ReArm Europe: (Financing of) Defence made in the EU

While the ReArm Europe Plan strengthens European defence with new financial resources, the White Paper sets a strategic framework and highlights investment needs. These measures aim to provide short-term support for Ukraine and at the same time address the long-term need to enhance Europe's security and defence capabilities.

2 Joint White Paper for European Defence Readiness 2030

2.1 European Readiness 2030 

The White Paper outlines measures to enhance Europe's deterrence capacity. It emphasises that while Member States remain responsible for their own armed forces, the EU will support and coordinate efforts to strengthen the European defence industrial base and overall readiness.

The Paper envisions facilitating large-scale investments in the defence sector, reducing regulatory hurdles and improving coordination through collaborative projects, which are expected to generate economies of scale and enhance production capacity. Furthermore, it proposes measures to ensure interoperability and develop dual-use infrastructure for mobility and space-based communication.

2.2 Closing the Gaps

The White Paper outlines the EU's strategy to address critical military capability gaps among its Member States. It emphasises the necessity of acquiring essential defence assets swiftly and strengthening cooperation with NATO. Key areas identified include air and missile defence, advanced artillery systems, ammunition stockpiling, drone technologies, military mobility, cyber and electronic warfare and critical infrastructure protection.

The Paper highlights the benefits of collaborative procurement to enhance efficiency, interoperability and cost-effectiveness. Furthermore, it calls for regulatory simplifications through a "Defence Omnibus" initiative to streamline defence-related procedures and it proposes the establishment of strategic stockpiles and readiness pools to ensure rapid response capabilities.

Military mobility improvements, including infrastructure upgrades and regulatory harmonisation, are also prioritised to facilitate swift troop and equipment movements. Additionally, the EU intends to support an integrated border defence system along its eastern border.

2.3 Porcupine strategy

The proposed "Porcupine strategy" aims to strengthen Ukraine's defence capabilities to deter future attacks and ensure lasting peace. Key measures include supplying large-calibre artillery ammunition, air defence systems and drones, supporting Ukraine's defence industry through direct procurement and financial instruments and improving military mobility and access to EU space assets. 

Furthermore, closer integration of Ukraine into EU defence initiatives, including participation in the European Defence Technological and Industrial Base (EDTIB) and the European Defence Industry Programme (EDIP), is recommended to facilitate knowledge transfer and technological advancement. 

2.4 Innovation in defence made in Europe

To address structural weaknesses, the 2026 revision of the EU Directive on defence and sensitive security procurement will consider "the Competitiveness Compass recommendation to introduce a European preference." Key strategic directions include scaling up production capacity through long-term orders, enhancing supply chain resilience, creating a unified EU defence market and simplifying regulations.

The EU also aims to foster disruptive innovation by investing in AI, robotics and emerging technologies through initiatives like the European Defence Innovation Scheme (EUDIS) and the Defence Equity Facility. SMEs play a crucial role in advancing defence R&D, with dedicated funding under the European Defence Fund (EDF) and the proposed Fund to Accelerate Defence Supply Chain Transformation (FAST). Additionally, a European Military Sales Mechanism and joint procurement initiatives seek to ensure timely and sufficient availability of defence equipment. The EU's approach emphasises technological autonomy, risk capital for defence startups and leveraging dual-use innovation to maintain global competitiveness.

2.5 Financing defence ramp-up 

The EU aims to significantly increase defence spending and investment to address past underfunding and enhance security. The ReArm Europe Plan outlines five key pillars:

1. establishing the Security and Action for Europe instrument (SAFE), providing up to EUR 150bn in loans backed by the EU budget to support joint defence procurement;
2. activating the National Escape Clause under the Stability and Growth Pact to grant Member States flexibility in financing increased defence expenditures;
3. making existing EU instruments, namely cohesion policy funds, more adaptable to defence-related investments;
4. expanding the European Investment Bank's role in funding defence projects, including cybersecurity, drones and quantum technologies;
5. mobilising private capital by improving SMEs' access to finance and clarifying the applicability of the Sustainable Finance Disclosures Regulation (SFDR) to defence investments. 

3 SAFE-Regulation 

To finance the defence ramp-up, the EU Commission has submitted a proposal for a Council Regulation, establishing the Security Action for Europe through the reinforcement of European defence industry Instrument, (SAFE Regulation). The regulation is based on Article 122 TFEU (due to the current exceptional security situation) and is therefore to be adopted by the Council without the European Parliament.

The Security Action For Europe Instrument (SAFE) thus introduced is intended to aid the Member States financially so that they are able to make urgent and major investments in support of the European defence industry. Financial aid based on SAFE is to take the form of loans granted by the Union to the Member State, which can be combined with other financial support from the EU. The maximum amount of financial assistance in the form of loans provided under the SAFE instrument is EUR 150bn.

An essential prerequisite for granting assistance to Member States for "activities, expenditures and measures related to defence products or other products for defence purpose" is that these are carried out through joint procurement.

Procurement by one Member State alone is only permitted within 12 months of the entry into force of the Regulation, whereby the State must take all measures to extend the benefit of the contract to at least one other Member State, one EEA EFTA State or Ukraine, in addition to any interested acceding country, candidate country, potential candidate, or other third country with whom the Union has entered a Security and Defence Partnership. Eligibility conditions (see below) apply with the necessary adaptations.

States that want to receive assistance under SAFE must send a request to the EC within six months after entry into force of the respective Regulation. The request must be accompanied by a plan ("European defence industry investment plan"), which has to be "duly reasoned and substantiated" and should specifically include a description of the defence product, along with other items relevant to defence needs within the respective product category, as well as

• a description of the planned activities, expenditures and measures;
• where relevant, a description of the foreseen involvement of Ukraine in the planned activities, expenditures and measures, or of foreseen actions for the benefit of Ukraine;
• a description of the planned measures aimed at ensuring compliance with the eligibility and procurement rules, including a description of how their respect is to be ensured;
• any other relevant information.

Public procurements supporting defence industry investments are only eligible for support under the SAFE instrument if they meet specified eligibility conditions, inter alia:

• Contractors and subcontractors must be established in the Union, EEA-EFTA States, or Ukraine, with executive management structures located there. They cannot be controlled by a third country outside of these areas. A legal entity in the Union controlled by a third country can participate if it has been screened according to Regulation (EU) 2019/452, and where necessary, has mitigation measures in place or provides verified guarantees from the Member State where the contractor is established.
• The infrastructure, facilities, assets and resources used for the procurement must be located within the Union, EEA-EFTA States or Ukraine. If no suitable alternatives exist in these areas, resources located outside these territories may be used, if this does not affect the security and defence interests of the Union and its Member States.

Supplies of defence products, including imported and intra-Union supplies, made under contracts resulting from common procurements under SAFE, shall be temporarily exempt from value-added tax.

4 Status Quo: Regulation of Defence in Austria 

Currently, Austrian companies engaged in the defence sector must comply with numerous regulations at the European, national and international levels, including arms embargoes. The export of military weapons to third countries and within the EU generally requires approval under the Foreign Trade Act 2011. If there is a risk that the goods will trigger armed conflicts or exacerbate existing conflicts in the destination country, no approval will be granted. 

The export or provision of brokering services for goods that can be used for both military and civilian purposes is also subject to strict rules under the Regulation (EU) 2021/821 (Dual-Use Regulation). Dual-use goods include, for example, unmanned aerial vehicles such as drones or specially developed components for high-performance diesel engines. The export of goods listed in the Ordinance of the Federal Government of 22 November 1977 concerning War Material requires a permit under the War Material Act. 

Additionally, the manufacture and distribution of defence goods in Austria require a trade license. The manufacture and trade of military weapons and ammunition fall under the regulated "weapons trade", which is subject to numerous special provisions, such as the maintenance of weapons registers. 

5 Key take-aways

• White Paper for European Defence: The White Paper outlines measures to strengthen the European defence industrial base, enhance interoperability, and improve mobility and space-based communication. It emphasises EU coordination to address military capability gaps, support large-scale investments and streamline defence-related procedures through collaborative projects and procurement initiatives. The Paper also includes boosting defence financing through the ReArm Europe Plan, featuring the SAFE instrument to support joint procurement, activate fiscal flexibility for Member States, the provision of additional ways Member States can increase funding for defence via cohesion policy and enhancement of private capital access to increase defence spending.
   
• SAFE Regulation: The SAFE Regulation introduces financial support to Member States for urgent investments in the defence industry, with provisions for loans up to EUR 150bn and eligibility criteria for common procurements.
   

Austrian Defence Regulation: Currently, Austrian defence companies must comply with national and international regulations, including strict controls on military exports, dual-use goods and the manufacturing of military equipment.