Europe’s commitment to increased defence spending continues to make headlines: NATO’s new 5% target, the EU’s 800bn SAFE funding scheme and a multiannual increase in Germany’s defence budget mark the most significant increase in funding since the Cold War. But a major question mark remains over how such funding will be efficiently channelled into productive investment in the defence sector.

To this end, the recent Defence Readiness Omnibus package (the “Package”) aims to translate some of the objectives from the Commission’s White Paper for European Defence-Readiness 2030 into practical reality. Focusing on removing regulatory impediments to rapid investment, development and deployment in the defence sector, it contains a series of legislative and non-legislative proposals including clarifications to the conditions for the EDF, streamlining of environmental rules and measures for facilitating investment in the sector.

As part of facilitating public and private investment, the Package addresses competition policy: clarifying that the Commission shall “take into consideration” the defence industry’s specificities as well as defence readiness when assessing transactions, cooperation agreements and government support. It also stresses defence’s unique position under EU law: highlighting that Article 346 TFEU shields Member State measures which protect “essential”’ security interests relating to the production or trade in arms, munitions, and war material from the operation of the Treaties.

The Package also proposes changes to public procurement processes for defence projects. However, it is not,  a proposal for structural reform of the Union’s competition law or procurement frameworks. It instead seeks to provide comfort, and the promise of further concrete measures aimed at providing further guidance and support.

Merger control: setting the scene for possible defence sector consolidation

The package first highlights that the Commission’s ongoing review of its merger guidelines will give “adequate weight”’ to the changed security environment and, in particular, assess the “overall benefits from enhanced defence and security within the Union leading to efficiencies.” But it also stresses the benefits of the EU merger control regime in supporting competitive markets that both deliver cutting edge technology and cost effectiveness for Member State budgets.

It remains to be seen how the Commission will balance the trade-off between these objectives in specific cases, and whether this would support the creation of European defence “champions”, which could reduce Member States’ dependence on third-country suppliers, something that the Commission describes as “a significant advantage in today's geopolitical landscape” which “ensures the long-term viability of the Union’s strategic independence”. In any event, following the Draghi report and Ribera’s mission letter, this is yet another indication that the Commission may be more receptive to claims that wider merger benefits may offset any alleged harm, which it has traditionally treated with scepticism.

Antitrust: (some) clarity on non-merger cooperation between Europe’s defence players

The Commission also highlights its willingness to provide antitrust guidance on cooperation in the defence sector. This would cover cooperation falling outside of merger control, such as joint R&D, production and standardization efforts between defence companies, supplementing the existing horizontal and vertical cooperation guidelines. Also, cooperation would enable the “buy European” strategy that Draghi advocated in his report. The Commission specifically identifies collaboration for quickly scaling up production and joint procurement of “raw materials” as areas where it would be willing to provide guidance. The latter perhaps providing an indication of where the Commission sees potential supply-chain bottlenecks.

Consistent with merger control, the Commission also highlights that it will ascribe weight to benefits including the positive effects for defence readiness, the resilience of defence supply chains and the internal market when reviewing cooperation in the sector. While heavily qualified, the stress on recognizing efficiencies that have broad benefits for the sector provides a reasonable steer that the Commission will be more flexible in accepting the trade-offs needed to enable the rapid development and scaling of new cooperation between European defence players aimed at servicing the new demand from the EU and its Member States. However, companies should be mindful of getting the balance right as defence sector relevance does not exempt from the applicability of antitrust laws, as e.g., Diehl experienced when getting fines for the military hand grenades cartel in September 2023 for allocating territories with its rival RUAG.

State aid and procurement: leveraging public funds in the defence arsenal and an adjusted procurement framework

Finally, state support of one form or another is likely to play an important role in the push for enhanced readiness of the defence industry. 

The Package seeks to (a) clarify that State aid measures to support investment in production capacity for defence products and services can normally benefit from Article 346 TFEU and be exempt from notification and (b) provide comfort that the Commission will look favourably at other State aid measures (which are still subject to notification), provided they support European defence readiness, for example by closing critical defence capability gaps, reducing dependencies on third countries or enhancing interoperability and security of supply of defence products (or inputs thereof) across the Union.

The cumulative effect of these measures is intended to reduce the risk of the EU’s State aid rules hampering the effective transmission of budgetary increases into the sector. 

Similarly, a reform of the defence public procurement rules is anticipated, in order to make processes more streamlined and flexible, allowing for more negotiated procedures and increasing the value threshold for contracts which would be subject to the rules. These changes could have a material impact and positively contribute to faster procurement processes that would encourage and facilitate investment and development of defence readiness.

A blueprint for a deeper integration of economic security in competition policy?

The Package, which follows on swiftly from the Commission’s March White Paper, is a welcome step that seeks to provide some immediate, albeit limited, comfort on competition law for the sector while also signalling a more comprehensive review in the coming months.

The approach to defence may also be a bellwether for other critical sectors — such as energy, telecommunications, cybersecurity and technology — where the Draghi report has highlighted a more strategic approach may be beneficial for long-term market outcomes. Watch this space.