The European Defence Industry: A Dormant Giant or a House of Cards?
Key Takeaways:
The European defence industry has been galvanised by the war in Ukraine, with European leaders striving to rebuild the foundations of a functioning and reliable industry.
With the prospect of reduced US financial and material support to Ukraine, European countries are preparing to shoulder the burden of continued support against Russian aggression, promising the supply of much needed munitions and weapons systems.
Relying too heavily on US tech and weaponry has led European defence manufacturing to lag significantly behind their Atlantic allies. Procurement and R&D projects suffer from underfunding and bureaucratic obstacles.
European leaders are concerned that changes in the electorate's priorities in the upcoming EU elections could affect backing for a unified European defence industry. Right-wing parties, advocating an increasingly non-interventionist stance, appear poised to present a credible political challenge.
As the war in Ukraine enters its second year since the beginning of Russia's 'special military operation', European NATO members are feeling the strain of continued material and financial support for their embattled ally. The EU, through their European Peace Facility (EPF), has provided lethal and non-lethal arms amounting to just over EUR 5.6 billion, with an additional EUR 1 billion set aside to reimburse EPF countries who have provided munitions directly from their own stockpiles. These munitions, often in the form of the much-coveted artillery shell, are not part of an infinite supply chain, meaning European states have encountered challenges in meeting both Ukraine's needs and maintaining their own defensive capacity. Artillery shells are a telling example of Europe’s currently skeletal defence industry, with the EU expected to deliver just over half a million shells produced in the year prior to March 2024. This is in stark contrast to Russia's wartime capacity to manufacture up to 2 million rounds annually.
Despite this, there are encouraging signs for the European defence industry, which Ursula von der Leyen claims is being ‘turbocharged’. In early March, she unveiled the eagerly awaited European Defence Industrial Strategy (EDIS). One of the strategy’s key aims is described as ‘leveraging readiness through investment: more, better, together, European’, with the aim of procuring at minimum 40% of defence equipment through European collaborations by 2030. By prioritising centralised defence spending, EU chiefs are seeking to reduce their dependence on ‘third countries’, a reliance borne through overestimation of peacetime production capacity, thus hindering urgent acquisitions. Europe's seemingly dormant defence industry, unwittingly thrust into 'war economy mode', could soon reap the rewards of an EU committed to a competitive global defence sector. This initiative aims to bolster European employment while ensuring sustained material preparedness, even during periods of reduced demand.
Opportunities
Indeed, there are indications that European states have acknowledged their past unpreparedness in outfitting and sustaining efficient munitions and equipment reserves. According to the European Defence Agency (EDA) and its annual Defence Data report for 2022, European defence spending increased by 6% on the previous year, with 20 of the 27 EU Member States increasing their expenditure, six of whom by over 10%. This increase in defence spending continued into 2023, reaching an EU record of EUR 270 billion and dispelling fears that 2022’s increased figures were simply knee jerk reactions to the invasion of Ukraine. Additionally, there was a substantial increase in the value of projects overseen by the EDA, with 18 projects initiated in 2022 amounting to over EUR 76 million. This constituted a total of EUR 250 million across 46 projects managed on behalf of Member States by the EDA. EDA managed projects continued to grow into 2023 with 236 proposals submitted by the defence industry, SMEs and research entities, competing for EUR 1.2 billion of EDIS funding. This suggests a revitalised European defence sector focused on prioritising self-sufficiency. The introduction of the EDIS strives to convert heightened defence expenditures into the advancement of European industries. Its commission advocates for establishing 'defence industrial readiness pools' to boost accessibility and shorten the delivery times of defence products manufactured within the EU. By offering financial assistance for the procurement of defence products from EU suppliers, it enables the formation of strategic reserves that can promptly be rendered 'accessible for additional customers, resulting in an appealing Government-to-Government program.'
Before the unveiling of EDIS, there were signs suggesting that Europe's defence firms were not as ineffective as previously believed.. The collective backlog of the region's leading seven companies in the sector, including BAE Systems, Leonardo, and Saab, surged to near-record highs of over USD 300 billion last year. As countries pledge to adhere to the EU’s new collaborative initiatives, companies like German ammunition producer, Rheinmetall, have seen their share price quadruple since Russia’s invasion, propelling the company onto Germany’s DAX index. Previously held back by ethical concerns and a focus on post-COVID economic recovery, companies are now being supported by EU politicians keen to exhibit their countries' support for Ukraine and economic resilience during a global downturn. While much of the focus has fallen on Europe’s major defence manufacturers, smaller companies have also benefitted from the uptick in orders from the war in Ukraine. William Cook, a family-run British company, saw a 20% increase in sales in its defence division between 2022 and 2023 thanks to a Ministry of Defence (MoD) contract to supply Ukraine with new tracks for its older Soviet armoured vehicles. Although direct application weapon systems like the HIMARS frequently attract media attention, William Cook's increasing prosperity reflects a more extensive achievement within European defence industries, leveraging the specialised market of weapon standardisation. The resurgence of EU arms cooperation is further illustrated by the joint announcement made by German and Danish leaders in February of this year regarding the establishment of a Rheinmetall factory in Unterluess, northern Germany. The EDIS outlines the expectation that EU members make 50% of their defence investments within the EU by 2030, curbing over-dependence on non-European imports and providing further investment for joint projects like the Rheinmetall factory in Unterluess.
Research and development (R&D) in the sector has also benefitted, as new and emerging weapons systems are being developed to equip European militaries, learning from conflicts in the Middle East and Ukraine. The Defence Command Paper Refresh (DCP23) set out the MoD’s intention to learn from the war in Ukraine and invest more than GBP 6.6 billion in advanced R&D to seize the opportunities presented by new and emerging technologies. This is exemplified by the Dragonfire laser system, a Laser Directed Energy Weapon (LDEW) that is being developed by a UK-based consortium involving Italian defence company Leonardo and the UK’s Defence Science and Technology Laboratory (Dstl). Designed to provide short-range air defence and protection for naval vessels, the weapon promises a revolutionary and cost-effective alternative to standard defensive munitions. The EU has also spearheaded new R&D projects, announcing in December 37 new joint R&D projects, bringing together 486 unique entities from 26 member states and amounting to EUR 832 million of EU funding. The grants for these new projects are in line with the EDA’s EU Capability Development Priorities, a set of policies ‘which will serve as the central reference for defence planning EU-wide and the baseline for all defence-related initiatives’.
The EDA, through these development priorities, seeks to provide the necessary capabilities for the EU to act as a ‘capable security provider and contribute to the defence of the European security order’ through the funding of new multinational projects. Key areas include next generation naval surface combat systems, future soldier systems, next generation close fire support systems and next generation joint precision strike capabilities; all made possible by designated EU R&D funding. While enhancing the combat readiness and effectiveness of European NATO members, the advantages will also extend to the region's defence industry. The heightened funding for R&D projects will enable companies to innovate and create new products, thereby competing with international counterparts and ensuring that European industries bolster their position in the sector.
Challenges
Although the European defence sector has steadily grown to meet nations' demands, there still exists a notable dependence on imports from the US and other third-party nations, posing a considerable challenge for substitution. From 2018 to 2023, around 55% of European arms imports originated from the US, marking a notable rise from the 35% recorded between 2014 and 2018. This figure greatly surpasses the contributions of the next two major suppliers to the region, with Germany and France, who account for 6.4% and 4.6% respectively of Europe’s supply. European states import a variety of different weapons systems from the US, such as Poland’s purchase of Apache helicopters for EUR 11.02 billion or Bulgaria’s EUR 1.38 billion purchase of Stryker Vehicles (both 2023). Although initiatives like the EDIS are promoting increased European collaboration in arms acquisition, the comparatively lower output of German and French industries in contrast to American imports indicates that Europe would need to ramp up its military industrial output significantly to replace the US as its primary supplier. This would require a level of European industrial militarisation unseen since the Second World War. The conflict in Ukraine provides a crucial measure for evaluating Europe's reliance on American resources. It would not be unfounded to suggest that Europe's financial support for Ukraine is comparatively less substantial than the contributions made by the US. The reluctance of the House of Representatives to approve additional defence packages may concern European leaders, who recognise that they are not yet fully prepared to assume the responsibility of Ukraine’s primary benefactor.
Another urgent concern for European nations is whether they have the necessary supply chains and infrastructure to replenish their own militaries to the appropriate defensive level. According to the head of Rheinmetall, it could be 10 years before Europe will be sufficiently equipped to defend itself due to the lack of surplus munitions caused by the war in Ukraine. The EU had originally pledged to send 1 million 155-millimetre shells to Ukraine in the year prior to this March. However, it has yet to fulfil this pledge, resulting in Ukrainian forces facing a 3:1 disadvantage compared to their Russian counterparts in terms of artillery capability. With the Ukrainian’s retreating from Avdiivka, further Russian advances by virtue of artillery advantage would be a damning indictment of Europe’s military supply chains and industrial efficiency. Europe's failure to arm Ukraine, though a notable problem, stems primarily from shortcomings in their procurement processes. For instance, A House of Commons committee report in July 2023 highlighted the UK's procurement system as being 'broken'. The report labelled the British procurement record as poor and stated that the land industrial base has withered; explicit condemnation which paints a bleak picture of the British military’s ability to re-arm itself in a effective manner should it need to contend with a near-peer adversary. In the EU, despite collaborative procurement models being touted in EDIS, they may also struggle due to institutional bureaucracy in Brussels. Directive 2009/43/EC exemplifies the bureaucratic red tape that complicates straightforward transfers within Europe, mandating transfer licenses and custom procedures, creating effective barriers that fragment supply chains and impede industrial efficiency across national borders.
Lastly, it is unclear whether there is political consensus for a reinvigorated European defence industry. While right-wing parties in Europe have traditionally upheld a pro-military stance, several of these parties, including those in Germany and the Netherlands, now argue that liberal figures in Brussels are using military aid as a means of provocation in a proxy conflict with Moscow. The upcoming European Union elections, scheduled for June, could potentially reflect the largest European opposition to Ukrainian aid since Viktor Orbán’s temporary blockade in February of a EUR 50 billion aid package. Orbán, the Hungarian Prime Minister, belonging to the right-wing Fidesz party and a key sceptic of Ukrainian support. Parties such as the German AFD and Dutch PVV could be set to secure wider representation in the European parliament, with both parties campaigning in their respective countries to re-engage with Russia to bring about economic prosperity. Whilst such parties will likely not secure a right-wing majority in the parliament, their voices may be loud enough to stir objective discourse over the EU’s attempts to foster a united European defence industry. Nationalist voices will be keen to highlight the amount of defence spending EU figures are requesting, some EUR 1.5 billion set aside for EDIS, arguing that the funds would be better spent on their own national issues. While some politicians may argue that a revitalised European defence industry will bring about more jobs and export-driven income, many will point to the heavy costs of procurement programmes and their burden on the taxpayer, a pertinent consideration after a prolonged period of inflation and economic stagnation.