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Europe faces a dilemma. It must take much greater responsibility for European defence, requiring fast rearmament in the short term, and a stronger defence-industrial base in the medium and long term. But Europe’s defence market is fragmented along national lines, and the scale of European arms production is low. This will make rearmament expensive and slow, and force us to purchase more arms from outside Europe than would be good for the development of the European defence industrial base. 

Europe’s rearmament efforts are also constrained by fiscal fragmentation. European democracies with shared defence interests should be building common assets that can benefit all, including common air defence, military satellites and transport capacity. These assets could complement those currently provided by the United States and offer insurance if the US significantly reduces its role in European defence. But they are too expensive for any individual European country.   

In a recent Policy Brief, we argue for a single defence industrial market in Europe. This would increase competition, encourage entry and raise production scale. Creating such a market for the EU is impossible, because this would require unanimity among EU countries. But it could be done through intergovernmental treaty. This treaty could also create a ‘European Defence Mechanism’ (EDM) that would fund Europe-wide common defence assets.  

The EDM would be open to all European democracies, who would own shares in proportion to capital subscriptions. It would issue bonds to fund common defence assets, which be owned by the EDM. It would also undertake joint procurement in specific areas. In joining the EDM, countries would commit not to procure nationally in these areas or discriminate against other EDM members in their national procurement.  

This structure is ambitious. Its creation raises many questions, some of which we answer in a Q&A. But it is far more realistic than creating a new EU funding structure similar to the  (RRF), or enacting EU Treaty change to create a single EU defence market. And it would have the great advantage that it could include all European democracies with a shared defence interest. 

The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy.