Calls for European Investment Bank to change rules to support defence industry

The European Investment Bank (EIB) is “ready to do more and better” to contribute to joint projects which boost the European defence industry, its president Nadia Calviño said after an informal EU Council meeting with economic and financial affairs ministers in Ghent last Friday.

The EIB is facing calls to update its rules so it can invest more in the defence sector. It comes as the European Commission is considering allowing dual use research projects in the next Framework research programme, FP10.

Both debates reflect a wider shift towards more investment in defence. The EU launched the €8 billion European Defence Fund in 2021, which finances defence research and innovation, while NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA) programme, which supports dual-use tech start-ups, became operational last year.

Security and competitiveness are high on the minds of European policymakers as the war in Ukraine drags on, and these themes were central to Friday’s discussions about the future strategy of the EIB.

“We are already engaging with the Commission and other key stakeholders on the scope and definition of dual use technologies and equipment,” Calviño said. She has agreed with ministers to report back in two months on the status of the discussions.

There was also an agreement to work together on a “one stop shop for security and defence projects,” to mobilise existing funding.

In 2022, EIB launched the Strategic European Security Initiative to provide €6 billion for dual-use research and innovation projects such as drones, civilian security infrastructure and technology. In June 2023, it increased the funding to €8 billion.

But to date, only €2 billion has been invested and the goal of the new “one stop shop” will be to accelerate the deployment of the remaining €6 billion, Calviño said.

Calviño did not give a direct answer when asked if she had discussed with ministers the possibility of adapting EIB rules to allow it to support purely military equipment like weapons and ammunition.

The current rules allow the EIB to finance dual-use research and innovation in sectors such as space and aeronautics, but require that most future revenues come from civilian applications.

Calviño said there is “strong support” among ministers for the EIB’s approach, as well as a “unanimous call for prudence” regarding the different instruments available.

Ahead of the meeting, the Czech government suggested reviewing the investment policy of public institutions including the EIB. “We want to debate whether the EIB could go beyond research and development of dual use products in the area of defence. For example, if the dominant part of civil use could be decreased or omitted,” a spokeswoman for the Czech Ministry of Finance told Science|Business.

“We suggest a more substantial role of the EIB in financing defence after a serious examination of the consequences,” she said.

The Czechs wanted to highlight the problem of access to finance more generally, and focused primarily on the private sector and eliminating barriers that discourage investment in defence, the ministry spokeswoman said.

“We invite the European Commission to clarify the treatment of defence investment in the EU taxonomy, or environmental, social and governance (ESG) reporting to reassure relevant stakeholders and market players that there are no restrictions based on the EU legislation,” she said.

Defence and security objectives

The defence industry wants the EU to explicitly include the sector within the definition of sustainable finance as part of its taxonomy legislation. It is not legally excluded from this definition but companies say a lack of clarity is putting off investors.

In a joint statement published in November 2023, EU defence ministers called for EU-level policies to facilitate access to public and private finance for the sector, and for the EIB to “enhance its support for EU defence and security objectives”.

ESG criteria play an increasingly important role in investment decisions, but the defence industry is often excluded, limiting the number of possible investors and damaging its reputation, the statement said.

Commissioner for the Internal Market Thierry Breton recently urged the EIB to review its rules to help the European defence industry to secure financing.

“The EIB is here to support European policies. Energy is part of the policy and defence is now part of the policy,” he said at an event organised by the Friends of Europe think tank early this month. “So I really hope the EIB will finally change a little bit its rules to make sure they support our defence industry.”

The Commission has been banging the drum for more defence research and innovation for some time. In February 2022, nine days before Russia’s invasion of Ukraine, it published a roadmap on security and defence technologies, which included a plan to allow more synergies between civilian and defence research.

The European Council, in the conclusions from its meeting in December, also called for “an enhanced role of the European Investment Bank Group in support of European security and defence.”

The priority is to step up production of weapons and ammunition for Ukraine, but there is a strong innovation component to EIB activities, and increased investment in the defence sector is likely to benefit small companies looking to scale up.

The EIB Group signed €87.9 billion of new financing in 2023, including €19.8 billion for “innovation, digital and human capital” projects, and €20 billion to support small businesses and mid-caps.

It has invested over €270 billion in innovation and skills since 2000, and its support encourages other banks to lend and private sector players to invest in a project. This includes investments in net-zero technologies, new vaccines, and infrastructure for basic research.

The group is already supporting innovative dual-use technologies via the European Investment Fund (EIF), which provides access to finance for SMEs. In January, the EIF and the European Commission launched the Defence Equity Facility, a €175 million initiative to stimulate the development of private funds investing in defence innovation.

In December, Estonian prime minister Kaja Kallas floated the idea of issuing EU defence bonds to boost investment in the sector. She has since received the support of high-profile figures including French president Emmanuel Macron, who backed the proposal after meeting European leaders to discuss the situation in Ukraine on Monday.

Stepping up investment in security and defence was one of eight core priorities Calviño presented to ministers. These also include accelerating technological innovation and digitalisation, and the need for reindustrialisation in areas such as chips, AI, and advanced materials; and moving ahead with the capital markets union.

The Council meeting included a session on the future of EU competitiveness with former Italian prime minister Mario Draghi, who is due to submit a highly anticipated report on the topic in June.

Valdis Dombrovskis, executive vice president of the European Commission cited “a relatively low level of spending on research and development, causing our innovative performance to lag behind that of the US, Japan and China,” as one of the key challenges following the meeting.