From Fragmentation to Strategic Autonomy: A Sequential Financing Model for Europe's Defence Industrial Base

It is widely acknowledged, especially after the first-ever white paper for European defence , along with the Commission’s inclusion of Security and Defence for the 2024-2029 priorities, that the European Union ought to develop a  robust defence industrial base. 

In order to do so, recent instruments have gained a standing role to enhance and manage mechanisms that empower the European Industry, namely Security Action for Europe (SAFE) and national escape clauses that ease national fiscal flexibility. 

In the same way, and with a more practical insight, ReArm Europe Plan highlights that Member States need to cooperate with each other and prioritise efficient-spending pathways. 

2. IDENTIFYING THE STRUCTURAL GAP

That the European Union is prioritising funding to develop defence capabilities is clear. However, while instruments such as SAFE are framed around priority capability development, their implementation still relies heavily on decentralised decision-making, limiting coherent industrial outcomes at European level.

SAFE aims to improve interoperability, cost-efficiency, and strategic coordination yet current figures must be considered. 99% of the European-based undertakings are SMEs, while Europe operates over five times as many weapons systems as the United States.These figures are better understood when considered together.

It is therefore crucial to develop cross-border synergies, as funding without efficiency does not build capacity. The ReArm Europe Plan aims to mobilise €800 billion in defence. Nevertheless, previous initiatives, from the €315 billion Juncker Plan to the €650 billion Next Generation EU programme, demonstrate that scale alone is insufficient. Without coordination, additionality and structural incentives, increased funding risks producing fragmented outcomes.

This is reflected in instruments such as the EDF, SAFE or EDIS. Despite supporting SMEs participation, they lack structured financing schemes and cumulative growth plans resulting in widening the gap, limited continuity and insufficient scale-up incentives. 

Consequently, SMEs do not either scale-up nor consolidate, as there is no structured access to subsequent funding nor incentives for chained projects.

Likewise, the current model approaches the industry in a one-size-fits-all manner, failing to account the distinct dynamics of sectors such as drones, communications and advanced materials.  This in turn results in homogenous policies being applied to fundamentally heterogeneous industrial realities.

3. TOWARDS THE PROPOSED SOLUTION

In essence, the proposed model is based on a sequential financing logic combined with a structured ecosystem dynamic.

This approach is further developed through three key components.

3.1 EXPLANATION OF THE MODEL

The model operates through a structured financing loop designed to enable cumulative industrial growth. Sequential financing connects projects benefiting from initial funding with follow-up funding and related projects, fostering organic SMEs development.

Under the concept ecosystem dynamics, the model enables defence-related SMEs to scale up and evolve into stronger undertakings,  capable of establishing a structured cooperation with newly established firms.  

The process is reinforced by development thresholds inspired by  EU Cohesion Policy-categorising firms as less developed, in transition, or more advanced. This in turn channels investment according to the development stage, ensuring that support is tailored to firms’ maturity and growth potential. 

Under the first tier, newly emerged firms and those under a minimum threshold become target partners for follow-up and related projects led by second-tier undertakings , as the latters would be the ones mostly benefiting from European funding. Where necessary, first-tier firms may benefit from State aid to enable effective cooperation with more developed SMEs. 

Once firms reach higher thresholds, they transition from reference partners for less developed actors to integration within cooperation frameworks involving larger industrial players, particularly those under the Savings and Investment Union Strategy. This marks a turning point for the firms to be considered more developed undertakings, where the cooperation agreements with larger firms would result in a multiplier effect that would have impact on the entire ecosystem.

In the aftermath, the cycle restarts all over again.  

3.2 INSTITUTIONAL DESIGN

Given that the sequential financing model requires institutional precision, its management within the existing institutional framework should be clearly defined. 

The model would operate under shared management, coordinated by DG DEFIS, and could build on the EDF framework while integrating principles from Cohesion Policy to address current fragmentation. 

Additionally, the EIB contributions should be maintained for complementing public funding, securing financing and strengthening market confidence, particularly for follow-up projects to prevent early ecosystem stagnation due to lack of funding. 

3.3 ACCESS CRITERIA AND GOVERNANCE SAFEGUARDS

3.3.1 CONDITIONED PREFERENTIAL ACCESS

In order to ensure optimal allocation of resources in line with sound financial management, preferential access to follow-up projects should be subject to a thorough assessment of the undertakings’ proposals. While the model promotes continuity through preferential access and sequential funding, this does not imply automatic approval for subsequent projects. 

Risk control must be systematic, as non-consolidated enterprises may pose financial and operational risks capable of undermining the ecosystem’s stability. A performance-based evaluation should therefore consider previous outcomes, scalability potential and the capacity to generate further industrial linkages.

This conditionality ensures that preferential access reinforces cumulative growth rather than inefficient resource allocation. 

 3.3.2 MERGERS AVOIDANCE

The internal market’s aims to ensure stability and the proper functioning of free movement. To this end, market quotas for new actors should be ensured, guaranteeing fair access with only necessary functional constraints. 

It is to be noted that the industrial scene encompasses a vast spectrum of specialisation fields, from conceptual and design-driven activities to operational domains requiring physical deployment. This diversity facilitates the participation of recently established enterprises, provided support mechanisms are properly tailored.  

Besides, to further prevent market concentration funded projects should, where appropriate, be structured through consortium, combining established actors and new entrants ensuring both integration and knowledge diffusion across the ecosystem.

3.3.3 LEGAL COMPATIBILITY

When follow-up projects and fundings are considered, the initial concern relates to their compatibility with EU law , particularly with State aid rules and, as referred to in 3.3.2, competition law. 

As regards the latter, article 101.3 TFEU provides a relevant mechanism, allowing the European Commission to enact Exemption Regulations when agreements contribute to the improvement of production or distribution of goods or promote technical or economic progress.  

Besides, given that SMEs constitute the core actors of the proposed model, Regulation 651/2014 establishes that certain categories of aid are compatible with the internal market, including investment aid, operating aid and SMEs’ access to finance, as well as aid for research, development and innovation. 

Without limiting the foregoing, the cross-border nature of the proposed project, aimed at strengthening the European industrial base, may also justify compatibility under article 107 TFEU which allows aids promoting the execution of projects of common European interest or facilitating the development of certain economic activities. 

4. SUSTAINABILITY AND PRACTICAL FEASIBILITY OF THE MODEL

Several factors underpin the viability of the proposed model.

Firstly, it follows an anti-mergers logic, allowing any undertaking meeting minimum requirements to participate, including start-ups at the first threshold.

Moreover, the ecosystem enables a tailored approach, as for instance advanced materials, drone components or electronic war systems rely on different market structures. Firms such as Indra and Amper exemplify industrial complementarities, where an anchor firm and a scaling SME could exhibit strong complementarities in several defence domains, particularly in electronic warfare and naval platforms. Such complementarities should be understood as part of an increasingly integrated European defence industrial base, as cross-border cooperation is, not only possible, but structurally necessary to achieve interoperability, scale effects and technological coherence across the Union. 

The model also reduces dependency on continuous public funding by embedding growth incentives within the ecosystem itself, while strengthening strategic autonomy and reducing reliance on external actors. Simultaneously, financial flexibility would contribute to the avoidance of  future deficits, freeing up resources to address demographic and climate challenges. 

The model constitutes a SMART objective, combining institutional realism, the use of existing structures and rapid implementation, while ensuring coherence between public spending, industrial development and strategic autonomy.

Ultimately, its feasibility derives from its reliance on existing structures and its alignment with both, EU industrial policy objectives and current strategic challenges . 

The question is therefore no longer whether Europe will invest more in defence, but whether it will do so in a way that transforms funding into capacity, and fragmentation into a self-sustaining industrial ecosystem. 

BIBLIOGRAPHY

Amper. (2026) Defensa, Seguridad y Comunicaciones. Available at:  https://www.grupoamper.com/defensa-seguridad-y-comunicaciones/  

Blog, Team. (2015) The ‘Juncker plan’ does not offer a genuine route to boosting the Eurozone’s recovery. LSE Blogs. 19th March. Available at:  https://blogs.lse.ac.uk/europpblog/2015/03/19/the-juncker-plan-does-not-offer-a-genuine-route-to-boosting-the-eurozones-recovery/ 

Cohen, P. & Alderman, L. (2024) Europe Wants to Build a Stronger Defense Industry, but Can’t Decide How. The New York Times.  22 th May. Available at:  https://www.nytimes.com/2024/05/20/business/economy/europe-defense-spending.html 

European Commission (2024) Commission’s priorities. Available at: https://commission.europa.eu/priorities-2024-2029_en

Lehndorff, S. (2025) The EU’s largest Investment Programme holds lessons we cannot afford to Ignore. Social Europe. 12th December,  Available at: https://www.socialeurope.eu/the-eus-largest-investment-programme-holds-lessons-we-cannot-afford-to-ignore 

Wallace, N. (2019) Auditors say Commission and EIB exaggerated benefits from the Juncker Plan. Science Business. 29th January. Available at: https://sciencebusiness.net/news/auditors-say-commission-and-eib-exaggerated-benefits-juncker-plan