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The Draghi report’s section dedicated to the defence industry starts with a statement that Europe is facing an increasing amount of external threats (page 159), therefore the defence sector is crucial to ensuring Europe’s strategic autonomy but also in fostering innovation which may have a spillover effect over the entire economy. The EU’s industrial base, nonetheless, is facing challenges in terms of capacity, know-how and technological edge. The EU, as a result, is not keeping pace with its competitors, which may cause crucial problems.

Draghi argues that public defence spending of EU member states is insufficient to adequately counter the threats in the current geopolitical environment. Since the end of the Second World War, Europe has lived under the US nuclear umbrella, while at the same time especially in recent decades, military spending on the continent has been in decline. The absence of demand and long-term procurement planning has deprived the European defence industry of its ability to predict potential demand, which has led to a decrease in industrial capacity. 

Apart from public funding, the report also informs that access to private funding likewise remains a challenge for the EU’s defence industry. This is particularly the case for small and medium enterprises (SMEs) and mid-caps which form the backbone of supply chains and are key innovation actors. Access to finance for companies in this sector is often hindered by the interpretation given by financial institutions to the EU’s Sustainable Finance Framework and Environmental, Social and Governance (ESG) frameworks. Even the European Investment Bank (EIB), which deploys financial instruments to address prevailing market failures, largely excludes the defence industry from its support schemes. This also tends to give a negative signal to the other financial institutions. 

Another factor which Draghi points to in terms of weakening the EU’s defence industrial base is a lack of coordination at EU level and product standardisation. EU member states very often do not systematically exploit the benefits of coordination at EU level, joint procurement or pooling/ sharing of resources. The results are obvious- insufficient and uncoordinated defence spending, especially in comparison with the EU’s competitors. European collaborative procurement of defence equipment accounted for only 18% of expenditure on defence equipment procurement in 2022. 

The lack of standardisation has had its negative impact on the EU’s aid to Ukraine too, since the country has been defending itself from Russian aggression. As far as 155mm shells are concerned, the EU has provided about ten different types of howitzers to Ukraine.

In terms of air force, fighter jets like French Rafale and Swedish Gripen represent about one third of Europe’s fleet currently, with US fighter jets comprising the rest. 

Apart from the USA, other non-EU arms manufacturers such as Turkey and South Korea have also recently seen their market share increase due to increased demand. 

The EU invests significantly less than its competitors in defence R&D as well. In 2022, the 27 member states cumulatively invested EUR 9.5 billion in defence R&D. To compare, in 2023 the US Department of Defence’s budget for Defence Research, Development, Test and Evaluation was about USD 140 billion (EUR 125.43 billion). 

Complex next-generation defence systems in all strategic domains will require massive investment that exceeds the capability of any member state. Defence is a highly technological industry that operates on the basis of very long development cycles, primarily due to the disruptive nature of the technologies it needs to mature. The industry, henceforth, requires stable long-term investments, but at the same time it faces small production series and a high capital expenditure. The European Defence Fund (EDF) provides financial support mainly through grants, to cross-border collaborative R&D defence products. For several critical military capacities, such as next-generation rotorcraft and tactical cargo aircraft, the EDF has served to incentivise Member States to align their requirements, as well as the industry to collaborate on solutions. Draghi proposes that this approach is confirmed and amplified. 

According to Draghi, the overall goals of EU action should be to expand and develop the EU’s defence industrial and technological base so that it can meet and address new European defence and security needs, as well as to reinforce the capacity, readiness, output and efficiency of the EU’s defence industrial base to guarantee long-term sustainability, technological and industrial competitiveness. Finally, an objective should also be to strengthen European R&D in defence to support the technological advancement of the EU’s defence industry and to ensure a spillover effect over other industries too.

A way in which these can be achieved is substantially increasing the aggregation of demand for defence assets between groups of Member States and to pursue the further standardisation and harmonisation of defence equipment. More joint procurement would, for example, create the favourable conditions to further consolidate industrial capacity.

More systematic standardisation, as long as it is in line with NATO standards, would create more interoperability within the EU, as well as interchangeability.

Draghi also advocates for the creation of a medium-term EU Defence Industrial Policy. This policy should set strategic objectives and by using targeted measures and incentives it should support industrial cooperation, the ‘Europeanisation’ of supply chains, and the structural cross-border integration of defence industrial assets between groups of Member States. Extra funding should be provided for the development of defence industrial capacities at EU level as new EU financial resources could be leveraged on financial markets and channelled through the creation of an ad hoc instrument. 

Lastly, the involvement of the most innovative and high-tech companies from the civilian sector, in particular SMEs and start-ups from across the EU, should be encouraged and supported concerning the development of new defence solutions. A number of new or very challenging segments in defence (e.g. drones, hypersonic missiles, directed-energy weapons, defence artificial intelligence, seabed and space warfare) call for a joint strategic pan-European approach. This approach could be developed through new dual-use programmes and the proposed European Defence Projects of Common Interest, which would ensure the necessary industrial cooperation, as well as ensuring that EU and national funding are in place for the development of appropriate systems and infrastructure.