Restructuring the EU's defence industrial base amid geopolitical shifts

Abstract

The European Union's (EU) defence industrial base has undergone an unprecedented wave of integration. The war in Ukraine and Donald Trump's re-election have exposed the EU's long-standing structural weaknesses in meeting military needs, creating a window of opportunity for an EU-centralized defence industry. The European Commission has leveraged this moment to enhance competitiveness and promote joint procurement, laying the foundations for a genuinely EU-wide internal defence market. These initiatives aim both to address Ukraine's urgent military requirements and to bolster Europe's capacity to act independently amid transatlantic uncertainty. Yet supranational momentum clashes with entrenched Member State reluctance to cede sovereignty, constraining the Commission's integrative efforts. This article critically examines the integration of the EU defence industrial base into the European Union’s legal order, highlighting limitations at both constitutional and market levels and the enduring tension between EU strategic autonomy and NATO's US-driven transatlantic defence agenda.

1. Introduction

The establishment of a more competitive and responsive defence industrial base has become a strategic priority for the European Union (EU). On the one hand, Russia's illegal full-scale invasion of Ukraine in 2022 compelled Member States to substantively expand their security production capacity to provide sustainable military support to Ukraine; on the other, the re-election of Donald Trump in the US in 2024 compelled the EU to shoulder greater responsibility for its own security, as US peace dividends in Europe faded for the first time since the Second World War. In response to these converging shocks, European leaders convened in Versailles ¹ and the launch of the Strategic Compass ² unveiled a new vision for a sovereign EU in defence, ³ including a defence industrial base capable of facing potential wartime scenarios over the coming decade. ⁴

This article critically analyses the integration of the EU's defence industrial base into the EU's legal order amid a fundamentally transformed geopolitical landscape. The integration of the EU defence industrial base constitutes a conditio sine qua non for the establishment of a genuine EU common defence – the natural endpoint of the Common Security and Defence Policy (CSDP) under Article 42(2) TEU. ⁵ Crucially, ‘bringing the European Defence Union to life’ has become the political centrepiece of the 2024–2029 Commission under President Ursula von der Leyen. ⁶ In line with this ambition, the Commission launched the ReArm Europe Plan ⁷ – later rebranded ‘Readiness 2030’ to sweeten its militaristic tone – adopted the first-ever White Paper on the future of European defence, ⁸ and proposed a €2 trillion 2028–2034 Multi-Annual Financial Framework (MFF) that quintuplicates funding for defence and space. ⁹ As a result, this article argues that, although the Commission has assumed a greater role in defence industry since the war in Ukraine, ¹⁰ integration continues to be slow and EU initiatives remain limited in their effectiveness – in continuity with the past. ¹¹

This article is structured as follows. Section 2 outlines the status quo of the EU defence industrial base, highlighting flaws that have become entrenched and gradually structural to the EU defence industrial landscape, with persistent difficulties in addressing them. Building on this, Section 3 maps the EU's responses, describing the rearmament programme and efforts to develop a more competitive defence industry in reaction to the post-2022 security environment. Section 4 analyses the deeper limits of creating a supranational EU defence industry, focusing on the inadequacies of the EU's constitutional architecture in centralizing common procurement, integrating national industries to exploit economies of scale and removing barriers to a functional single market for defence. Section 5 examines the complementarity between the EU's defence industrial policy and the North Atlantic Treaty Organisation (NATO)'s, reflecting on the Commission's ambitions for strategic autonomy in the context of Trump's aggressive foreign policy. Section 6 concludes by summarizing the main findings and outlining future prospects for the integration of the EU defence industry.

2. A structurally inefficient market

Despite the 1997 Amsterdam Treaty acknowledging the link between industrial armaments and the EU's foreign policy, ¹² mutual distrust among Member States and the protection of national industrial specificities have structurally halted progress in both the investment and integration within the defence sector. ¹³

Since 1994, EU Member States have allocated less than 2% of GDP to defence, with a low of 1.3% between 2014 and 2017. ¹⁴ This underinvestment has not been offset by private capital, with approximately 44% of SMEs facing equity financing constraints and around 60% of investments originate from US sources. ¹⁵ As a result, the EU economy has not fully benefitted from the potential effects of major defence spending. Although defence economics literature is divided on this point, the EU has consistently emphasized the positive impact of increased defence investment on economic growth. ¹⁶ A 2013 study commissioned by the European Defence Agency (EDA) estimated a return of €1.56 in aggregated EU GDP for every euro invested in defence. ¹⁷ Moreover, a 2025 Commission assessment attached to the activation of the national escape clause concluded that an investment of 1.5% of GDP in defence over 2025–2028 could generate an additional 0.5% of GDP, with the prospect of greater long-term effects through R&D and infrastructure investment. ¹⁸ Defence spending thus produces multiplier effects well beyond the defence sector itself, boosting traditional EU manufacturing industries such as automotive, steel, aluminium and chemicals, while also helping offset the impact of Trump tariffs. ¹⁹ The memorandum signed by German companies Continental and Rheinmetall to create new employment opportunities epitomizes the synergy between the automotive and the military, which could be replicated at EU level to mitigate declines in automotive production capacity. ²⁰

At the same time, the establishment of the European Defence Equipment Market continues to recycle – often verbatim – the same ambitions and criticisms voiced three decades ago, ²¹ underscoring how the EU's defence industrial base has remained fundamentally stagnant in its integration process and unable to harness the economic benefits of a fully-fledged Capital Markets Union. ²² According to International Monetary Fund projections, this structural fragmentation alone equates to a self-imposed tariff, raising production costs by 45% in manufacturing and 110% in services. ²³ Since the end of the Cold War, the EU's defence industry has remained divided along national lines. While the US has consolidated its defence sector from 51 to just five major players, the EU still operates through 27 relatively small, protectionist and uncompetitive domestic markets.

Even without the desire to replicate the US’s near-monopolistic model, ²⁴ the EU has achieved only Airbus and MBDA as successful examples of European consolidation – far from sufficient to compete globally. ²⁵ Moreover, only 20% of EU defence procurement derives from collaborative projects. ²⁶ This uneven integration has fostered geographical concentration. France, Germany and Italy together account for around 60% of total defence revenues ²⁷ and host industrial networks far more integrated than those in Central and Eastern Europe. ²⁸ Conversely, Member States such as Greece and Romania sustain high defence expenditure but lack sizeable domestic defence industries. These asymmetries risk entrenching a two-speed EU defence sector, undermining the level playing field.

Fragmentation has proven costly. Economies of scale could save EU defence firms between €18 and €57 billion annually – the so-called ‘cost of non-Europe’ ²⁹ – while Member States lost an estimated €10.9 billion each year, or about 44 cents for every euro spent on defence equipment. ³⁰ EU defence spending achieves barely 15% of the efficiency of US expenditure, ³¹ with Sweden and Germany lagging 60% and 40% behind even the EU average. ³² Paradoxically, the EU spends one-third of the US defence budget but maintains nearly six times as many weapons systems – 179 compared with 30: ³³ it operates 19 combat tank models to America's single one, 20 tactical combat aircraft types versus 7, and 28 howitzer models – more than one per Member State. ³⁴ This proliferation has had direct battlefield consequences, as Ukraine received 10 different howitzer models and 12 types of battle tanks from EU Member States, severely complicating logistics and maintenance. ³⁵

The economic and operational gap with the US has thus become stark. The US-based Lockheed Martin – the world's largest defence contractor – alone generates over €60 billion annually, roughly five times the combined revenues of Airbus and Leonardo. The US defence industrial base reached $955 billion in turnover and employed nearly 1.3 million people in 2024, ³⁶ compared to the EU's €160 billion and 581,000. ³⁷ Of the world's 10 largest defence contractors, six are American, three Chinese and one British: none are EU-based. ³⁸ In 2000, by contrast, two EU firms ranked among the top 10. ³⁹ Even where the EU has briefly outproduced the US – increasing shell production capacity to two million units per year versus half a million in the US ⁴⁰ – the EDTIB remains unable to sustain the new tempo of wartime production. Significantly, the one million shells promised to Ukraine took two years instead of one. ⁴¹

The production deficit has deepened the EU's dependence on third countries. Between 2005 and 2023, 37% of defence equipment was imported from outside the Union ⁴² and 80% of EU financial support for Ukraine was spent on non-European products. ⁴³ The larger stockpiles and faster production cycles of non-EU manufactures have driven Member States towards off-the-shelf acquisitions rather than coordinated joint procurement. ⁴⁴ The 1.5 million rounds of ammunition delivered to Ukraine under the Czech Republic-led initiative in 2024 were entirely sourced from third countries. ⁴⁵ Such reliance is more than an economic inefficiency: it represents a strategic failure. It perpetuates fragmentation, wastes opportunities to aggregate demand and undermines competitiveness – channelling EU taxpayers’ money abroad rather than into domestic technological development and skilled employment.

3. The EU's new defence industrial policy

The war in Ukraine has accelerated integration in the EU's defence industry to an extent unmatched in the past three decades. ⁴⁶ Since 2022, the European Commission has launched five flagship programmes to ramp up defence production capacity and promote collaborative procurement under an unprecedentedly dirigiste political economy. ⁴⁷ Collectively, these industrial initiatives have unlocked a potential firepower of over €802 billion through grants, loans and extraordinary fiscal flexibility. Within this framework, the ReArm Europe Plan alone – valued at around €800 billion – constitutes the most ambitious financial package for defence purposes in EU history. ⁴⁸ Moreover, the first-ever European Defence Industrial Strategy (EDIS) has set ambitious 2030 targets: at least 50% of defence procurement from EU suppliers, 40% of defence equipment jointly purchased by Member States – thus surpassing the 35% target established by the European Defence Agency in 2007 ⁴⁹ – and 35% of total EU defence trade conducted within the Union market. ⁵⁰

The Commission's most significant intervention has been the expansion of national budgetary flexibility for defence spending to meet the demands of a transformed security environment. As a matter of fact, although EU-aggregate defence expenditure has increased by 36% since 2022 – reaching its highest share of GDP since 1994, at 1.9% in 2024, and projected to hit 2.1% in 2025 ⁵¹ – EU Member States’ race towards the newly-established 5% NATO benchmark set in 2025 is an uphill battle for two reasons. ⁵² On the one hand, the EU's austere fiscal rules have constrained governments’ capacity to finance defence through debt. On the other hand, Member States have prioritized welfare expenditure, diverting resources away from defence – a shift difficult to reverse without confronting a sceptical public opinion. Recent polls show that only 23% of EU citizens support increased defence investment, favouring education, health, employment and housing instead. ⁵³ Yet the 5% target could help remedy three decades of structural underinvestment. According to the ‘learning by necessity’ theory, if Member States were to attain the new 5% GDP target under current economic conditions of limited productive capacity, the additional defence spending would generate a demand shock that boosts productivity and competitiveness across the EU's industry as a whole – a scenario already experienced during the Second World War. ⁵⁴

In order to unblock greater defence spending, the European Commission has introduced unprecedented fiscal flexibility to Member States. For the first time, it has authorized them to invoke the national escape clause of the Stability and Growth Pact to deviate from their net expenditure paths between 2025 and 2028, allowing up to 1.5% of GDP in additional defence investment without triggering an excessive deficit procedure. ⁵⁵ If fully utilized, this clause could generate fiscal space of approximately €255 billion annually for defence purposes. This flexibility rests on the Commission's recognition that the combined effects of Russia's war in Ukraine and rising transatlantic uncertainty constitute ‘exceptional circumstances outside the control of the Member State with a major impact on its public finances’, making fiscal recovery under standard EU rules unfeasible. ⁵⁶ By contrast, during the COVID-19 pandemic, the Commission activated the general escape clause, reflecting the uniform nature of the crisis across the Union. ⁵⁷

Complementing this approach, the Commission has authorized the reallocation of unused cohesion funds worth around €390 billion for the period 2025–2027 towards defence and security projects under its mid-term budget review, with a 100% EU co-financing rate. ⁵⁸ In parallel, the European Investment Bank (EIB) has tripled its annual investment in defence-related firms to €3 billion since 2025 ⁵⁹ and expanded its lending policy to cover dual-use projects under the EIB Group's Security and Defence Action Plan, thereby supporting a sector that remains structurally under-financed. ⁶⁰ Moreover, the Commission has committed to developing a fully-fledged Savings and Investments Union to mobilize private capital for defence. ⁶¹ Given Europe's high household savings rate but low financial literacy, ⁶² the objective is to channel up to 80% of dormant private savings – estimated at around €8 trillion – into productive defence investments by 2026, aligning EU investment practices more closely with those of the US. ⁶³

While private investments will take years to yield tangible results, the EU's more immediate fiscal flexibility measures are unlikely to provide a cure-all. On paper, the combination of current defence spending and full use of the available fiscal flexibility would bring EU defence expenditure to around €730 billion per year – still below the roughly €900 billion required to meet the new 5% benchmark, and only about two-thirds of the US’s defence spending. In practice, however, even this projection is overly optimistic. Only 16 Member States have activated the national escape clause, ⁶⁴ and the absence of France, Italy and Spain alone cuts the expected €255 billion increase in defence spending by roughly €100 billion annually. Similarly, the reallocation of cohesion funds has attracted limited interest, as it requires politically sensitive trade-offs with other priorities that resonate more directly with EU citizens – such as competitiveness, decarbonization, affordable housing, water resilience and energy transition. This explains why Lithuania, Poland and Estonia have collectively redirected merely €300 million towards defence-related projects. ⁶⁵ Looking ahead, EU fiscal flexibility represents at best a stopgap measure, one that might facilitate a gradual adaptation of both national and EU budgets to the Union's evolving security needs. Yet debt-financed defence spending cannot constitute a sustainable strategy in the long term, raising the question of whether the EU's fiscal framework can genuinely accommodate a permanent shift towards higher defence expenditure.

In the context of building a new industrial policy, the Commission has prioritized joint procurement over national deals to exploit economies of scale at the European level, enhancing spending efficiency and providing multi-year contracts capable of stabilizing industrial production at the higher levels now required. To this end, the European Defence Industry Reinforcement through Common Procurement (EDIRPA) ⁶⁶ financed five cross-border projects in missile defence systems, modern armoured vehicles and ammunition ⁶⁷ with €300 million in 2025 from the EU's regular budget. ⁶⁸ Projects supplying Ukraine or Moldova received a higher reimbursement rate of 20%, compared to the standard 15%. ⁶⁹ Despite its modest budget, EDIRPA proved remarkably effective, generating an aggregate industrial value of €11 billion – 36 times its envelope – with each project involving an average of six Member States – twice the legal minimum. ⁷⁰ Nevertheless, Germany was awarded three of the five EDIRPA projects, concentrating funds in a single country. ⁷¹ To ensure ex post accountability, the Commission must submit a final evaluation report to the European Parliament and the Council by the end of 2026. ⁷²

Building on EDIRPA's purpose, the Council approved the Security Action for Europe (SAFE) in the form of a Regulation under Article 122 TFEU in May 2025. ⁷³ SAFE provides up to €150 billion in financial assistance between 2024 and 2028 for Member States engaging in the joint procurement of defence products classified under NATO categories 1, 2 and 3, ⁷⁴ conditional on the submission of a European defence industry investment plan to the Commission by November 2025. ⁷⁵ To prevent excessive concentration in a few countries, the three largest recipients cannot benefit from more than €90 billion under SAFE. ⁷⁶ Unlike EDIRPA, SAFE operates as a loan-based instrument backed by the EU's budgetary headroom. ⁷⁷ By empowering the Commission to issue common debt on financial markets until 2030, ⁷⁸ SAFE reduces borrowing costs by enabling repayment under highly favourable conditions – such as a maximum maturity of 45 years, a 10-year grace period and automatic compatibility with the national escape clause to avoid breaches of the EU Stability and Growth Pact. ⁷⁹ SAFE is therefore structurally more relevant to Member States with lower credit ratings than the EU's AAA/stable outlook. ⁸⁰ To date, 18 Member States have expressed interest in accessing SAFE loans, ⁸¹ enabling, for example, Italy (rated BBB+/stable) ⁸² to save around 0.7% in annual interest compared to issuing its own bonds. By contrast, Germany has refrained from SAFE loans, as its low borrowing costs allow it to expand national debt more cheaply. Consequently, SAFE and the national escape clause have become alternative instruments on paper, serving different fiscal exigencies among EU Member States.

Complementing both EDIRPA and SAFE, Member States have also reinforced military capability development through Permanent Structured Cooperation (PESCO), established in 2017 under Articles 42(6) and 46 TEU and Protocol No. 10 TFEU. ⁸³ Since the outbreak of the war in Ukraine, the number of PESCO projects has risen from 61 to 83; ⁸⁴ participation has expanded to 26 Member States following Denmark's historic decision to abolish its opt-out clause; ⁸⁵ and a Strategic Review has been launched to, inter alia, promote collaborative procurement by at least three Member States. ⁸⁶ For the first time, Member States have committed to developing four capabilities of strategic relevance: Integrated Air and Missile Defence, Electronic Warfare, Loitering Munitions and the European Combat Vessel. ⁸⁷

The Commission has also sought to strengthen the competitiveness and readiness of the EU defence supply chain. The Act in Support of Ammunition Production (ASAP) scaled up the manufacture of ground-to-ground and artillery ammunition as well as missiles – classified as ‘relevant defence products’. ⁸⁸ Under the MFF, ASAP allocated €500 million to reimburse up to 35% of eligible costs – rising to 45% for products destined for Ukraine, though not Moldova ⁸⁹ – across 31 projects in five strategic domains: explosives, powders, shells, missiles and certification for testing and reconditioning artillery ammunition. ⁹⁰ Like EDIRPA, ASAP has generated effects far exceeding its modest envelope, mobilizing €1.5 billion in cumulative investment and increasing annual production capacity by 10,000 tons of explosives and 4,300 tons of powders. Yet the distribution of funds has been uneven: German firms alone secured approximately €100 million of the €500 million ASAP fund. ⁹¹ Moreover, Commission assessments indicate that an additional €240 million – less than half the original envelope – could have raised EU powder production by 40% and doubled shell-body output, ⁹² underscoring the stringent limits of EU financial resources.

In parallel, the European Defence Fund (EDF) has continued to underpin cutting-edge innovation within the EDTIB. ⁹³ To date, the EDF has funded 225 projects involving an average of 18 entities from eight Member States, disbursing over €4 billion of its €7.3 billion 2021–2027 budget and providing up to 100% financing. In 2024 alone, the EDF received a record 297 proposals, directed 27% of its allocations to SMEs, and co-financed 14 PESCO-linked projects ⁹⁴ – eligible for a 10% funding bonus. Collectively, these results illustrate the cumulative and mutually reinforcing logic of EU defence industrial initiatives.

Since the innovative instruments EDIRPA, ASAP and SAFE were conceived as short-term responses, the Commission proposed in March 2024 the creation of the European Defence Industrial Programme (EDIP) ⁹⁵ to establish a permanent ‘adequate regulatory environment’ for the development of a European defence industry. ⁹⁶ Addressing more than three decades of legal vacuum in this domain, EDIP seeks to merge the demand-side logic of EDIRPA with the supply-side logic of ASAP into a single instrument, backed by a modest €1.5 billion budget through 2027 – the end of the current MFF. EDIP is designed as a multi-layered framework for defence industrial governance. At the institutional level, it foresees the creation of a Defence Industrial Readiness Board to enhance coordination and minimize vertical friction between the Commission and Member States. ⁹⁷ On the procurement side, it would introduce a new legal platform for collaborative purchases with VAT exemptions called Structure for European Armament Programme (SEAP); ⁹⁸ a EU-centralized catalogue of defence products called Defence Industrial Readiness Pool; and a European fund for jointly procured items, partly financed through the Military Sales Mechanism (MSM). ⁹⁹ Moreover, the Commission would designate a new category of European Defence Projects of Common Interest (EDPCI), involving at least four Member States, eligible for reimbursement of up to 25% of costs from the EU budget. ¹⁰⁰ On the production side, EDIP would expand the ratione materiae of ASAP to cover all defence products and establish the Fund to Accelerate Defence Supply Chain Transformation (FAST) to facilitate SME access to debt financing. ¹⁰¹ Crucially, it would also formalize, for the first time, the legal concepts of a ‘supply crisis state’ ¹⁰² and a ‘security-related supply crisis state’, ¹⁰³ empowering the Commission to intervene directly in defence production during geopolitical shocks – thereby embedding industrial resilience within the EU's legal framework.

However, EDIP has remained pending after more than 18 months of negotiations. Although both the EP's Industry, Research and Energy (ITRE) and Security and Defence (SEDE) Committees, as well as the Council, initially endorsed the proposal, the trilogue has exposed deep institutional divides with a provisional agreement reached only in October 2025. ¹⁰⁴ The EP advocated a more integrated and EU-centralized defence industry, diverging from the Council's national sovereignty approach. Accordingly, the EP sought to strengthen the ‘buy European’ by raising the threshold for EU-origin components from 65% to 70% to qualify for EDIP funding, ¹⁰⁵ and to increase the minimum number of participating Member States for European Defence Projects of Common Interest from four to six – except in cases of imminent conventional military threat. ¹⁰⁶ The EP also criticized the programme's limited budget, ¹⁰⁷ calling for an additional €15 billion in Member State contributions ¹⁰⁸ and a €5 billion envelope for the Ukraine Support Instrument. ¹⁰⁹ In contrast, the Council defended the Commission's initial figures and reiterated Member States’ sole responsibility over national security under Article 4(2) TEU and their essential security interests under Article 346 TFEU. ¹¹⁰

Besides measures aimed at strengthening the EU defence industrial base, the Commission also launched the first-ever simplification process to eliminate uneconomical red tape and advance the creation of a genuine single market for defence. ¹¹¹ Accordingly, it reduced permitting times for construction or expansion of defence plants to 60 days, facilitated access of Ukrainian industries to the EDF, clarified the scope of state aid rules, raised the procurement exemption threshold to €900,000 under the Defence and Sensitive Security Procurement Directive (Directive 2009/81) ¹¹² – thus institutionalizing the temporary derogations previously granted under ASAP and EDIRPA – and required the uniform application of General Transfer Licences under the Directive on intra-EU transfers of defence-related products (Directive 2009/43). ¹¹³

4. Constitutional lacunae

The EU's constitutional architecture falls short in the field of the defence industry. Even under ideal political conditions, substantive and institutional legal limitations hinder – if not preclude – the edification of a fully-fledged supranational EU defence industrial base.

Technically, the defence industry falls within the category of EU supporting competences under Article 6(b) TFEU. This means that the EU cannot override Member States’ sovereignty in this field, nor can it harmonize national legislation. Unlike in areas of exclusive competence, the EU – acting through the Commission – retains only a purely consultative and coordinative role, limited to promoting best practices. Moreover, the absence of an expressis verbis legal basis for a defence industry policy in the treaties has compelled reliance on the more general Article 173 TFEU – the sole treaty provision explicitly referring to ‘industry’. Following the outbreak of the war in Ukraine, Article 173 TFEU has been revived – alone or in conjunction with other provisions – as the central legal basis for industrial research and development (R&D), procurement and the production of defence equipment. In particular, Article 173 TFEU alone suffices when measures are centred on collaborative procurement. ¹¹⁴ Significantly, the proposed EDIP rests on a multi-layered combination of legal bases designed to anchor the defence industry within the EU legal order, exceptionally drawing on Article 173 TFEU, Article 114 TFEU to harmonize internal market rules, ¹¹⁵ Article 212 TFEU to enable technical and economic cooperation with Ukrainian industries and Article 322 TFEU to govern financial implementation under the Financial Regulation. ¹¹⁶

Even more exceptional is the legal foundation of SAFE, which rests on Article 122 TFEU. Traditionally reserved for financial emergencies, ¹¹⁷ its use in SAFE marks the first occasion in which Article 122 TFEU has been invoked to address an ‘exceptional and unprecedented security context’. ¹¹⁸ Nevertheless, this reliance has sparked debate over its legal admissibility, political appropriateness and democratic legitimacy – particularly since SAFE was adopted as a non-legislative act that bypasses the EP's approval, rather than taking the typical form of a Regulation grounded in the well-known Article 173(3) TFEU. ¹¹⁹ While the EP formally ‘welcomed’ SAFE in plenary, ¹²⁰ its Committee on Legal Affairs (JURI) unanimously rejected the use of Article 122 TFEU ¹²¹ and President Metsola urged the Commission and the Council to reconsider the legal basis. ¹²² This institutional friction culminated in August 2025, when the Parliament brought an action before the ECJ challenging the suitability of Article 122 TFEU as the foundation for SAFE. ¹²³ Unsurprisingly, this restrictive stance reflects the EP's earlier opposition to the use of Article 122 TFEU during the Covid-19 crisis, ¹²⁴ which, mutatis mutandis, led to the adoption of a Joint Declaration ensuring parliamentary budgetary oversight ¹²⁵ and to the insertion of Article 138 into its Rules of Procedure, obliging the Commission to justify proposals relying on Article 122 TFEU. ¹²⁶

Hence, SAFE follows the trajectory initiated during the Covid-19 crisis. First, it confirms the Council's broad discretion in determining the appropriateness of Article 122 TFEU for emergencies of various kinds – financial, energy-related, sanitary or security-driven. Second, as with the SURE instrument, SAFE relies on both paragraphs of Article 122 TFEU: paragraph 1 provides the legal basis for joint procurement to address the ‘severe difficulties’ in the supply of defence products arising from the war in Ukraine and the need to safeguard the EU's autonomous defence capacity; paragraph 2 underpins the provision of financial assistance to Member States ‘in difficulties’ or ‘seriously threatened with severe difficulties’ in the new security environment, through loans guaranteed by the EU budget. Third, although formally limited to four years – in line with case-law requiring an ‘essentially transitionary nature’ ¹²⁷ – SAFE arguably consolidates the qualitative leap initiated with the use of Article 122 TFEU for the NGEU, ¹²⁸ extending its reach to measures with lasting integrative effects on the fiscal plane. Accordingly, it would be prudent for the EU to transition to the more legally robust Article 173 TFEU as the legal foundation for defence industry financing beyond 2028, thereby avoiding the normalization of Article 122 TFEU as an ordinary legal basis.

Strictly tied to its supporting nature, the defence industry occupies an inherently ambiguous position within the EU's institutional architecture. Combining both industrial and defence dimensions, it embodies a delicate balance between the internal market – a shared competence under Article 4(2)(a) TFEU administered by the Commission – and the CFSP – an intergovernmental competence under Article 2(4) TFEU steered by the European Council and the Council, with coordination by the High Representative. EDIS epitomizes this cross-cutting character, encompassing initiatives that span industrial competitiveness, competition rules, single market construction, and defence and security. ¹²⁹

The war in Ukraine has further accentuated this complexity. The new constellation of EU measures in the defence industry has been described as a ‘very good demonstration of the Commission's ability to act urgently and in full compliance with the legal framework’. ¹³⁰ Yet development and procurement of defence capabilities depend on the voluntary participation of Member States in capability coalitions, rather than on the Commission, under the Defence Readiness Roadmap 2030. ¹³¹ The structural dominance of the intergovernmental pillar in the dualism between the internal market and the CFSP has deep historical and legal roots. Historically, the current institutional design builds on the 2004 creation of the European Defence Agency, conceived in continuity with the Western European Armaments Group (WEAG), the Western European Armaments Organisation (WEAO) and the Organisation for Joint Armaments Co-Operation (OCCAR), rather than through the establishment of a supranational mandate. Legally, the preservation of full sovereignty over national security under Article 4(2) TEU, together with the protection of essential security interests under Article 346(1)(b) TFEU, has entrenched the intergovernmental imbalance in the field of defence industry. ¹³²

Since the early stages of European integration, Article 346 TFEU has shielded Member States from Commission attempts to carve out a stronger role in the defence industry. ¹³³ It has traditionally been invoked as an automatic exemption allowing national defence industries to circumvent EU rules on mergers, monopolies and procurement. The Court of Justice, however, has consolidated a narrow interpretation of Article 346 TFEU, requiring Member States to demonstrate, case by case, that derogations are strictly necessary to safeguard their essential security interests. ¹³⁴ Consequently, the routine invocation of Article 346 TFEU by Member States reflects less a sound legal argument than a political reflex – a domaine réservé practice rooted in the enduring conception of defence as a core attribute of sovereignty. Yet the momentum generated by recent security crises may prompt the Commission to challenge this political automatism, rediscover the real scope of Article 346 TFEU, and incrementally expand its competences in the defence industry.

Crucially, the Commission's efforts to counterbalance the intergovernmental spillover of Article 346 TFEU by leveraging its internal market competence ex Article 114 TFEU have so far fallen short. Both Directive 2009/43 and Directive 2009/81 have been chronically underused, as Member States continue to rely on the more predictable national procurement channels for major military contracts. ¹³⁵ Stricter enforcement of these Directives by the Commission would be a double-edged sword. It could promote deeper integration in the defence market, though likely at the cost of infringement procedures that Member States would regard as direct encroachments upon their sovereignty. In substance, both Article 173 TFEU and Article 114 TFEU represent two sides of the same coin: they reflect Member States’ persistent determination to preserve the defence industry as a domaine réservé – irrespective of the precise legal framework.

In this context, a dedicated Commissioner for Defence and Space was created within the 2025–2029 College of Commissioners, ¹³⁶ while the Defence Industrial Readiness Board (DIRB) was proposed under EDIP to centralize procurement programming on the basis of the Capability Development Plan, consult National Defence Industrial Associations and oversee the activation and implementation of the ‘supply-crisis’ status. ¹³⁷ In practice, however, the EU defence industry remains a triple-hatted competence, divided among the Commission, the High Representative and Member States. The creation of a Commissioner for Defence and Space signals the political centrality of the defence industry in the new Commission mandate, yet in substance it represents little more than an internal restructuring of competence allocations within the Commission, as coordination with the High Representative and Member States remains indispensable. Similarly, while the DIRB is innovative in establishing direct channels between governments and firms, it is expected to operate primarily as a consultative forum – unlikely to resolve the enduring fuzziness in the division of labour within the EU and between the EU and its Member States. Chaired by the Commission and comprising the High Representative and one representative per Member State, the DIRB preserves the existing distribution of competences. Needless to say, this institutional fragmentation risks generating both horizontal and vertical conflicts, further complexity in the already burdensome implementation of EU defence-industry measures. Moreover, the EU still lacks a centralized procurement authority comparable to the US Department of Defence. Neither the new Commissioner for Defence and Space, nor the DIRB, nor even the EDA possesses the legal power, decision-making autonomy and financial firepower to act as a European Pentagon in a market where governments remain the sole buyers. Consequently, the absence of a supranational procurement authority perpetuates an institutionally fragmented landscape of 27 – often conflicting – national centres of demand, undermining the goal of a coherent European armament production strategy.

Alongside institutional and competence-related challenges, decisions regarding defence spending rest exclusively with the Member States. Article 41(2) TEU explicitly prohibits charging military or defence expenditure to the EU's regular budget. While this prohibition prevents the EU from directly purchasing military equipment on the market, it does not preclude reimbursing Member States for such purchases when they serve to strengthen industrial competitiveness and production capacity at EU level. Accordingly, major initiatives such as EDIRPA, ASAP and EDIP have reimbursed a share of eligible costs incurred by Member States in acquiring military equipment – wisely shifting the centre of gravity from CFSP to internal market competence and thereby circumventing the constitutional limitation imposed by Article 41(2) TEU. Nonetheless, it must be recalled that, as the defence industry does not fall within the EU's exclusive competences, the decision whether to benefit from these new EU funding opportunities remains entirely with the Member States.

The EU has experimented with innovative budgetary techniques. On the one hand, it has, for the first time, converted existing civilian instruments into defence-related ones, ¹³⁸ following the strategic logic that defence research can spur civilian innovation – a model long established in the US. ¹³⁹ As a result, defence technologies have been recognized as the fourth strategic sector – alongside digital, clean and biotech industries – under the Strategic Technologies for Europe Platform (STEP). ¹⁴⁰ Horizon Europe and the Digital Europe Programme (DEP) have been extended to cover dual-use innovation; ¹⁴¹ the Connecting Europe Facility (CEF) has incorporated military mobility among its objectives; ¹⁴² and cohesion funds may now be voluntarily redirected to ASAP and the EDF through a ‘landing clause’. Similarly, the European Parliament has proposed an 18-month extension of NGEU funds to allow Member States to invest specifically in the production of defence capabilities. ¹⁴³ On the other hand, the EU has issued €150 billion in common debt under SAFE to support joint defence procurement for the first time – building on the broader toolkit of common debt-based instruments for Ukraine, such as the Macro Financial Assistance Plus, ¹⁴⁴ the Ukraine Facility ¹⁴⁵ and the Exceptional Macro Financial Assistance. ¹⁴⁶

To structuralize EU financing to defence in the long term, the Commission has proposed simplifying the new funding mechanisms introduced after the war in Ukraine and the return of Donald Trump – grants, loans, equity and procurement – through the creation of a comprehensive European Competitiveness Fund in the 2028–2034 MFF. ¹⁴⁷ Moreover, the Commission has called for the creation of the first-ever Crisis Mechanism, building upon the unprecedented political appetite for Eurobonds that has emerged since 2022. Alongside the largest Member States – which in November 2024 opened the door to EU common debt for defence for the first time in November 2024 ¹⁴⁸ – the EP has advocated for permanent European defence bonds modelled on the NGEU coronabonds, ¹⁴⁹ while former European Central Bank President Mario Draghi has recommended systematic issuance of EU common debt to bolster the competitiveness of the EU's defence industry. ¹⁵⁰ Notably, Denmark has committed to endorsing joint EU borrowing for defence and to expanding the EU budget with new own resources during its Council presidency – marking a clear departure from its traditional frugal stance. ¹⁵¹

5. Transatlantic competition

While the EU has awakened to the imperative of developing a defence industrial base to support Ukraine and defend itself, NATO has undergone a parallel transformation. Admittedly, the combination of Articles 2 and 3 of the North Atlantic Treaty (NAT) promotes economic harmonization and collaboration among Allies to ensure a credible collective defence against external threats. In response to the shifted geopolitical landscape, the Allies launched the Production Action Plan ¹⁵² and the Industrial Capacity Expansion Pledge ¹⁵³ to ‘reduce and eliminate…obstacles to defence trade and investment among Allies’. ¹⁵⁴ The Updated Production Action Plan further accelerated this integrative trajectory by requiring demand aggregation, long-term procurement orders and alignment with NATO standards and capability needs. ¹⁵⁵

NATO's new industrial ambitions carry significant legal and political implications for the EU. ¹⁵⁶ Under Article 42(2) TEU, the EU must ‘respect the obligations’ arising within NATO, ensuring compatibility between EU and NATO defence industrial policies. ¹⁵⁷ This NATO-primacy clause has acquired unprecedented relevance following the accession of Sweden and Finland – two historically neutral countries – to NATO, which has brought the number of common EU-NATO members to 23. Consequently, the development of a genuinely autonomous defence industrial base is interconnected with – and to some extent legally dependent on – the decisions taken by NATO and, by extension, the influence of the US.

Ideally, the EU's single defence market would operate as a sub-set of NATO's integrated defence market, thereby reinforcing the so-called European pillar – formerly known as the European Security and Defence Identity (ESDI). A truly transatlantic single market for defence would represent the largest in the world, with an estimated annual turnover of €1.2 trillion, thereby encompassing the comparatively smaller EU defence industrial base. ¹⁵⁸ This vision reflects the EU's geopolitical view of the US as a ‘natural partner’. ¹⁵⁹ It also explains why the Commission pledged to ‘substantially increase procurement of military and defence equipment from the United States’ under the EU-US trade deal concluded in August 2025. ¹⁶⁰

Technically, however, the EU legal framework places the EU single market for defence in direct competition with NATO. Article 173 TFEU situates the defence industry within the logic of the internal market ex Article 114 TFEU, adopting a Europe-centric approach that excludes competence to foster transatlantic industrial integration. Above all, Article 346 TFEU restricts the scope of defence industry measures to a national conception. Reconciling EU and NATO industrial cooperation would therefore require supplementary legal bases alongside Article 173 TFEU – such as Article 21(1) TEU for strategic partnerships ¹⁶¹ and Article 212 TFEU for financial cooperation with third countries. In this sense, EDIP constitutes a sophisticated precedent, employing Article 212 TFEU to create financial cooperation between EU and Ukrainian defence industries. ¹⁶² The EU justifies such external linkages on the grounds of the ‘internationalisation of supply chains for relevant products and technologies’. ¹⁶³ SAFE equally represents a milestone in the EU's process of normative openness to the ‘wider world’, ¹⁶⁴ extending eligibility to EFTA/EEA states, Ukraine, acceding and candidate countries, potential candidates and all states with a Security and Defence Partnership. ¹⁶⁵ Yet, for geopolitical reasons, the EU remains normatively closed to its two principal NATO Allies – the US and Türkiye.

Beyond legal obstacles, the EU and NATO were institutionally created to operate separately in the defence industry. Any transatlantic defence market would thus risk inefficiency due to unnecessary institutional duplication. Although EU initiatives such as PESCO, ¹⁶⁶ the EDF, ¹⁶⁷ EDIRPA, ¹⁶⁸ EDIP ¹⁶⁹ and SAFE ¹⁷⁰ routinely refer to NATO standards (STANAGs), the EU defence industrial base remains fragmented. A homogeneous EU-standardization process would require, first, the political willingness of all Member States to apply STANAGs through a legally binding Council decision, and, second, enhanced coordination between the EDA and the NATO Standardisation Office (NSO). In this sense, the unification of the European Defence Standards Reference System (EDSTAR) and the roughly 1,200 existing STANAGs into a single document would greatly simplify the process.

Moreover, closer coordination – or ideally, the merger – of overlapping EU and NATO entities would improve efficiency. For example, the EDA and the NATO Support and Procurement Agency (NSPA) both coordinate multinational equipment acquisitions but have so far achieved only a handful of EU-NATO integrated projects, such as the joint A330 Multi-Role Tanker Transport project. ¹⁷¹ Similarly, the proposed DIRB under EDIP mirrors the structure and mandate of NATO's Defence Industrial Production Board, creating parallel institutions that issue separate recommendations to partly overlapping constituencies. Duplication also extends to initiatives. For example, PESCO and NATO's High-Visibility Projects both promote multinational capability development; the EDF and NATO's Defence Innovation Accelerator for the North Atlantic (DIANA) both fund R&D; ¹⁷² and both organizations have adopted separate security-of-supply strategies, resulting in competing frameworks within the same operational domain. ¹⁷³

By foreclosing formal cooperation with NATO to establish a wider single defence market, the EU legal framework advances, ultimately, the Commission's strategic autonomy agenda. The war in Ukraine has cemented the urgency of building a self-sufficient EU's domestic industrial base, exposing vulnerabilities created by overreliance on external suppliers. In response, European leaders have called for greater sovereignty and reduced dependencies, ¹⁷⁴ and EDIS has added ‘European’ to the well-worn slogan ‘more, better, together’. ¹⁷⁵ The EU's pursuit of strategic autonomy culminated in the European Economic Security Strategy – its first-ever roadmap to phase out economic dependencies ¹⁷⁶ – as well as in horizontal initiatives such as the Chips Act ¹⁷⁷ and the Critical Raw Materials Act, ¹⁷⁸ aimed at securing supply chains in strategic sectors. ¹⁷⁹ Finally, a new ‘buy-European’ clause has been introduced under SAFE, requiring that at least 65% of a project's component costs originate within the EU. Yet a paradox arises: while EU defence industrial measures have been designed to precisely strengthen the EU's autonomous military readiness in light of the erosion of US security guarantees under the Trump administration, ¹⁸⁰ the new EU-US trade deal runs against the tide. ¹⁸¹ In the absence of a centralized EU procurement authority, the EU-US agreement merely ensures predictability in US tariffs, compelling Member States to place orders individually rather than collectively. As a result, smaller and larger Member States will pay divergent prices for equivalent equipment – an asymmetry made particularly stark by the fact that, between 2022 and 2023, the US alone accounted for 63% of EU military imports. ¹⁸²

6. Conclusion

The post-2022 security context has advanced the integration of the EU defence industry to an unprecedented degree. The White Paper on the future of defence, the ReArm Europe Plan, NATO's new 5% defence spending target and the Commission's proposal for a fivefold increase in resources for defence and space signal a paradigm shift in the perception of defence as a public good of primary importance at both the EU and national levels. Crucially, these initiatives are likely to set the long-term trajectory of EU defence industry integration, regardless of whether the geopolitical shocks that prompted them persist or fade – a dynamic described in economic literature as ‘hysteresis’. ¹⁸³

However, constitutional lacunae and entrenched political resistance have halted ambitions for a fully-fledged supranational EU defence industrial base. Although the Commission has acquired an unprecedented geopolitical role by leveraging the internal market's competitiveness competence under Article 114 TFEU, Member States continue to treat defence as a core area of national sovereignty. This has forced the Commission to rely, mutatis mutandis, on suboptimal solutions such as Article 122 TFEU for SAFE. The primarily nationally driven defence spending, supported by EU common debt-backed loans, relaxed fiscal rules and budgetary flexibility, is unsustainable in the long term if not complemented by a gradual adaptation of the EU budget in primis and of national budgets in secundis to the new security needs. The lack of willingness among Member States to pursue EU integration risks undermining the gains achieved in joint procurement and defence production capacity, perpetuating inefficiencies and duplication. While the EU legal framework envisions an autonomous defence industry, the Commission and Member States have oscillated between protecting their domestic industries and maintaining geopolitical alignment with the US. In this context, the new EU-US trade agreement reinforces a US-defence industrial monopoly in Europe, constraining the prospects for genuine EU defence integration.

Structural criticalities that have persisted since the 1990s continue to constrain the EU defence industrial base. The new policy has not created a supranational defence industrial base as ideally conceived: a unified, centrally governed ecosystem free from economic barriers. Instead, the EU defence industry remains composed of 27 national markets, each with its own procurement authorities, regulatory regimes and industrial interests, cooperating only sporadically under the Commission's limited influence. Achieving EU defence industrial autonomy must therefore be understood as a means, rather than an end – a tool to strengthen Europe's security within NATO and to enable a partnership with the US on equal terms.