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The course for Europe's defence capability is currently being set anew. Characterised by decades of insufficient investment, changes in political direction and a fragmented defence market, Europe is currently facing the challenge of expanding its security architecture in order to establish defence readiness. For many European countries, this means not only working on their defence capabilities, but also exploiting digital technologies and AI potential more effectively. Against this backdrop, the recently announced ‘ReArm Europe� plan and the European Commission's ‘European Defence - Readiness 2030� white paper are steps in the right direction.

The ‘ReArm Europe� plan sets out five pillars for improving the EU's security architecture. A new EU financial instrument called Security Action for Europe (SAFE) for defence financing will be created, the relaxation of the Stability and Growth Pact for defence spending will be promoted and existing EU instruments for higher investment will be made more flexible. Finally, the financing of defence projects by the European Investment Bank (EIB) and private capital is to be expanded. Overall, the European Defence Technological and Industrial Base (EDTIB) is to be sustainably strengthened.

In the past, the development of the EDTIB was hampered by various factors. These included a steady decline in defence budgets and high unit costs in defence equipment production due to fragmented demand or lengthy procurement programmes. Initiatives such as ‘ReArm Europe� herald a change that can help the EDTIB to respond better to current and future challenges in European security and defence.

Many of the measures announced by the EU Commission as part of ‘ReArm� and the white paper ‘European Defence - Readiness 2030� are in line with our findings - a clear sign for us that the industry will welcome many of the planned initiatives. However, our interviews with representatives from industry, the public and financial sectors as well as capital market participants show that many companies in the European defence industry have difficulties in accessing the necessary capital. Small and medium-sized enterprises and research organisations are particularly affected, as they often find it difficult to find private or public investors.

Three factors contribute to this phenomenon:

1. Complex legislation has been identified as the main obstacle to investment in and activities of defence companies, with the variation in national regulations across the EU representing a key challenge. 
2. There is still a lack of standardised and legally binding definitions for defence equipment as well as uniform ethical ESG criteria to ensure greater transparency. 
3. The heterogeneity of data sets from data providers used by investors to classify and evaluate potential investment objects is an expression of inconsistent criteria, definitions and standards between these providers. This makes it difficult to establish comparability and make transparent decisions about assets.

The European defence market is characterised by a range of national and EU regulations as well as ESG-based soft law. These different regulations create a lack of transparency and pose a risk for investment decisions. This clearly shows the need for better coordination between EU-wide and national regulations for the procurement of defence equipment and for capital investments. There is also a need for Europe-wide recognised exclusion criteria for investments in the defence sector in the form of clearly defined legal standards. For example, different jurisdictions currently have differing views on the definition of controversial weapons or the handling of dual-use technologies.

Reducing regulatory complexity should go hand in hand with a stronger commitment from leading capital market players. For this reason, positive market signals from public banks, such as the European Investment Bank's (EIB) defence investment programme, are important to provide guidance in this capital market segment. This can strengthen the confidence of national public banks and private investors in defence asset classes, leading to more capital inflows.

Regardless of this new dynamic, however, the following still applies: a successful investment decision depends on the collation of a large number of data points and a thorough due diligence process. Due to the specifics of the defence sector, the knowledge of industry experts is essential.

The current political and economic momentum to strengthen European security, numerous initiatives to improve financing and sustainable growth on the demand side form the basis for promising investment opportunities. Throughout the entire investment process, ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø is at your side with comprehensive expertise and customised solutions. Contact us to find out more about how we can support you.