European defense mechanism: A proposal to unify procurement

During the informal meeting of finance ministers in Warsaw, the Polish presidency intends to continue the conversation on defense funding. It has been exploring ideas with Northern European governments and discussing the topic with the British, as reported by Politico last week.

The foundation for the talks in Warsaw will be an evaluation by the Brussels-based think tank, Bruegel, assessing the current proposals of the European Commission in this domain. This includes the SAFE loan program valued at approximately 230 billion Canadian dollars and the easing of financial discipline rules.

The analysis, published on Monday, indicates that while the proposals mark progress towards bolstering the supply of military products, the incentives offered are insufficient to resolve issues such as governments' reluctance to make joint purchases or to coordinate actions to prevent duplication.

The analysis presents two proposals, which—according to the Polish finance minister, as mentioned in an invitation to his counterparts—should serve as a "sincere and constructive basis" for further discussions on defense funding. The first, more conservative option suggests gradually expanding mechanisms that already function within the EU, such as the European Defense Agency (EDA) or the Permanent Structured Cooperation (PESCO) in defense.

The second option involves the establishment of a "European Defense Mechanism", which would be open to non-EU countries like the United Kingdom.

This mechanism would serve multiple purposes: acting as an exclusive public procurement agency in certain areas, as well as a planner, funder, and potential owner of assets, such as satellites. Unlike existing EU mechanisms, member countries' failure to meet obligations could lead to sanctions, including suspension of membership.

This institution would operate on principles similar to the European Stability Mechanism, which supports eurozone countries in maintaining financial stability.

According to the authors of the Bruegel analysis, the EU, following the model of the European Bank for Reconstruction and Development (EBRD), could be represented as a separate shareholder by the European Commission. This would facilitate coordination between EU and EDM activities impacting the defense industry and defense capabilities.

Similar to the EBRD, this institution could also be funded by contributions from member states, determined based on factors like GDP size or defense expenditures. Decisions would be made using weighted majority voting.

To establish a common defense market, EDM member countries would need to adhere to two key principles: they could not provide state aid to arms companies and national preferences in procurement would be prohibited. Additionally, certain areas specified in the treaty establishing the EDM would be subject to joint procurement.

Bruegel also cautioned in its analysis that the United States' potential withdrawal from its role as Europe's protector could lead to significant increases in armament costs due to rising demand in Europe. To prevent price hikes, countries should collaborate, especially in procurement.

Analysts, however, are concerned that the European Commission's current proposals for defense funding might exacerbate "nationalism" in the defense market.

"The risk associated with allowing EU countries to spend more by loosening the fiscal rules without creating common funding mechanisms is that it may further increase procurement nationalism within the EU", the analysis states.

The second EU proposal, the SAFE loan program valued at approximately 230 billion Canadian dollars, aims to encourage joint purchases. The loans will be provided on the condition that at least two countries participate in military procurements. However, according to Bruegel, this incentive is too "modest" to reverse the negative trend in joint procurement.