruns, delays, and a failure to deliver the initially promised benefits in terms of economies of scale and military interoperability.

Finally, attitudes regarding the future of European integration differ within Europe. Countries such as Poland, Hungary, and the UK are keen to uphold their national autonomy, which also has implications for the defense sector.

As a result, there is no consistent common vision or idea of what the EDTIB should look like in terms of regional distribution, production portfolio, rules for exports, or cooperation partners. Nor is there any consensus on how much Europe should import or which degree of autonomy it should aim to achieve.

This does not mean, however, that there is no common ground. The EU has established a number of instruments for facilitating joint arms development that are widely regarded as successful, notably the EDF. Although these instruments lack clarity, coherence, and compatibility with NATO processes, most governments agree that such EU policies will be crucial for the future development of the EDTIB.

How Will the EDTIB Develop?

The analysis presented above suggests that absent major political initiatives, there will be no major changes to the basic design of the EDTIB in the new era of European defense. Instead, business will be conducted as usual. That is, the European core will continue to produce state-of-the-art capabilities that provide a degree of political and operational autonomy from the United States. The periphery will seek to reduce its dependence, including on its European allies, while maintaining an ambivalent attitude toward European cooperation and European strategic autonomy.

Although the increase in budgets may revive parts of the defense sector and generate some momentum for defense companies, there are few signs of improved coherence and coordination. Currently, there is no momentum for closer defense industrial cooperation in Europe, nor do waves of consolidation seem likely in the foreseeable future. While small-scale mergers are possible, there appears to be nothing major on the horizon. The overall industrial structure will remain unchanged.

Regional and economic divides will persist, as will the wide differences over sourcing and cooperation. However, there will be opportunities for more ad-hoc, country-to-country, and sectoral cooperation formats such as the European Sky Shield initiative. But there will be no grand design, no coherent European vision of how to coordinate and drive the EDTIB.

The sources of change are the rising stars and the non-European suppliers. The main players to watch are South Korea, Poland, and Türkiye. The United States is a traditional European supplier already. Its share in Europe may increase but without larger industrial relevance to the American DTIB.

Some mid-sized and smaller European players will continue to grow and increase their role. But there will be no major shift in the industrial balance of power. The industrial core will continue to determine the development of the EDTIB. The fundamental power asymmetry will remain, with all its consequences for European cooperation and coordination.

What are the game changers that could shift this trajectory? If European countries were to agree large multilateral programs with sufficient funding to generate major technological advances, new champions and pan-European companies could emerge, which would transform the industrial landscape. Another game changer could be a reform of EU policies to harmonize existing instruments and shape a consistent development path for the EDTIB.

Recommendations

Given the most likely scenario for the future development of the EDTIB, what can the EU and member state governments do to influence the trajectory of the defense sector and produce a better outcome? The following section sets out which actions can be taken to make the EDTIB more coherent and capable.

1. Regard the EDTIB as a strategic asset: Europe needs to equip the EDTIB to meet both its short and long-term needs. It should regard the EDTIB as a strategic asset, which includes finding answers to questions such as:

   • How can “bonsai industries” be rebuilt to meet European demand?

   • What can governments do to enhance the development of defense technologies and avoid being overtaken by competitors such as China?

   • How can governments make the best use of a wide range of instruments, including political control over the sector? Since the defense industry is vital for national and European security, there is no doubt that political intervention in the market and the exercise of political control over market players can be justified.

2. Establish a mechanism for building up stocks: In response to the current shortage of ammunition and materiel, European government should pass legally binding requirements to ensure that the EDTIB has sufficient depth in terms of industrial capacity to be able to equip European militaries in a war scenario. They should also provide for sufficient reserves of ammunition and other critical goods. The design of such a system could be inspired by Cold War arrangements.

3. Secure funding: To stay at the cutting edge of technology, the EU and its member states must make the necessary funding available, particularly for R&D. This means that funding must be sustainable, which will also attract more private investment. Governments need to be able to credibly tell defense companies that the current increases in defense spending and the new level of ambition for European defense are more than a blip. Doing so would send a message to shareholders and owners that investing into the development of new weaponry carries a low risk and that investments will pay off.

4. Set up major European development programs: Involving as many European countries as possible in major multilateral development programs is the most effective way to boost the technological development of the EDTIB. Such programs ensure that sufficient financial resources are pooled to produce the high-end capabilities needed to remain competitive. At the same time, they create economies of scale and increase interoperability, which is a decisive military advantage.

5. Develop a strategy to deal with third countries: As third countries become more important as arms suppliers, European governments should develop a common approach toward them. To this end, they need to decide:

   • Who should be allowed to participate in EDF and PESCO projects and thus benefit from EU funds? This concerns primarily the United Kingdom and the United States but potentially also Indo-Pacific partners such as Australia or Japan.

   • How much should US companies operating in Europe be allowed to contribute to European projects? What share would make it possible for them to add value without compromising European autonomy?

   • How should Europe deal with Türkiye and South Korea? As partners? As competitors? Each categorization has different policy implications.

6. Europe must also find solutions to the underlying problems of the EDTIB’s economic structure and the lack of a common political vision. A first step would be a comprehensive review of EU policies to assess which have proved useful and which have not. An important issue for discussion would be to reexamine the European Commission’s approach to competition and consolidation in the defense sector. Before the Russian attack on Ukraine in February 2022, consolidation was seen as beneficial because it reduced overcapacity, pooled technological knowledge, and created synergies. Some effects, however, have proved problematic. As players left the market or merged and overcapacity was reduced, the EDTIB was unable to ramp up production quickly enough to meet current demand. This shows that a certain amount of industrial overcapacity is probably necessary to be able to scale up production in a war scenario.

   Another side-effect of consolidation is the concentration of market power in the hands of a small number of European system integrators. In some sectors, this has led to quasi-oligopolistic market structures, with all the negative effects associated with such a concentration of economic power. Paradoxically, the EU’s emphasis on competition has in some cases led to a reduction in competition as consolidation increased.

7. Align EU and NATO defense industrial frameworks: A better fit is needed between NATO instruments, such as the NATO Defence Planning Process (NDPP) and NATO standards, and the EU industrial framework and, more generally, the EDTIB, to reduce duplication and create synergies. This is one of the few aspects on which there is almost complete consensus among European governments. Eastern European countries in particular stress that EU initiatives should not be realized at the expense of NATO frameworks.

8. Reduce regional imbalances: A major structural obstacle to greater coherence and coordination in the EDTIB consists of regional imbalances between core countries on the one side and mid-sized countries and the periphery on the other side in terms of industrial capacity and technological advantage. The EU – and especially the industrial core – must find ways to make participation in joint European development programs attractive to central and eastern European countries. This will most likely mean the transfer of knowledge and some part of the production. Such a step requires a willingness on the part of core governments and companies to support industrial development in central and eastern Europe even at the expense of some of their domestic profits. This is the price to be paid for greater coherence, coordination, and involvement of peripheral and mid-sized industries. A good starting point could be to use the additional funds becoming available from rising defense budgets to build production facilities in mid-sized and peripheral countries and integrate them into European supply chains.

9. Establish a secondary market for used and modernized equipment: Smaller countries with fewer financial resources are calling for the establishment of a secondary market to help modernize their armed forces and meet NATO standards in a cost-effective manner.

10. Address structural dependencies: Europe has become dependent on imports of raw materials, alloys, and components such as semiconductors, mainly from Asia. Given the systemic competition between Western countries and China, security of supply will be a key issue. Europe’s dependence should be addressed.

11. Deal with other challenges and structural barriers at the national level:

• Reduce Bureaucracy: Slow and complex procurement processes are a major obstacle in countries across Europe. Eliminating some of the influence of vested interests on the production process will help to speed up procurement decisions. As procurement processes differ from country to country, this is mostly a task for national governments.

• Create the necessary legal environment and defense ecosystem: Some eastern European states have laws which ban the government from supporting and guiding the development of their domestic DTIBs. Yet the production of high-end capabilities requires a comprehensive defense ecosystem with a highly skilled workforce and a sophisticated R&D network, including public research centers. Building such a network across Europe and enabling smaller countries to participate will be crucial.

• Stabilize funding: Another challenge is the lack of binding long-term fiscal legislation that guarantees funding on a multi-year basis. Spain, Italy, and Germany are major players that lack multi-year budget allocations. Companies are discouraged from investing because they cannot be certain that sufficient funds will be available to complete a project. Defense budgets must be approved annually, which means they are subject to change every year. This contradicts the logic of large procurement and development programs which tend to run for several years.

For the future of Europe’s defense technological and industrial base, it is crucial that the additional public resources invested in defense translate into higher operational readiness of the armed forces and more industrial capacity. This analysis suggests that major reforms are needed to advance the development of the European defense sector. With new funds available, there may be a window of opportunity for change – not necessarily for a fundamental transformation of the sector but certainly to address some of the shortcomings of today’s EDTIB.

Christian Mölling is deputy director of the DGAP Research Institute and head of the Center for Security and Defense.

Sören Hellmonds is a freelance scientist.