EU adding arms industry to priorities alongside climate, digitalization

Top European Union officials have acknowledged that defense spending is making its way to the group of key investment areas, joining the green transition and the digital revolution. Some financing and subsidy mechanisms have already been rearranged to align with the shift in priorities. The special pandemic recovery and sustainable development package of EUR 800 billion is expiring in three years. It means the pace of decarbonization is uncertain from that point.

Just six months ago, European Commissioner for Energy Kadri Simson said the EU was shifting its focus from the energy crisis response to its net zero emissions agenda. There are, apparently, other priorities as well – defense in particular could erode decarbonization funding.

The administration in Brussels is promoting reindustrialization, mostly with innovative technologies and renewable energy. For a large part, it is (for now slowly) responding to China’s domination in manufacturing and the massive subsidies that the United States introduced with its 2022 Inflation Reduction Act.

But the arms industry was also way behind when Russia invaded Ukraine two years ago. The support for the sector is growing, the Financial Times reported, citing funding data and statements from officials.

EIB introducing dual use financing for security sector

Member states have slashed the Strategic Technologies for Europe Platform (STEP) proposal from EUR 10 billion to EUR 1.5 billion, leaving only the item earmarked for the European Defence Fund. The entire program was envisaged to reinforce existing funding mechanisms for critical and green technologies. Negotiations are still ongoing.

Moreover, the European Investment Bank intends to commit EUR 8 billion for investments including cybersecurity, space, military mobility and the protection of critical infrastructure. The EU doesn’t allow the lender to finance defense hardware, guns and ammunition as such, but the ban excludes projects that benefit civilian security or so-called dual use.

The European Investment Bank is already contributing to the Ukraine war effort

This month the bank said it is preparing a defense equity facility of EUR 175 million, in cooperation with the European Commission, for small firms and startups. The EIB’s strategy is on the agenda of next month’s informal meeting of the Economic and Financial Affairs Council (Ecofin).

The lender’s new President Nadia Calviño said it is now oriented toward contributing to “the war effort,” among its other priorities, but that it would have a greater role in reconstruction in Ukraine.

Van Peteghem: Little bit less risk aversion, little bit of change in priorities

Belgian Minister of Finance Vincent Van Peteghem, who is also the chairman of the Board of Governors of EIB, suggested last week to loosen the risk aversion stance “a little bit” and pointed to the sectors of defense, green transition and digitalization.

Quoted separately in the abovementioned article, he said that the “huge focus on green and digital” that was promoted after the coronavirus crisis is “shifting a little bit away.” Van Peteghem added that the EU needs to secure financing for “strategic autonomy, competitiveness and defense.”

Next up, green weaponry?

European Commissioner for Climate Action Wopke Hoekstra has highlighted defense, climate action and artificial intelligence, roughly the same sectors, among the ones needing “significant investments.” As for defense, he stressed that governments are “stepping up” and added: “We haven’t seen the end of it.”

The main source of funding decarbonization activities is the NextGenerationEU. The package of EUR 800 billion in grants and cheap loans was adopted alongside the regular seven-year budget. It expires in 2026 as well.

NextGenerationEU emanated from the European Green Deal initiative and the push to recover the economy after the pandemic with sustainable investments.

Also next in the EU, it remains to be seen how many manufacturing projects the defense industry will advertise as sustainable, carbon neutral or zero waste.