Defending Europe: Reflections on the White Paper on the Defense of Europe

Significant increases in defence spending only occurred after Russia's full-scale invasion of Ukraine. In the period 2022 to 2024, the share of pan-European defence spending in gross domestic product (GDP) rose by around a quarter. In 2024, the NATO target of 2 percent of GDP for Europe as a whole was thus achieved for the first time. Compared to the US, Europe has a similar number of soldiers, but a systematically much smaller budget. In recent years, the US has spent almost three times as much on defence as the EU countries. Most recently, the factor has only fallen to 2.3 times.
 
To make matters worse, the poor financial situation is compounded by the fact that European spending tends to be less efficient. So far, military procurement has essentially taken place nationally. This leads to additional complexity due to the significantly increased variety of systems used (Centrone/Fernandes, 2024), but also to higher costs. Economies of scale in development and production cannot be utilised, and the better market conditions of joint procurement are not realised. There is no single market for military goods, although the efficient use of public funds in this rapidly growing area would be of great importance.  

The EU's most important financing instrument is the annual budget, which is integrated into a multi-year financial framework (MFF) – usually seven years. In terms of commitment appropriations, the appropriations for heading 5 (security and defence) over the seven-year period from 2021 to 2027 will thus amount to 16.425 billion euros, or 1.3 per cent. However, the Treaty on European Union (TEU) stipulates that expenditure arising from operations having military or defence implications may not be financed from the EU budget unless the Council unanimously decides otherwise. The main instrument for the extra-budgetary financing of the Common Security and Defence Policy (CSDP) is the European Peace Facility (EPF), which is used to finance military missions. It now has a budget of €17 billion.  
 
If we start from the fiscal policy functions for the target dimensions of allocation, distribution and stabilisation, then defence is a public good: non-rivalry and non-excludability apply in consumption. Cross-border externalities, economies of scale, cost savings and efficiency gains speak in favour of centralisation at the EU level.
 
The European Commission has proposed a new instrument to increase funding for defence spending: SAFE. It is taking out loans of 150 billion euros, which it will pass on to interested member states under certain conditions. In the Stability and Growth Pact, member states can temporarily activate the national escape clause. According to Commission estimates, this could generate up to €650 billion for national defence spending. Furthermore, cohesion policy funds are to be redirected into defence investments. In the next MFF, the share of spending on security and crisis preparedness is to be increased. The European Investment Bank (EIB) intends to expand its range of loans for security and defence purposes. The additional mobilisation of private capital is also being discussed.  
 
Just as important as expanding financing is making progress in the single market for defence, which is highly fragmented on both the supply and demand sides. It is important to increase joint procurement by several member states with a European preference. Only with Europe-wide tenders without national preference can the opportunities offered by competition in the single market be exploited. The public sector would benefit from lower prices and more intensive competition on costs and innovation. In the long term, companies would have opportunities in larger markets and could assert themselves by offering innovative solutions, thereby also strengthening their international competitiveness. This would presumably lead to a certain degree of consolidation and thus to cost advantages through higher unit volumes.
 
In addition to financing and organising joint or coordinated procurement of defence equipment, the EU can take on certain functions that cannot be achieved at the national level. The paper concludes by discussing five possible areas of work at the European level: research and development, cyber defence and AI, air defence, logistics and medical care, intelligence and satellites.