1.    Introduction

On 5 March 2024, the Commission published A new European Defence Industrial Strategy: Achieving EU readiness through a responsive and resilient European Defence Industry (EDIS) together with a proposal for an implementing Regulation, the European Defence Industry Programme and a framework of measures to ensure the timely availability and supply of defence products (the proposed EDIP Regulation).

The EDIS points to several challenges for the European Defence Technological and Industrial Base (EDTIB), notably fragmentation caused by national preferences, shortage of capacity caused by lack of common procurement by Member States and decades of underinvestment (i.e. the policy choice of Member States to “allocate the dividend of peace to other societal uses”). Russia’s war of aggression against Ukraine made these issues painfully clear. Scholars and policymakers argue that the current challenges could at least partly be subscribed to the national views on defence matters rather than encompassing common European perspectives. As a result, the security of the population in the EU and its allies in times of war is at risk. In response, the objectives of the EDIS are to achieve “defence industrial readiness” and “to invest more, better, together and European”.

These objectives are backed by the measures of the proposed EDIP Regulation,[1] which entail:

• EU aid instruments for industrial ramp up for Member States’ common procurement, for SMEs (Fund to Accelerate defence Supply chains Transformation [FAST] – facilitating the general access to financing for SMEs in the defence sector to remedy the widespread “black listing” of the sector by financial institutions), for European Defence Projects of Common Interest (co-financing of large scale projects with several Member States), and for defence industrial readiness pools/EU level strategic reserves;
• incentives and a regulatory framework for Member States’ common procurement (Member State-Member State) as well as for joint procurement at EU level (Commission-Member States);
• an EU-level security of supply regime for relevant defence products;
• an instrument for matching EU demand and supply by increasing transparency in the market (European Military Sales Mechanism); and
• the establishment of an European Defence Industrial Readiness Board to assist with the implementation of the EDIP.

The measures generally facilitate participation by Ukraine. Specific measures to support the Ukrainian defence technological and industrial base are also suggested. Moreover, the proposed EDIP Regulation complements other recent initiatives in support for EU resilience, such as the European Defence Fund (EDF) and the proposed Internal Market Emergency and Resilience Act (IMERA).

On 30 May 2024, the European Economic and Social Committee issued their opinion (EESC opinion) on the proposed EDIP Regulation and by June 2024, two Member States (Romania and Portugal) had endorsed the measures under the procedure for proportionality and subsidiarity in Article 5(3) TEU. On 10 July 2024, an addendum to the proposed EDIP Regulation was published in the form of an accompanying Staff Working Document (SWD). On request by the Council, on 3 October 2024 the European Court of Auditors issued its opinion on the proposed EDIS Regulation (ECA opinion).

There are clearly many interesting features to the proposed EDIP Regulation.[2] This blog analyses one specific horizontal feature: the pervading requirement to “buy European”. This requirement must be fulfilled to benefit from the proposed measures and establishes a link to the Foreign Direct Investment (FDI) regime.

2.    The background for a “buy European” condition

According to the EDIS - as confirmed by the Draghi report (Part A – A competitiveness strategy for Europe) - Member States tend to acquire off-the-shelf defence products from third countries, and thereby investing European taxpayers’ money in jobs and key technologies abroad rather than in Europe. In the EDIS and in the SWD, the Commission refers to a study showing that in 2022, 78% of defence procurement was procured from outside the EU. Out of this, almost 80% stems from the US, 13% from South Korea and 3% from the UK and Israel. In contrast, this has required the EDTIB to focus on exports and thus it must be expected that third country customers will be prioritised also in a time of crisis. The EDIS and the proposed EDIP Regulation seek to correct this perceived inappropriateness or unbalance, referring to the US defence market as a clear ideal (one buyer, large scale).

3.    What does the “buy European” condition entail?

The proposed EDIP Regulation envisages that many of the measures should require, first, that the (private) recipients of financial support and any contractors or sub-contractors being awarded the contracts in public procurement procedures that benefit from the measures in EDIP, must be established in the EU, associated countries (EEA countries, i.e. Iceland, Liechtenstein or Norway) or Ukraine.

Second, they may not directly or indirectly be controlled by non-associated third countries or entities. However, there are two exceptions: i) when the acquisition of control has been subject to FDI screening (Article 10(5); ii) when the controlled entity gives certain guarantees to the Member State or the associated country in which it is established. These guarantees shall ensure the security and defence interests of the Union and its Member States and that the objectives of the EDIP – which essentially are to support the EDTIB and the Ukrainian DTIB[3] – are not contravened. In particular, the exercise of control cannot restrict the controlled entity’s ability to carry out the activities, and security clearances must be in place where the activities concern sensitive information. Such guarantees must be submitted to the Commission.[4]

Third, the proposed EDIP Regulation requires that the infrastructure, facilities, assets and resources used for the purposes of the action should be located in the territory of a Member State, of an associated country or of Ukraine. Exceptions from this requirement can be granted by the Member States, if it does not contravene the security and defence interests of the Union and the Member States and is consistent with the objectives of the EDIP.[5]

Furthermore, defence products should not be subject to control or restrictions by a non-associated third country or entity, such as restrictions on use, which constitutes a central limitation for the Ukrainian use of donated armaments.

The “buy European” condition as described above is known from e.g. the European Defence Fund Regulation of 2021, but the application to procurement seems more far reaching than in the context of eligibility for R&D funding.[6]

4.    When to “buy European”?

The requirements described in the section above must be fulfilled by (private)[7] legal entities that:

• apply for funding for actions that will increase the defence industrial readiness of the EDTIB or the Ukrainian DTIB (Article 10(2)-(6) and Article 21(2)-(6),
• participate as tenderers in supported common procurement procedures (Member State-Member State; Articles 12(5) and (6), participate as tenderers in EU-level joint procurement (Commission-Member States; Article 35(8) and Article 37(3), or,
• are existing providers or compete to be new providers on existing framework agreements when they are re-opened for additional contracting authorities from other Member States and/or for an increase of the volume to facilitate the demand of extra contracting authorities; Article 34(2) and (3).[8]

5.    Will the “buy European” requirement break the vicious circle?

In recent years, EU trade policy has undergone a paradigm shift from radical reliance on globalisation to an enhanced focus on security. The “buy European” requirement in the proposed EDIP Regulation is yet another step in this direction.  The question rises whether the “buy European” condition properly addresses these underlying issues of national procurement patterns and underinvestment.

At first sight, the “buy European” condition could probably remedy the challenges of the EDTIB caused by national procurement patterns. However, the proposed EDIP Regulation may not always push Member States and the EDTIB in the right direction for three main reasons:

First, the goal is to defragment market supply by aligning the demand side. However, the fragmentation of the EDTIB has been addressed in strategy documents and EU measures since the 1990’ies. It constituted one of the motivations for the 2007 Defence Package that contained the Defence and Security Procurement Directive and the Directive on inter-EU transfer of defence-related products. In 2007, a target for common procurement of 35 % of all defence procurement was agreed in the auspices of the European Defence Agency. According to the EDIS, the level reached in 2022 was 18 %, while the target for 2030 is fixed at 40 %. As recognised in the EDIS, the tools for common procurement and subsequent access for other contracting authorities to framework agreements are already available in the Defence and Security Directive. On the one hand, the instruments of common and joint procurement are useful to solve the fragmentation of EDTIB, and the funding made available could provide the required “push”. On the other hand, the additional (mainly financial) incentives might not be strong enough to overcome the costs and compromises of increasing such collaboration.

Second, as mentioned, the Member States currently acquire 78% of their procurement from non-associated third countries. Therefore, it may be difficult to fulfil the criteria for buying European, even for projects or procurements that have this intention. As described, there are exceptions to some of the requirements. However, many Member States have only recently adopted FDI screening mechanisms, and therefore it may not be possible to rely on the first exception to the “buy European” condition. The other exception – the provision of guarantees – adds red tape. The consequence could be that the EDIP measures will not be utilised.

Third, the EDIP budget is EUR 1.5 billion, from the adoption of the EDIP Regulation until the end of 2027, when the period of the next Multiannual Financial Framework begins. In its opinion, the EESC “asks” for this budget to be increased in the medium term. Indeed, the success of the EDIP relies on Member States committing more funds for common procurement. Moreover, the European Taxonomy for sustainable products limits the defence industry‘s access to the financial markets. Therefore, the EESC argues that the budget cannot meet the “significant financing needs to come”. Moreover, the budget has a limited lifetime, entailing a lack of stability to adequately address underinvestment for the EDTIB in the longer term. In the same vein, the ECA opinion highlights the risk that the limited budget and the short lifetime will not be commensurate with the objectives of the proposed EDIP Regulation.

It may be worth to consider Recital 47 of the proposed EDIP Regulation, which states that: “Member States should consider using defence-related exemptions […]. That could in particular apply to Union law concerning environmental, health and safety issues, which is indispensable to improving the protection of human health and the environment, as well as to achieving a sustainable and safe development […]”. This Recital is related to security of supply. A defence-related exemption that is conspicuous by its absence is Article 346 TFEU. It is mentioned neither in the EDIS nor in the proposed EDIP Regulation. Offsets have historically been adopted by Member States with reference to Article 346 TFEU and entail a form of compensation from a seller to a buyer (requested by the buyer).[9] In a defence procurement context, offsets are contracts between a Member State and a non-national provider, in which the Member State requires the provider to invest in the (defence) industry or award sub-contracts to 'its’ undertakings as a type of “payment” for being awarded the contract. The cost of offsets will of course be reflected in the price of the original contract, but the commitments made by the non-national provider create positive economic effects in the local (defence) industry.[10]

The Commission has historically taken a relatively hard stance regarding offset policies, but has also been pragmatic. It may be considered whether the budget deficiency could be boosted and the “buy European” requirement be relaxed by an offset-inspired measure?[11] For example in cases where the procurement concerns capabilities that are not offered in the same or at the same rate of order-to-delivery times within the EU compared to producers in non-associated third countries. The absence of such measures in the proposed EDIP Regulation could suggest that offset-like measures remain controversial.

The proposed EDIP Regulation is intended to be operational as of beginning of 2025 – this timeline is however questioned in the ECA opinion. According to the proposal, the effects of the Regulation will be evaluated in June 2027. It will be intriguing to follow its adoption and effects.

[1] The proposed EDIP Regulation builds on the time limited so-called “emergency response” measures adopted in 2023, i.e. the Act in Support of Ammunition Production (ASAP) and European Defence Industry Reinforcement through Common Procurement Act (EDIRPA).

[2] For an overview and commentary on the measures in the proposed EDIP Regulation related to public procurement, see Grith Skovgaard Ølykke, “The European Defence Industrial Strategy and its implementing regulation viewed through procurement law spectacles”, Public Procurement Law Review 2024(4), NA107-NA118.

[3] The objectives of the programme are listed in Article 4 of the proposed EDIP Regulation.

[4] The procedural requirements in this regard are not very clear, see Article 10(5), 12(6) and 21(5) of the proposed EDIP Regulation.

[5] It is also possible to collaborate with entities in non-associated countries and to use their assets with the same reservation regarding the mentioned interests, but the costs related to such activities are not eligible for funding, cf. Article 10(6) of the proposed EDIP Regulation.

[6] Note that the defence procurement exception in the Government Procurement Agreement is wider in scope than Article 346 TFEU. Examining the relation between the “buy European” condition in the proposed EDIP Regulation to the GPA is outside the scope of this blog post.

[7] Private is in brackets, as the requirements could also be relevant for public entities, but for example contracting authorities from the Member States and associated countries are exempted from the requirements; see e.g. Article 10(7) of the proposed EDIP Regulation.

[8]  See Ølykke (n. 4) for description and discussion of this measure.

[9] E.g. Martin Trybus, Buying Defence and Security in Europe - The EU Defence and Security Procurement Directive in Context (CUP 2014), 54-55.

[10] On offsets, see e.g. a report commissioned by the EDA: E. Anders Eriksson with contributions by Mattias Axelson, Keith Hartley, Mike Mason, Ann-Sofie Stenérus and Martin Trybus, “Study on the effects of offsets on the Development of a European Defence Industry and Market”, 12 July 2007; Martin Trybus, Buying Defence and Security in Europe - The EU Defence and Security Procurement Directive in Context (CUP 2014), 54 ff; Baudoin Heuninckx, “346, the Number of the Beast? A Blueprint for the Protection of Essential Security Interests in EU Defence Procurement”, Public Procurement Law Review 2018(2), 51-74.

[11] The EDA commissioned study mentioned in footnote 10 considers pros and cons of different types of offset policies.