The financial implications of the White Paper on European Defence

This article has been written in collaboration with Sarah Hennig, consultant in European Projects at Zabala Innovation.

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Facing emerging threats and evolving dynamics in the international order, on March 19th, as expected, the European Commission released a Joint White Paper for European Defence Readiness 2030, outlining key positions, approaches and priorities for enhancing and strengthening the EU’s defence posture. While the European Union remains committed to its core and foundational values, the shifting geopolitical landscape increasingly calls on the EU to focus on defence to safeguard its sovereignty and global competitiveness.

The White Paper emphasizes the urgent need for collective action among Member States to protect peace, democracy, and reinforce Europe’s strategic autonomy, as to “ensure that security remains our shared commitment” against emerging challenges which overcome conventional warfare, borders and locations.

Since 2021, Member States have increased defence spending by more than 31%, reaching €326 billion in 2024, equivalent to 1.9% of the EU’s combined GDP. Nevertheless, EU defence investment remains significantly lower than United States, Russia and China’s ones. Therefore, there is a clear need to change previous conservative approaches towards defence spending, which dominated the post-world wars decades, and “overcome the effects of past under-investments”.

As very appropriately pointed out by the White Paper this objective needs to be achieved by leveraging on the combination of both public and private investments, not exclusively through public spending.

Fostering European defence industrial basis

On one side, to achieve its security objectives, Europe will need to foster its efforts towards technological innovation, diversification of supply and strategic competitiveness to ensure Europe’s independence and strategic positioning.

As such, the White Paper presents a series of actions including the collaboration and coordination of Member States to reinforce the EU’s defence industrial base and enhance defence readiness, while also contributing to NATO’s deterrence and collective defence goals. In addition to fostering, the EU intends to facilitate the scale-up of the defence industry, improving its ability to develop and produce military capabilities, equipment and effectors, while improving efficiency, interchangeability, and interoperability among EU defence systems.

Promoting of the use of common standards, mutually recognized certification schemes and interoperability measures are not to be underestimated in terms of impacts for this sector. Achieving common procurement and effective joint operations is made possible through the harmonization of tools, capabilities, effectors, vehicles and any kind of equipment at EU level.

Indeed, standardization and interoperability carry a real potential to empower joint operations, enhance efficiency, and drive savings in public spending on defence, overcoming the national silos that have historically dominated Europe due to the legacy of pre-World War divisions. Lowering costs and streamlining procurement for Member States, must go-hand-in-hand with increasing stability and predictability through multi-year industrial demand, ensuring long-term sustainability.

In line with these considerations, the White Paper points towards the leverage on the European Defence Agency and EU Military Staff structures and expertise to foster and facilitate the development of large-scale joint procurement based on multi-annual contracts and planning. A strategic dialogue with the European defence industry is also essential to identify critical raw materials and components, ensuring a diversified supply chain with EU support. The long-term objective is to gradually establish a European military sales mechanism, ensuring the rapid acquisition of defence products from within Europe.

Boosting public and private investment

Although the White Paper does not provide any indication concerning changes in financial resources allocations for the European Defence Fund programme, it explicitly refers to the simplification and speeding up of its rules through the mid-term programme review which is expected to positively impact the effectiveness of the programme.

Noteworthy, the White Paper also indicates that the “EU will promote an open architecture combined with variable geometry allowing for the participation of like-minded partners in cooperative defence projects and initiatives, such as Pesco projects which will be encouraged on a case-by-case basis”. As Pesco projects provide grounds for bonus points that impact the funding rate of EDF development actions, these developments have potentially positive impacts in terms of opportunities for applicants in this programme.

On the other hand, the way to overcome past under-investment indicated by the White Paper, in line with the ReArm Europe plan, relies on the combination of five pillars, which combine instruments to support common public procurements, and leveraging public and private investments.

The first pillar refers to a new financial instrument under the Treaty on the Functioning of the EU that will provide Member States with loans backed by the EU budget, totalling €150 billion under the Security and Action for Europe (SAFE) instrument. This initiative will significantly enhance Europe’s defence capabilities, requiring participation from at least two countries (one of which must be an EU Member State receiving SAFE assistance, while the other may be another EU country, an EFTA State, a member of the EEA, or Ukraine).

The second pillar points towards unlocking flexibility for higher defence expenditure through the coordinated activation of the National Escape Clause of the Stability and Growth Pact, allowing Member States to mobilize additional defence expenditure for up to 1.5% of GDP.

The third pillar refers to the introduction of greater flexibility in its existing instruments by allowing national, regional, and local authorities to voluntarily reallocate funds from their cohesion policy programs toward emerging defence and security priorities.

As concerns the fourth pillar, the European Investment Bank (EIB) is expected to double its annual investment to €2 billion to support projects related to drones, space technology, cybersecurity, quantum technologies, military facilities, and civil protection.

Finally, the fifth pillar points towards fostering private investment in defence, particularly for SMEs and mid-cap companies. The Saving and Investment Union will play a crucial role in searching for additional private investment toward defence priorities. The European Commission will introduce regulatory measures to facilitate private-sector financing of defence initiatives, including a revision of the Sustainable Finance Disclosure Regulation. The mobilization of private investments, will introduce market dynamics in a sector traditionally dominated by direct public spending, potentially increasing the level of expectations in terms of results and efficiency of spending.

Support for SMEs

Moreover, the White Paper appropriately highlights the need to support SMEs and Mid-caps in the access to capital “including guarantees for de-risking investments to bring their solutions to industrial scale and to drive the industrial ramp-up that Europe needs”. The defence sector has been traditionally dominated by major groups as the sector, as it has been driven by single-buyer public spending, which is considered highly risky especially for SMEs and Mid-caps that needed to attract a more diversified set of buyers to ensure sustainability for their products.

As such, SMEs and Mid-cap have recurrently worked on dual-use applications, and now solutions developed for the civil security domain carry a great potential to be adapted to defence sector, provided that sufficient guarantees are provided to invest in these kinds of developments. This constitute a relevant potential for EU-developed technologies to be appropriately exploited and promoted in the upcoming years.

Lastly, the European Commission will also ensure that the upcoming Multiannual Financial Framework (MFF) provides a comprehensive and robust framework to support the EU’s long-term defence ambitions. Considering that the next MFF will not be implemented for another three years (starting in 2028), this confirms that the expansion of defence focus in terms of spending at public level is actually expected to be a medium-term trend, not only an immediate measure to deal with contingent situations.

A noteworthy consideration refers to the final call of the White Paper for “enhanced security through partnerships”, as for civil R&I there is a long history of cross border collaborations, which generated relevant expertise and lessons learned that can be transferred to the defence sector to foster collaborations.

All these efforts are designed to equip the European Union with the tools needed to effectively navigate the growing security threats and challenges of the international arena. The contribution of the research and innovation domain, including through effort already put in place through the projects already funded by the EDF and precursor programmes, will be essential to foster EU independence and strategic competitiveness in the defence sector.