Although increasing EU defence production has been on the agenda of EU leaders since the start of the war in Ukraine, the issue has been slow to gain traction.
The most sensitive issue is how to finance further defence investment in the future. EU leaders agreed on Thursday (21 March) to force the European Investment Bank (EIB) to ‘adapt its policy on lending to the defence industry and its current definition of dual-use goods, while maintaining its financing capacity’.
They also made progress on using proceeds from frozen Russian assets to help Ukraine within months, under a plan to use most of the money to buy arms for Kiev.
The European Commission had proposed that 90% of the proceeds from frozen Russian assets be used to finance Ukraine’s defence production and military aid, while the remaining 10% would be given to Kiev as budget support.
European Council President Charles Michel and European Commission President Ursula von der Leyen said the idea of using the proceeds from frozen Russian assets to benefit Ukraine had broad support among EU countries.
Concerns of ‘neutral’ countries
But the use of this money to buy weapons is a problem for some countries, including militarily neutral states such as Austria, Ireland and Malta.
“For us neutrals, it must be ensured that the money we approve is not spent on arms and ammunition,” said Austrian Chancellor Karl Nehammer. Michel said Brussels could find ways to address their concerns.
“Russia must feel the real cost of war and the need for a just peace,” Ukrainian President Volodymyr Zelensky said, urging EU leaders to go further and use the assets themselves, a step the bloc has not yet considered.
Proposal for joint defence borrowing rejected
At the same time, EU leaders disagreed on a broader initiative for European financing of arms for Kiev, such as the ‘Eurobond for defence’ requested by Estonia and France.
Member states such as the Netherlands and Sweden are sceptical about joint borrowing on the financial market for defence purposes.
“The urgency of the issue means we have to consider options we don’t like,” an EU diplomat told Euractiv.
The leaders asked the European Commission to “explore all options for mobilising financing and report back by June”, a choice of words pushed by the Baltic states, Poland and Greece.
Leyen told reporters that the discussion was still at an early stage.
Fear of ‘power grab’
Although there is no coherent plan for new funding, the Commission has recently outlined plans for a European defence strategy.
These include Leyen’s idea of a new defence (industry) commissioner for the next term, more defence funding, an expansion of the bloc’s defence industrial base and the use of frozen Russian assets.
The plan even goes as far as the EU executive being prepared to place arms orders with member states to support joint arms procurement.
But this is where the controversy erupts. Leyen’s plan for a European defence industrial strategy is drawing criticism from some EU countries, including Germany, which supports strengthening the sector but fears the plan involves usurping national competences.
EU diplomats said there was considerable scepticism during Thursday’s summit discussions.
German Chancellor Olaf Scholz told EU leaders that the bloc did not need ‘another state-like structure for defence’ or the creation of new powers that would amount to a power grab, two people familiar with the talks told Euractiv.
While Scholz stressed the need to develop the bloc’s potential for joint procurement, he rejected the idea of the Commission as a mediator that could slow down processes.
“She wants to be a war president but forgets that the EU is not a state,” an EU diplomat said of Leyen, suggesting that critics of her using the defence issue to win a second term were right.
Member states still opposed to investment programme
In recent months, many EU countries have raised concerns about the Commission’s intentions behind the European Defence Investment Programme (EDIP), the bloc’s ambitious framework for strengthening the military-industrial complex.
As the programme will give EU member states and the Commission the power to redirect industrial priorities, finance arms production and give the EU body an overview of production capacities and supply chains, often protected by governments for national security reasons, some measures are considered ‘sensitive’ by member states.
Presenting the text, internal market commissioner Thierry Breton said his organisation was not interested in a ‘power grab’ and rejected a loose interpretation of EU treaties prohibiting the transfer of EU funds to military operations.
To avoid this accusation, the European Commission based its industrial policy proposal on Article 173 of the EU treaty, which allows the bloc to work on industrial competitiveness.
The Commission’s directorate-general in charge of implementing the programme (DEFIS) recently sent envoys to prepare the ground with EU countries to avoid potential problems.
Despite concerns, EU leaders on Thursday instructed their ministers to examine the EDIP text ‘without delay’.
Negotiations on technical details are expected to start in early April, with the European Council due to adopt its position in June, before the new European Parliament convenes in the summer.
