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The EU will adjust its merger rules for defence companies and give reassurances about their compliance with environmental standards, under a raft of measures aimed at easing investment in Europe’s arms industry.
The European Commission on Tuesday made the proposals aimed at attracting more investment in a defence sector previously shunned by some lenders wary of the reputational risk associated with the arms industry. Brussels warned that Europe needed to rapidly scale up weapons manufacturing to “prepare for and thereby deter a high intensity conflict” as Russia’s full-scale war in Ukraine grinds on into its fourth year.
“We are sending a clear political signal: Europe is serious about defence,” said Henna Virkkunen, the commission’s vice-president in charge of security. “We are cutting through bureaucracy to help member states and industry act faster, invest smarter, and strengthen our collective deterrence.”
If approved by EU governments and the European parliament, the proposal would add “defence readiness” as a positive factor when the commission evaluates whether to approve the merger or acquisition of a company.
“When it’s a potential merger in the field of defence, it will have an initial positive starting point,” an EU official said. “We give the signal to companies that mergers that contribute to the defence readiness objective would be considered as a positive contribution,” said another EU official.
The proposal comes as the EU undertakes a review of how it polices M&A. As part of that, Brussels is also looking into other potential changes to the merger rules for the industry, including a more positive assessment of technology that can have both civilian and military applications.
The commission will also clarify that defence companies are in compliance with EU environmental, social and governance (ESG) rules, except for the makers of internationally banned weapons such as landmines. This clarification is aimed at attracting investment from market actors who have so far shunned the sector.
This “will really open up other funding opportunities for defence companies,” the second EU official added, dispelling investors’ “persistent misconceptions”.
The guidance, however, has concerned sustainability campaigners.
But Vicky Sins from the World Benchmarking Alliance, an NGO ranking companies based on ESG compliance, said that the proposed changes “risk diverting capital away from climate and environmental initiatives at a crucial time”.
“While addressing immediate security and defence needs is necessary to safeguard Europe’s stability, long-term resilience also depends on tackling climate change and inequality,” she said.
Separately, EU capitals are at odds on how to spend €1.5bn in grants from the bloc’s budget on defence production. The initiative has been stuck in negotiations for 18 months because of disagreements over the eligibility of non-EU defence products — notably the US-made Patriot air defence system.
A compromise, which three EU diplomats said could win the backing of capitals this month, would allow investment in Patriot “ammunition and missiles” made in Europe provided there is the potential to transfer the technology to an EU manufacturer in the future.
The initiative is in addition to a €150bn defence fund raised against the EU budget agreed earlier this year, which will be distributed in the form of loans.
Additional reporting by Andy Bounds and Barbara Moens in Brussels and Alice Hancock in Luxembourg
