Letta gives way to Commission’s push to create common defence market

The EU’s defence market must be more integrated, create champions, get access to cash and give the European Commission overseeing powers, according to a report by former Italian prime minister Enrico Letta, going fiercely against member states’ protectorship.

“The Single Market should bolster European defence capabilities, envisioned as a common market guaranteeing all members access to the military capacity needed for the defence of their citizens and the promotion of global peace,” Letta wrote in his long-awaited reform proposals to be published on Thursday (18 April) but seen by Euractiv.

To achieve this ‘Common Market for the Security and Defence Industry’, it is necessary to tackle the “integration deficit” between EU defence companies, dismantling barriers linked to missing budget synchronisation and national defence industrial policy considerations.

Letta’s analysis resembles the European Commission’s latest bid for a European Industry Defence Programme (EDIP), which attempts to revive the bloc’s military-industrial complex since Russia attacked Ukraine, differing from member states’ traditional perspectives. 

While the former focuses on de-fragmentation, cooperation, and the bloc’s competitiveness, the latter looks for national returns and selects its suppliers based on political and national security considerations.

Over the past weeks, EU countries have asked questions about the EDIP text tabled by the EU executive, with most showing reluctance in giving the Commission or any supra-national body governance powers over their military priorities, purchasing rights, and access to supply chain related information, people involved in the talks told Euractiv.

Berlin, especially, three people said, has “a lot of questions”.

Yet, despite EU countries’ concerns, Letta portrays the yet-to-be-approved Defence Industrial Readiness Board as necessary and having a crucial role in implementing the scheme and matching supply and demand.

Achieving a “unified defence market”, he says, requires more cooperation on touchy topics such as aligning supply and demand signals and industrial capacities with armed forces needs, strategic planning, harmonisation of defence-related regulations and fewer administrative, customs, and tax barriers.

It also nods to Europeanised supply chains, priority to European suppliers, flexible production, access to off-the-shelf purchases, visibility in orders and needs for peacetime and crises.

According to Letta, mergers and European champions should also be on the bloc’s to-do list, challenging the core of the highly sensitive and siloed market.

“The integration of Europe’s defence companies is challenging without political convergence, but it is highly needed,” the Italian says, citing as a model Airbus and MBDA, two multinational defence companies with national divisions based on expertise.

A common market also “has the potential to encourage [small companies] cooperation or even lead to European mergers, creating stronger and more innovative medium-sized enterprises”.

Cash from where?

Last but not least, Letta lists several solutions to find funds for the defence industry ramp-up as governments look deep in their pockets to supply both Ukraine and refill their arsenals.

A surprising point he raises is using the European Stability Mechanism (ESM), also known as the EU’s ‘bailout’ fund for countries on the verge of sovereign debt or bank crisis, to help cover expenses.

“A parallel initiative [akin to the COVID-19 pandemic plans] could establish a specialised credit line for national defence spending”, Letta suggests.

It “could provide loans of up to 2% of a member country’s GDP at exceptionally favourable interest rates, specifically earmarked for defence and security expenditures”.

This idea comes on top of those already in discussions, which he backs: the use of joint borrowing via Eurobonds – despite the reluctance –  “EU instruments” to access venture capital and incubators for startups and SMEs, adding pressure to the European Investment Bank (EIB).

All on top of “substantial direct support through the EU budget” to (co)-fund joint research, development, and procurement projects of common interest, as well as support throughout the whole life cycle – as proposed in the EDIP regulation.

*Théophane Hartmann contributed to the story

[Edited by Alexandra Brzozowski/Alice Taylor]

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