EUROPEAN COMMISSION Brussels, 18.5.2022 JOIN(2022) 24 final JOINT COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on the Defence Investment Gaps Analysis and Way Forward



1.Introduction EU Heads of State or Government, meeting in Versailles on 11 March, committed to “bolster European defence capabilities” in light of the Russian military aggression against Ukraine. They agreed to: 1) increase defence expenditures; 2) step up cooperation through joint projects; 3) close shortfalls and meet capability objectives; 4) boost innovation including through civil/military synergies; and 5) strengthen and develop our defence industry, including SMEs. Moreover, they invited “the Commission, in coordination with the European Defence Agency, to put forward an analysis of the defence investment gaps by mid-May and to propose any further initiative necessary to strengthen the European defence industrial and technological base.” The tasking was also integrated in the Strategic Compass on Security and Defence adopted by the Council and endorsed by the European Council in March 2022. This Joint Communication provides the requested analysis to the European Council with the aim to ensure that the increased defence spending by Member States results in a much stronger EU defence technological and industrial base, resulting into increased conventional deterrence for any kind of potential adversary. Building in particular on the “defence package” Communication of 15 February 2022, it offers Member States new ways to step up joint procurements as well as to engage with industry to step up their production capacity to meet the increased needs, based on consolidated and more predictable demand. Citizens’ perception of the need for stronger EU action regarding defence is highlighted in the final report of the Conference on the Future of Europe. Such steps are critical in light of the significant implications that Russia’s unprovoked military aggression against Ukraine has for European defence. The return of warfare to Europe has underlined the effects of years of defence underspending, which has led to an accumulation of gaps and shortfalls in the collective military inventories as well as reduced industrial production capacity. In addition to correcting this situation, increased defence expenditure will also have to address urgently the short-term need to replenish and expand defence stocks including to compensate for the military assistance to Ukraine. Member States have announced increases in their defence budgets in the order of, so far, close to EUR 200 additional billion in coming years. Whilst these increases are essential, there is a serious risk that this will not be able to make up for the existing shortfalls if spent in a non-coordinated way. EU Member States must therefore not only spend more but also invest better and more together – as acknowledged in the Versailles declaration as well as the Strategic Compass. Only by working together can Member States maximise economies of scale and face the large costs of high-end capabilities, while avoiding to compete for limited supply capacity and preventing unnecessary duplication. Based on the historical record, there is nonetheless a risk that Member States opt for national solutions, because of industrial and security of supply considerations, or, when not available privilege “off-the shelf” non-EU solutions given the sense of urgency, at the expense of possible EU solutions that may have equivalent lead times. Defence industries may be inclined to serve as a matter of priority their national government as opposed to a more European-wide client-base. Without coordination and cooperation, the increased investments would deepen the fragmentation of the European defence sector, limit the potential for cooperation throughout the life cycle of the equipment, intensify external dependencies and likely hamper interoperability. Short term acquisitions will have a longer-term impact in this regard, resulting into a reduction of market strength and foregone opportunities for the next decades. In short, persistent underspending and lack of cooperation have resulted in critical defence capability shortfalls, particularly at the higher end of the spectrum, across domains, as well as in the fragmentation of the related industry in Europe. It is essential that the EU does not repeat past mistakes that led to inefficiencies, duplications and dependencies and builds instead on the EU defence initiatives and capability development tools set up during the last few years to strengthen Member States’ defence cooperation. These initiatives aim to reduce the fragmentation of the European defence market – notably the European Defence Fund (EDF) – and enhance coordination of Member States defence policies, planning and capability development – notably through Permanent Structured Cooperation (PESCO), the Coordinated Annual Review on Defence (CARD) and the Capability Development Plan (CDP). Moreover, the Strategic Compass calls, as of 2022, for annual Defence Ministerial meetings on the EU defence initiatives addressing capability development, organised and chaired by the High Representative/Vice President of the Commission/Head of the European Defence Agency, making full use of existing formats. These are all important steps in the right direction to address the existing shortfalls but they need to be further strengthened in light of the new situation, notably as regards joint investment and procurement of defence capabilities. Such steps are critical to ensure that Europe can field stronger and more interoperable defence capabilities while enhancing the European defence industrial and technological base (EDTIB), which are both essential for Europe’s long-term security and strategic autonomy. The overall aim is therefore to invest: ·Together, by exploiting economies of scale through collaborative projects and joint procurements. Developing and buying together reduces prices and will also help to prevent Member States competing for limited industrial resources, thereby further driving up prices or crowding out smaller or more exposed Member States, and thus ensuring solidarity. Similarities with the COVID vaccine situation in 2020-21 present themselves. ·Better, by supporting Member States to focus on the identified EU capability priorities. These are coherent with those of NATO and will also be reviewed in light of the political-strategic guidance provided by the Strategic Compass. This analysis highlights some urgent capability gaps in the changed strategic context; and ·European, by incentivising defence investments that reinforce industrial ramp-up, longer-term industrial capacity and economic growth within the Union through a more competitive European defence industry. Enhancing the European Defence Technological Industrial Base (EDTIB) has become of strategic importance in the deteriorating geostrategic environment. This is also beneficial for NATO which remains the foundation of the collective defence of its members. EU initiatives to foster defence cooperation also help reinforce a fairer Transatlantic burden-sharing and a more effective European contribution within NATO. Member States can use their single set of forces nationally or within the EU, NATO, UN or any other framework. EU’s capability development priorities are coherent with those agreed within NATO, while taking into account the difference in nature and responsibilities between the two organisations and ensuring mutual reinforcement in respective efforts. Defence capability development is a key pillar of the enhanced EU-NATO dialogue and cooperation agreed under the Joint Declarations of 2016 and 2018. This Joint Communication looks at: a) defence expenditures within the EU, b) capability and industrial gaps that need to be addressed including the most urgent ones, c) ways to address them, and d) options to reinforce defence capability supply. 2.Defence expenditures within the EU and underinvestment levels In response to the new security threats, in 2022 most Member States are announcing substantial increases of their defence budgets, in some cases even going beyond 2% of their GDP, building on an upwards trend that started some years ago. In 2020, Member States collectively spent over EUR 200 billion on defence and in 2021 their combined expenditure is estimated to have grown to EUR 220 billion. These recent developments nonetheless follow a prolonged period of substantial cuts in defence spending after the economic and financial crisis 2007-08; down from EUR 183 billion in 2008 to EUR 159 billion in 2014, only recovering to the pre-crisis levels by 2018-19 (see the graph below). Between 2009 and 2018, Member States cuts amount to an aggregated under-investment of around EUR 160 billion, compared to the 2008 spending level. This, alongside the structural trend of cost increase of defence systems and the focus on expeditionary operations in some Member States, has led to severe reductions in overall national force volumes, equipment quantities, and stockpiles – now further depleted by the support provided to Ukraine. As a result, the capacity to operate full-spectrum and at high intensity was neglected, while existing shortfalls and missing high-end capabilities were, when necessary, covered by non-EU NATO Allies, notably the US.

Moreover, over the past decade, the US – and more worryingly Russia – have increased their defence budgets at a much higher rate than Europe. It is striking that China increased its budget even more over the same period. From 1999 to 2021, EU combined defence spending increased by 19.7% against 65.7% for the US, 292% for Russia and 592% for China. This does not even account for the significant underestimation of the defence spending by China and Russia as the purchasing power of their budget is higher than the conversion based on exchange rates would make it appear. On a purchasing power parity basis, the 2021 Russian and Chinese defence budgets are estimated to be USD 178 billion and USD 332 billion respectively. On top of that, the share of investment in the defence spending of the United States, China and Russia is significantly higher than that of EU Member States. While there is no legally binding target for individual national defence spending levels for Member States, the vast majority of them have agreed, in the framework of NATO and/or the Permanent Structured Cooperation (PESCO), to the objective of increasing their defence spending. As an indication: had all Member States spent 2% of their GDP on defence with 20% dedicated to investment, since 2006 until 2020, this would have resulted in an additional approximately EUR 1,100 billion for defence, of which around EUR 270 billion on investment. Furthermore, European defence expenditure has historically resulted in a lower efficiency and output in comparison with that of our allies and of our competitors. Lack of cooperation between Member States on defence is estimated to cost tens of EUR billions per year. Despite the increased European defence expenditure in 2020, there was a new low point of only 11% of investments spent in collaboratively – far below the 35% benchmark agreed by Member States in the EDA framework and set within the PESCO – as opposed to 89% spent on a national basis. Lack of cooperation has led to wasteful duplications and a multiplication of defence systems of the same kind within the EU. In addition, while in 2020 Member States’ combined defence Research and Technology (R&T) spending amounted to EUR 2.5 billion, this amounts to only 1.2% of their total defence spending, thus far below the 2% benchmark agreed in the EDA framework and set as more binding commitment within PESCO. 3.The defence industrial gaps The European defence industrial basis is composed of a large set of prime contractors, mid-caps and small and medium enterprises developing and producing most of the advanced technologies and defence capabilities Member States’ Armed Forces need and could procure. Overall, the estimated annual turnover of the EU defence sector amounts to almost EUR 84 billion, supporting directly estimated amount of over 196,000 high-skilled jobs, and over 315,000 jobs indirectly Despite the overall competitiveness of the sector, difficulties and gaps exist. Defence companies are still structured mainly along national borders, benefitting from a close relation with national governments. This structure of the market, combined with a low investment spending, has resulted in a number of national players operating in small markets, producing therefore small volumes. A series of consolidation steps at national and European level have fallen way short of the US industrial consolidation. Therefore, the EDITB remains highly fragmented, especially outside the aeronautics and missile sectors. This greatly reduces its ability to improve its competitiveness through pooling of R&D and economies of scale in production. Moreover, dependencies exist for some key defence equipment for which the EDTIB is not offering indigenous solutions. The root causes of the difficulties of the EDTIB are the described under-investment gaps by Member States and fragmented spending, coupled with the fact that a very significant part of Member States’ spending is not invested in the EDTIB, even when an EU-made product is available. As an indication, between 2007-16 it is estimated that over 60% of European defence procurement budget was spent on non-EU military imports, with the resulting third country controls or restrictions. The return of high intensity conflict and increased territorial threat requires a conversion of the defence industrial ecosystem in the EU to ensure security of supply and an expansion of manufacturing capabilities where necessary or a greater ramp-up readiness. Furthermore, when it comes to disruptive technologies having the potential to radically change the future battlefield (e.g. AI, Quantum) and future equipment, the described root causes risk affecting EDTIB competitiveness in the long term, and its ability to develop advanced capabilities (e.g. hypersonic systems, collaborative combat). 4.Capability gaps The Strategic Compass identified the EU’s overall ambition as further developing “full spectrum forces that are agile and mobile, interoperable, technologically advanced, energy efficient and resilient”. It has also recalled the already identified critical capability shortfalls indispensable to enable the Union to undertake the full range of Common Security and Defence Policy (CSDP) tasks set out in the Treaty, specifically those in the higher spectrum of intensity. These shortfalls are included in the priorities set by the Member States in the Capability Development Plan of 2018, which will be reviewed in light of the Strategic Compass and remain a key reference for coherence among EU defence initiatives. To address these priorities, the EDF is providing financial support contributing to the development of strategic enablers and major capabilities while Member States are also working together to address them through 60 projects within PESCO. The Commission and the European Defence Agency (EDA) have analysed the defence investment gaps. In that context, the EDA has presented to Member States an analysis of investment gaps to be filled in the short, medium and longer term, along three lines of actions: 1) to be prepared (increase readiness including replenishment linked to the support to Ukraine); 2) to augment existing forces and capabilities; and 3) to reinforce and modernise capabilities, based on EU agreed capability priorities and informed by CARD (see annex). In light of the elevated security threat, and building on the coordinated analysis of the Commission and the EDA, the Commission and the High Representative propose to focus on the following most urgent capability gaps that can be addressed by the European defence industry: 1.Replenish stockpiles: Secure the combat readiness of armed forces and coordinate competing national demands, avoiding price spiralling and ensuring that most exposed countries have access to required capabilities. 2.Replace: Phase out existing Soviet era legacy systems still in use within EU Armed Forces with European solutions (such as: Main Battle Tanks, Armoured Fighting Vehicles, Infantry Fighting Vehicles, Armoured Personnel Carriers, heavy artillery, etc.), as part of a wider effort to augment existing capabilities and supporting interoperability and enhancing security of supply. 3.Reinforce: Strengthen the multilayer Air and Missile Defence systems of Member States, starting with mid-range systems in those most exposed. The defence of population areas, military forces and/or critical infrastructure against air and missiles threats is a critical challenge in the new security situation. Beyond these urgent capability gaps, the Commission and the High Representative propose to work on the following strategic medium- to long-term capabilities to improve Europe’s defence capabilities in the face of persistent threats: ·Air domain: The development and operationalisation of the medium-altitude “Eurodrone” (MALE RPAS) – which forms part of PESCO and EDF projects – gained importance. In the short to medium term, upgrading and expanding Air-to-Air Refuelling capabilities and existing aircraft fleets, building a multilayer Air Defence capable of integrated management, as well as developing and procuring counter drone-capabilities and weaponised medium-sized drones are priorities. In the medium and longer term, the modernisation of anti-access/area denial systems and the fleet of multi-role fighter aircraft in the EU is another area where Member States intend to make new investments and where a coordinated approach would help optimise resources, also in view of developing the next generation of systems. ·Land domain: The upgrade and expansion of the existing inventory of Main Battle Tanks and Armoured Fighting Vehicles, as well as next generation systems has become an urgency for many Member States, in light of the return of large-scale, high intensity warfare in Europe. The reinforcement of land combat capability should include combat support, notably a wide range of anti-tank and artillery systems, with an emphasis on precision strike and counter-artillery.

·Maritime domain: further strengthening Member States’ naval forces remains critical in light of increasingly contested Black, Baltic and Mediterranean Seas as well the need to reinforce force and power projection but also anti-access denial and coastal defence capabilities. This includes frigates, submarines and patrol corvettes to ensure maritime security. In the medium to long term, ISR capabilities and the protection of sea lines of communication will benefit from high-end inter-connected ships augmented by unmanned platforms for surface and underwater control and electronic warfare. ·Space (connectivity, surveillance, protection): The war in Ukraine has further demonstrated the importance of satellite-based secure connectivity, including a highly resilient European ultra-secured connectivity programme including quantum encryption, as well as space-based earth observation as critical enablers. Optimising synergies with the EU’s space-based connectivity programme is one of the advantages of working together in this context. Protection of EU space infrastructure against threats (space situational awareness) is also a growing priority. Space based assets can also be a key enabler for a strong early warning system needed to detect the departure of missiles (e.g. ballistic, hypersonic) and to track them. ·Cyber defence: To counter the growing risk of cyber-attacks by state actors in the context of geopolitical competition, the EU and its Member States could launch work towards a full-spectrum cyber defence capability (from research, detection, and protection to response, including active defence capabilities). This includes capabilities for cyber situational awareness and information sharing (also building on potential synergies with a European ‘Cyber Shield’ infrastructure of Security Operation Centres (SOCs)), cyber resilient and interoperable command and control for military operations and missions, cyber exercise and training, and cyber reserve forces at national level. The EU can offer here a platform for cooperation between EU services and Member States including synergies with relevant EU programmes. In addition, the war in Ukraine has reaffirmed the importance of effective and efficient logistics including the maintenance, sustainment and movement of forces, equipment and supplies to, from and across the theatre of operations. The Commission has accelerated the implementation of the military mobility budget under the Connecting Europe Facility (CEF) and stands ready to frontload it within the constraints set by the MFF. Transport infrastructure in particular requires increased investments. The consultations with the Member States on their dual-use transport infrastructure project pipelines and the oversubscription for co-funding in the first call for proposals demonstrate the need for and the capacity to use a larger budget. The EU should build on its work on enhanced military mobility, reinforcing strategic and tactical lift capacity by land, air and sea as well as civil/military synergies in the area of transport, resilience and energy efficiency and more broadly increase synergies of capabilities between civil protection, border management and defence needs. 5.Enhanced defence cooperation framework To address these gaps, the Commission and the High Representative propose the following way forward to coordinate and incentivise joint procurement of defence equipment, starting with replenishment as the most urgent step. It would complement existing collaborative EU defence initiatives such as in the EDF and PESCO, and on synergies with other EU programmes. European defence industry has strong capabilities and products to offer in all of these areas. The success of any EU defence initiative depends on Member States’ commitment to spend better - to invest, procure and operate together in the common interest. The proposed cooperative approach is critical to streamline and strengthen both European defence demand (programming and procurement) and supply (development and production). 5.1. Immediate measures: Task Force to support coordination Given the urgent need, the Commission, and the High Representative/Head of Agency will swiftly establish a Defence Joint Procurement Task Force to work with Member States to support the coordination of their very short-term procurement needs to face the new security situation. Initially, the Task Force would focus on de-confliction and coordination to avoid a race to secure orders which would result in spiralling prices, over concentration of demands in the same time frame, shortages of supplies and difficulties for the more exposed Member States to secure indispensable items, thereby preventing potential conflicts between parallel national procurement efforts. This could include centralising the collection of information, providing methodological support and coordinating or managing purchases. The Task Force would also establish an aggregate estimate of needs, and map and support the expansion of the EU industrial manufacturing capacities necessary to answer the needs. Within the Task Force, and in partnership with the Commission, the EDA could already facilitate such very short-term joint procurement building on its expertise and experience in this regard. The Task Force would also coordinate with the Clearing House Cell set up within the EEAS/EU Military Staff to facilitate coordination of military assistance to Ukraine, with a view to support Member States to procure the most urgent items needed to replenish stocks. 5.2. Short-term EU instrument to reinforce defence industrial capabilities through joint procurement As indicated, without coordination and cooperation, the increased Member State investments would deepen the fragmentation of the European defence sector, limit the potential for cooperation throughout the life cycle of the equipment, intensify external dependencies and likely hamper interoperability. Short-term acquisitions will have a longer-term impact in this regard, resulting in a reduction of market strength and foregone opportunities for the next decades. The Member States need to restore defence combat readiness as a matter of urgency in light of the security situation and of transfers already made to Ukraine. In particular, a replenishment of stocks of material would also enable them to provide further assistance to Ukraine. Today, Member States that provide military assistance to Ukraine can receive financial reimbursement through the European Peace Facility. As they proceed to replenish their stockpiles and equipment, however, they should seize the opportunity to do so in a collaborative way as this would provide greater value for money, by seizing economies of scale, and enhance interoperability. This also requires further enhancing and reinforcing the EDTIB. To this end, the Commission will propose a dedicated short-term instrument, designed in a spirit of solidarity, to incentivise Member States who are willing to pursue joint procurement to fill the most urgent and critical gaps, especially those created by the response to the current aggression, in a collaborative way. The new instrument would contribute to reinforce joint defence procurement and, through the associated Union financing, thereby to strengthen and reform their defence industrial capabilities. The EU financial support should leverage new defence investments from Member States and benefit the European industrial base while ensuring EU Member States’ ability to act and to attain greater interoperability. The new instrument should remain simple and straightforward in its implementation but conditioned to Member States meeting specific criteria such as a minimum of three Member States participating in the joint procurement. In the implementation of this new instrument, the Commission will rely on the assistance of the Task Force. The Commission is ready to invest EUR 500 million over two years (2022-24) into this scheme. To this end, the Commission will propose to the co-legislators to engage in a fast-track adoption of a Regulation enabling the instrument and the related budget increase. 5.3. An EU framework for Defence Joint Procurement Beyond the short-term urgent needs linked to the new security paradigm, it is necessary to move forward towards an EU framework for Defence Joint Procurement. Through the European Defence Fund, the EU has a strong instrument to incentivize joint and collective R&D in defence up to the prototype level. The EDA is competent to conduct joint procurement and does it already, however it would need to be reinforced for the EU to benefit from a fully fit-for-purpose capacity for joint procurement. In light of this, the Commission will propose in the third quarter of 2022 a European Defence Investment Programme (EDIP) regulation. It will aim at establishing the conditions and criteria for Member States to form consortia that qualify as a European Defence Capability Consortium (EDCC) that will jointly procure, for the use of participating Member States, defence capabilities that are developed in a collaborative way within the EU and would benefit from a VAT exemption. This new vehicle would complement existing related options under the umbrella of the EDA, while it could also serve projects in the PESCO framework.

For cooperation based on research and development (R&D) of a new product, the EDCC would also benefit from the flexibility provided by Article 13(c) of the Defence Procurement Directive, including, where applicable, with regard to later phases of all or part of the life-cycle of the product. An EDCC would create a very strong cooperative element and would bring additional benefits such as interoperability over the life cycle, harmonisation of procedures and training curricula for operation, maintenance, repair and overhaul, as well as economies of scale. The VAT exemption would also apply to operation, maintenance and decommissioning, which are a major cost over the lifecycle of defence equipment. The capabilities procured through an EDCC would be available for use by Member States nationally or in CSDP missions and operations, as well as within the context of UN or NATO. The EDCC could also be a vehicle allowing for synergies and aggregation of demand of capabilities relevant for EU civil protection, border management and defence needs. The EDIP Regulation could serve as the anchor for future joint development and procurement projects of high common interest to the security of the Member States and the Union, and by extension of the logic of the short-term instrument, for possible associated Union financial intervention for the reinforcement of the European defence industrial base, in particular for projects which no single Member State could develop or procure alone. 5.4 Towards an EU Joint Defence Strategic Programming and Procurement Beyond the tools and instrument to incentivise cooperation “downstream”, it is paramount that a more ambitious upstream coordination is put forward. Coordinated action at EU level is needed to prevent 27 uncoordinated national approaches. Today’s processes and approach are not all-encompassing and do not allow for enough prioritisation. As Member States will start adapting their planning processes to take into account the new security landscape, it is paramount to set-up a more structured approach – a joint EU strategic defence programming and procurement – to deliver on this new ambition in a coordinated way. It should build on existing processes and structures, and coherence with NATO planning process should be ensured. To this end, a joint EU defence programming and procurement function could be envisaged involving Member States, the High Representative/Head of the Agency and the Commission. It would ensure joint comprehensive multiannual programming – building on the EDF multiannual perspective, refinement of needs and specifications – and act as a central purchasing body for EU joint procurement and support Member States in their joint procurements, including downstream from the EDF-funded projects. In this regard, the work of the Task Force under section 4.1 could be seen as a pilot for such a function in the future. 5.5 Reinforcement of Europe defence industrial capacity Enhanced European defence cooperation also requires a solid action plan that provides clarity and visibility for the defence industry to invest, modernise and ramp-up EU defence manufacturing capacity, while also enabling it to anticipate and address potential supply chain bottlenecks and ensure EU security of supply on defence capabilities. The Commission will support defence industry in its effort to modernise its production lines and processes, ramp up manufacturing capacities and reduce critical dependencies and address its critical bottlenecks. In this perspective, the Commission, in cooperation where applicable with the EDA, proposes to put in place several measures: ·In-depth mapping of EU current and necessary additional industrial manufacturing capabilities, including building on efforts ongoing under the Industrial Strategy and in other fora (e.g. EDA Key Strategic Activities). The objective would be to have a shared picture of the capacity to produce and the needs to ensure European security of supply to Member States, including the most exposed ones. ·Consider enabling defence industry access to Critical Raw Materials (CRMs) and other key components in time of crisis, including machine tools needed for production. The Commission will table a Critical Raw Materials initiative, including legislative measures, which will aim to strengthen the EU’s resilience and security of supply as regards CRMs, including in the field of defence. ·Measures will be considered as regards defence specific skills, including cyber skills, to ensure that defence industry has access to and retains the necessary workforce, in particular in the science, technology, engineering, and mathematics (STEM) area as well as in any other area linked with the current extraordinary effort to ramp up production capacities. Specific attention will be given to attract all talents and skills. ·The Commission will work on further measures (inter alia, coordinated calls among existing EU instruments and EIB loans) to support critical technologies and industrial capacities by developing strategic projects. ·The Commission will consider possible amendments to the framework for dual-use research and innovation to improve synergies between civil and defence instruments. 5.6 Sustain the R&D effort Today, the European Defence Fund is the EU Defence R&D programme. However, considering the new security paradigm, and the unprecedented alignment of increase in defence spending, the EDF should be able to respond to the new needs. It is paramount to define a careful planning to support collaborative R&T and R&D, preparing the ground for future joint procurements and capabilities, avoiding the emergence of new dependencies on third countries which could weaken the EU armed forces security of supply and security of information, particularly during a military conflict.