Executive summary
Russia’s illegal invasion of Ukraine has brought war back to Europe. Failing to stop Russia’s aggression would leave Europe at a critical disadvantage for decades, with a long-term threat to peace in the European Union. The EU can no longer rely on United States leadership in NATO and European countries therefore need to rapidly build-up their military capabilities.
European countries have increased the amounts spent on defence considerably in recent years but the underinvestment of previous decades means that gaps still exist. While the EU as a whole fulfils the 2% NATO target, 7 EU NATO countries still fall short of reaching it.
The European defence market remains fragmented. The lack of joint procurement and national preferences for defence spending translate into small markets with low production numbers. We provide evidence of the cost of no EU single market for selected defence products: Low production numbers are a major reason for relatively high costs per unit of production.
European countries should work with the incoming EU defence commissioner to develop a cost-effective rearmament strategy. Countries pursuing goals individually would be ineffective. While EU defence industrial policy is constrained by institutional, political and practical problems, there are significant opportunities. A more integrated market for defence products would lead to greater economies of scale, resulting in lower prices and more defence readiness. Europe should aim at greater market integration for defence rather than at protecting smaller national markets.
Addressing the current security concerns will require both EU and national large funding, easily €500 billion in the next five years, for which budget prioritisation as well as European and national debt will be needed.
The European defence strategy should account for comparative advantages and disadvantages, which means that purchases of weapons from outside the EU are warranted and rational, especially when the security of supply and interoperability are guaranteed. Yet local purchases, i.e. some European preference, to boost industrial capabilities and innovation are critical to reinforce strategic autonomy and avoid falling behind on military technology.
About the authors:
Juan Mejino Lopez is a Research analyst at Bruegel.
Guntram B. Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).