Next Steps in European Defense

The United States and Europe are at a critical juncture with increasing demands on their defense industrial bases in the face of ongoing threats. Both sides of the Atlantic are focused on increasing defense spending, developing new capabilities and domestic manufacturing of defense articles, which will likely create both opportunities and challenges for established defense companies and new entrants into the defense market. At the same time, the transatlantic defense relationship is undergoing significant change, with the Trump administration pushing European and NATO countries to do more for their own defense and Europe investing and re-arming as it charts its own path forward.

In June, a series of international high-level meetings will help determine the future of European defense and transatlantic defense ties. G7 members (the United States, Canada, the United Kingdom (UK), Germany, France, Italy, Japan, and the European Union as a guest member) (“Member States”) recently convened in Kananaskis, Canada, between June 15 to 17 to discuss common action and solutions to international peace and security, global economic stability and the digital transition. NATO heads of state will meet on June 24 and 25 in the Hague, Netherlands, to continue discussions on strengthening the transatlantic alliance amid the changing security environment and with serious questions about the role of the United States in the alliance.

Although this is an important time for the development of the American defense industrial base and future defense capabilities, this client alert is focused on Europe and the UK. If you would like to read more about U.S. defense capabilities and the Trump administration’s push for shipbuilding, “Golden Dome for America,” foreign military sales reform and Senate Armed Services Chairman Roger Wicker’s (R-MS) FoRGED Act, please see the included links. If you would like to read more about global changes in defense spending, please see this link.

European Union’s “ReArm Europe Plan/Readiness 2030” Defense Strategy

On March 12, European Commission President Ursula von der Leyen announced ReArm Europe Plan/Readiness 2030, a comprehensive new strategy that aims to increase defense spending to over €800 billion in the upcoming years. Shortly after its release, the European Commission released a “White Paper for European Defence – Readiness 2030” and presented a package of financial incentives to EU Member States to drive investments into defense capabilities and support the ReArm Europe Plan/Readiness 2030.

The key components of the plan are:

• Lifting the caps on defense spending. Countries will be allowed to use the National Escape Clause under the Stability and Growth Pact, which allows Member States flexibility to increase defense spending without breaking EU fiscal rules.
• Creating a new fund/loan mechanism, called the Security Action for Europe (SAFE), specifically for the European Commission to help Member States increase their investments in defense. This new fund will provide 150 billion Euros in loans to EU Member States and has specific requirements, including a mandate that defense articles must be produced in EU countries and Ukraine and that at least 65% of the cost must be for components originating in the EU or Ukraine.
• Mobilizing private capital by allowing the European Investment Bank Group to invest in defense and security projects. The Savings and Investments Union Strategy will also support the private sector’s plans and help channel investments into defense. This will support a boost in innovation and modernization in Europe’s defense sector, as well as increase defense manufacturing capacity and self-reliance.

There are other opportunities that European countries, particularly those outside of the EU and the European Commission, can participate in to access the benefits provided through SAFE or other defense spending boost programs. For example, the EU may negotiate bilateral or multilateral agreements with other countries, like the one recently concluded with the UK.

The White Paper proposes that Member States heavily invest in defense, procure defense systems and build up readiness capabilities and the readiness of the European defense industry over the next five years and beyond. To fulfill these priorities, the White Paper suggests:

• Focusing on critical capabilities: air and missile defense, artillery systems, ammunition and missiles, drones and counter drone systems
• Increasing collaborative procurement and aggregating demand to help support the European defense industry.
• Increasing military assistance and deepening integration of European and Ukrainian defense industries.
• Simplifying regulations and deepening the EU-wide defense market.

UK-EU Defense Security Agreement

On May 19, the United Kingdom and the European Commission agreed on a new defense and security trade agreement as part of a wider economic pact. The new defense agreement is designed to support the UK’s and the EU’s efforts to boost defense production and deepen collaboration between the EU and the UK. The agreement will focus on military mobility, peacekeeping and crisis management, as well as countering hybrid threats. While this agreement is the first step toward UK involvement in EU defense programs, the two sides will still have to conduct more in-depth negotiations before the UK is eligible for contracts, subsidies for joint procurement and funding through the SAFE mechanism.

The EU and the UK have said that the new security trade agreement will help strengthen Europe’s contribution to NATO and “sharpen our focus on common strategic priorities in trade.” UK Prime Minister Kier Starmer celebrated the signing of the agreement, adding that it provides the United Kingdom “unprecedented access to the EU market” while still maintaining the principles of Brexit.

EU Seeks Deeper G-7 Defense Ties

The European Union is hoping to sign agreements with other G-7 countries, including a defense and security partnership with Canada, with the intention of creating a new defense fund. The EU will hold a summit with Canada on June 23, just before the NATO Summit, and a signed agreement would be a first step towards allowing Canada to participate in the new EU loan mechanism, such as the case with the UK agreement.

The EU is also reaching out to Asia, with a meeting in July with Japan to try to deepen a security agreement, particularly focused on naval cooperation.

UK Strategic Defense Review

The UK announced the results of a new Strategic Defense Review on June 2, a transformative proposal, with the UK laying out plans for its biggest investment in defense spending in decades. British Prime Minister Starmer previewed the plan with an announcement at the Govan Shipyards in Scotland that the UK would acquire “up to” 12 AUKUS submarines. The Defense Review also provides a new warfighting vision, based on a drone-centric strategy “where uncrewed systems are deployed for first wave attacks before tanks, attack helicopters and other crewed platforms arrive on the battlefield.”

The UK has made it clear that it plans to continue to work closely with the United States on defense matters. As the UK Ambassador to the United States Peter Mandelson said at an event at the Atlantic Center, “Our approach is to become less dependent on America, while remaining inseparably linked to America.”

NATO

The NATO Summit will take place on June 24 and 25. At last week’s NATO Defense Minister’s meeting, NATO Secretary-General Mark Rutte remained optimistic that most NATO countries will support Trump’s demand for 5% investment of GDP on their defense needs, 3.5 % on core military spending and the remaining 1.5% on the infrastructure, such as road, bridges and ports, necessary to deploy their respective militaries, with the increase taking place over a relatively short time frame of seven years.

New capability targets, which set NATO plans for countries’ purchases of key capabilities and plans to have European allies and Canada increase their stocks of weapons by about 30%, were also discussed, according to a senior alliance official.

Next Steps

As Europe, the EU, the UK and NATO continue to invest in European defense, we anticipate there will be announcements about the development of joint procurement plans, updates regarding security agreements and partnerships and future support for Ukraine’s defense. We expect countries to also begin negotiations on joint manufacturing facilities or partnerships between defense companies to access the loan funding provided by the European Commission. As these announcements come out, the Brownstein International and Defense teams can work with you to understand the challenges and opportunities available for the U.S. or non-EU defense industry, including how the SAFE loan program will work. For more information on how to get involved in the European defense spending boom, please contact one of the authors of this alert.