European Competition Law and the Defence Industry: Trends, Opportunities, and Risks

Policy Context and Market Momentum

Building and expanding on prior and ongoing policy initiatives, such as the European Economic Security StrategyJoint Communication of the European Parliament, the European Council and the Council on European Economic Security Strategy - JOIN(2023) 20 final. and the White Paper on export controls, the EU has placed defence at the core of its economic and regulatory agenda for the remainder of the decade. The White Paper for European Defence – Readiness 2030 sets the policy framework: it calls for a substantial increase in investment to close critical capability gaps, rebuild industrial capacity, and ensure that Europe can deter aggression by 2030.White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025), p. 3. It identifies the need to “spend more, spend together, and spend European”, and sets out a multi‑year effort to mobilise public and private finance, accelerate procurement, and foster an EU‑wide market for defence equipment.White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025), pp. 13-14, 16-18.

Funding

SAFE, which is a temporary EU lending tool of up to €150 billion, supports common procurement and brings forward Member States’ investment in the EDTIB.Proposal for a Council Regulation establishing the Security Action for Europe (SAFE) (COM(2025) 122 final, 19 March 2025). SAFE is part of the ReArm Europe/Readiness 2030 plan. That plan includes coordinated use of the Stability and Growth Pact’s national escape clause to allow higher defence spending, increased support from the EIB under its Security and Defence Action Plan, and steps to mobilise private capital.White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025). SAFE focuses on European control and secure supply chains. It uses value‑origin thresholds and limits on third‑country control, with targeted flexibilities for dual‑use inputs. It also provides temporary VAT relief and simpler procurement to speed up awards.Proposal for a Council Regulation establishing the Security Action for Europe (SAFE) (COM(2025) 122 final, 19 March 2025).

EU policy recommends introducing a “European preference” through public procurement policies in critical sectors and technologies consistent with EU law and security objectives.Cf. Competitiveness Compass and White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025). New EU funding and joint procurement frameworks prioritise European sourcing and control. They also create defined routes for Ukraine to participate on equal terms with EU suppliers.White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025). The Commission points to cohesion policy re‑programming and planned competitiveness tools as additional sources of support. The Commission aims to mobilise private capital and scale defence‑tech innovation.Proposal for a Council Regulation establishing the Security Action for Europe (SAFE) (COM(2025) 122 final, 19 March 2025).

Defence Readiness Roadmap 2030

In parallel, the Commission and the High Representative — i.e., the chief coordinator and representative of the EU’s Common Foreign and Security Policy — have introduced the Defence Readiness Roadmap 2030, which translates the White Paper’s objectives into milestones, flagship initiatives, and indicators, and aligns EU actions with Member States’ commitments (including those within NATO). The roadmap turns goals into actions by 2030. It sets up Member State capability coalitions in priority areas such as air and missile defence, drones and counter‑drones, artillery, cyber/AI/electronic warfare, strategic enablers, and military mobility. It launches four EU flagship initiatives: the European Drone Defence Initiative, Eastern Flank Watch, the European Air Shield, and the European Space Shield. It also aims to establish a targeted military‑mobility area by 2027.Preserving Peace – Defence Readiness Roadmap 2030 (Joint Communication, 16 October 2025).

To support scale and interoperability, the Defence Readiness Omnibus proposes to streamline cross‑border procurement and intra‑EU transfers, expand mutual recognition and cross‑certification, speed up permitting for defence industrial projects, and enable secure information exchange.Preserving Peace – Defence Readiness Roadmap 2030 (Joint Communication, 16 October 2025), pp. 3, 5-9, 12-13, 14-15.

Competition Policy

Competition policy is being calibrated to this environment while maintaining effective competition. The Commission’s enforcement communications confirm that antitrust and merger control continue to apply to defence, but assessments will consider the sector’s specificities, including cooperation necessary to scale production or ensure supply‑chain resilience as well as efficiencies linked to security and interoperability. For instance, in the Defence Readiness Omnibus, the Commission states that it “stands ready” to provide guidance on collaboration between companies in the defence industry, particularly in cases where such collaboration is necessary to increase production or where individual companies would otherwise be unable to develop or manufacture a product independently.Preserving Peace – Defence Readiness Roadmap 2030 (Joint Communication, 16 October 2025), p. 10.

Merger Control

The Commission states that it will give “adequate weight” to the changed security and defence environment in its ongoing review of the EU Merger Guidelines.Preserving Peace – Defence Readiness Roadmap 2030 (Joint Communication, 16 October 2025), p. 10. The review explores how to reflect defence and security considerations, the interaction between Article 21 EUMR (public‑security interventions by Member States) and Article 346 TFEU, and the treatment of dual‑use markets. Whether the Commission’s intentions will translate into clearly defined safe harbours that provide companies with legal certainty remains uncertain.

However, merger control and antitrust do not operate in a vacuum. The FSR and FDI screening regimes add complementary scrutiny of third‑country financial support and ownership/control risks, and those regimes will increasingly run in parallel with merger and procurement processes in defence transactions.

Antitrust: Collaboration vs. Cartel Risk

With the EU’s increased focus on defence, antitrust regulators could be receptive to collaboration between competitors in the defence industry — similar to the receptivity provided to other non-competition-related public policy goals, such as sustainability initiatives. The Defence Readiness Omnibus is clear: “[C]ompetition rules apply to defence and contribute to a better functioning of the internal market”. However, the Commission is also conscious of the need to ramp up the defence sector quickly — and one way of doing that could be by allowing defence firms to collaborate, such as through joint development or procurement to enable quicker and less costly routes to market for certain defence products or services.

The “Efficiency Defence”

Article 101 TFEU enshrines the prohibition against anti-competitive agreements. According to Article 101 TFEU, anti-competitive agreements are automatically void, unless Article 101(3) — the “efficiency defence” — can be invoked. The requirement is that efficiency gains must outweigh the negative effects of a restriction on competition, thereby enhancing consumer welfare and ensuring an efficient allocation of resources. Article 101(3) sets out four cumulative conditions for allowing such agreements:

• Efficiency gains must involve some kind of improvement in production or distribution of goods/services, or promote technical or economic progress, and the efficiencies must flow from the agreement itself.
• A fair share of the benefits must accrue to consumers, and this should accrue to the same, or a substantially similar, group of consumers as the ones being disadvantaged.See case C-382/12 P, MasterCard Inc, Judgment of 11 September 2014, ECLI:EU:C:2014:2201.
• Restrictions on competition created by the agreement must be indispensable to the efficiencies. This requires a two-step assessment: (i) Is the agreement itself reasonably necessary to achieve the efficiencies, and (ii) are the restrictions that flow from the agreement reasonably necessary to achieve the efficiencies?
• Short-term efficiency gains must not outweigh longer-term losses from reduced competition in the form of, for example, rent seeking, misallocation of resources, reduced innovation, or higher prices.See para. 105 of the Article 103(3) Guidelines.

Europe’s defence readiness objective could benefit from the efficiency gains that would bring it under Article 101(3). As for sustainability agreements, this will likely need detailed explanation of qualitative efficiencies, particularly regarding technological improvements, e.g., where a restrictive R&D agreement can break down silos between firms developing complementary technologies that together can improve a final defence product.

Alternatively, companies may be able to invoke quantitative efficiencies, such as cost savings, through cooperation. These are all conceived by Article 101(3) and its accompanying Guidelines and do not require much stretching of the existing framework.

The next condition, a fair share of the benefits, requires a consideration of the overlap between consumers of the relevant market and beneficiaries of the collective benefits from improved defence readiness. The Horizontal Guidelines define three types of benefits to “all direct and indirect customers of the products covered by the agreement” to be taken into account when assessing the procompetitive effects of sustainability agreements. These benefits must all be linked to the consumers on the relevant market and constitute:

• individual use-value benefits (which cover qualitative and quantitative efficiencies at the individual consumer level);
• individual non-use value benefits (which require looking at consumer preference, i.e., consumers’ appreciation of the impact of their sustainable consumption on others for which consumers may be willing to pay a higher price for the lesser adverse impact on sustainability); or
• collective benefits (which occur regardless of consumers’ individual appreciation of the product both (i) in another market that is related to the relevant market and in which consumers substantially overlap with consumers in the relevant market, and (ii) outside the relevant market only if consumers substantially overlap or are part of the beneficiaries, and they are sufficient to compensate consumers in the relevant market).

Tellingly, the Horizontal Guidelines do not go far in giving a blueprint, as they do not provide clear guidance on how to determine the overlap between consumers. It remains an important limitation for the inclusion of out-of-market efficiencies, as consumers in the relevant market will always have to be compensated for any harm caused by the agreement. It is likely that defence would be treated in the same way, i.e., the traditional fair-share analysis will need to be applied.

The final two conditions, indispensability and no elimination of competition, must be met by defence contractors in the same way as for any other horizontal agreement. The treatment of sustainability in the Horizontal Guidelines does not provide a template for treating policy considerations differently in respect of those two conditions.

Other Tools

If the Commission believes horizontal cooperation in the defence sector would turbo-charge Europe’s defence readiness, it may well consider two tools to assist companies in their implementation. The Commission’s Notice on Informal Guidance, which was redesigned in October 2022, allows the Commission to provide informal guidance at the request of companies if questions are either novel or where precedents exist but no longer provide sufficient clarity. The Commission can take into account its overall priorities (which includes defence) and the Union’s interest alongside the economic importance.

Procedural improvements include the option to contact the Commission informally before making a formal submission, the Commission’s ability to investigate the matter further (e.g., by contacting third parties), and the obligation to respond to requests “within a reasonable time”. Importantly, the Commission will not impose fines where the applicant relies on the guidance letter in “good faith”. The Commission has recently used this procedural tool to provide legal certainty to companies in the sustainability field.For example, Commission, press release dated 9 July 2025, Commission provides guidance on sustainability agreement to reduce CO2 emissions in European ports.

The Commission has indicated that it would be inclined to issue negative attestations under Article 10 of Regulation 1/2003 with the same intention of creating legal certainty for the companies involved. The defence goal appears important enough for the Union and may, therefore, set the first precedent. But this possibility should not be taken as a free pass for cartels in the sector. The Commission has shown as recently as 2023 that it remains committed to prosecuting genuinely anticompetitive conduct, notably cartels, in the defence sector. However, its action was a rather modest statement of that determination, amounting to a fine of just €1.2 million on German defence company Diehl for participating in a military hand grenades cartel for 14 years with a fellow German defence company, RUAG.

Without clear guidance on the treatment of horizontal cooperation under Article 101, we can only fall back on the usual analyses under each of the provisions of the article. It may be that as the European defence agenda develops, we will see some soft safe harbours arising, similar to the standardisation and other specific exemptions set out in the Horizontal Guidelines for sustainability.

Merger Control and Cooperation: Consolidation with Safeguards

The White Paper for European Defence – Readiness 2030 describes the European defence industry as “too fragmented with dominant national players catering mostly to domestic markets”.White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025), p. 12. Demand-side solutions, such as encouraging common procurement and unlocking Member State investment, are just one side of the coin. The Commission does not ignore the supply side: A “truly functioning EU-wide market for defence equipment […] would boost market opportunities across Member States through cross-border industrial collaborations, mergers and acquisitions or start-ups, thereby prompting more EU-made defence products”.White Paper for European Defence – Readiness 2030 (European Commission/High Representative, 2025), p. p. 13.

Political Support

This is clear political support for more European defence-related M&A and joint ventures. The SAFE instrument and encouraged pooling of Member State procurement may strain existing supply chains. Relaxing defence-related red tape is unlikely to unlock the desired amount of scale in time. Scale is achieved more quickly by inorganic growth and collaboration. There are many arguments to be made in favour of joint ventures and combined firms in light of the new political support, such as more easily meeting multiple Member States’ local content requirements, internalising double margins to reduce prices, designing interoperable and interchangeable equipment, meeting the scale required by new multi-year orders, and accelerating R&D efforts.

The Defence Readiness Omnibus published after the White Paper makes express reference to the EU’s merger control regime and the ongoing review of the Merger Guidelines.Communication from the Commission to the European Parliament and the Council, Defence Readiness Omnibus (European Commission, 2025), p. 10. [Cross reference to LW alert on Merger Guidelines revision] This review is actively soliciting feedback about the extent to which the existing Guidelines give adequate weight to the changed security and defence environment: “The Commission will particularly assess the overall benefits from enhanced defence and security within the Union leading to efficiencies”.Communication from the Commission to the European Parliament and the Council, Defence Readiness Omnibus (European Commission, 2025), p. 10. [Cross reference to LW alert on Merger Guidelines revision]

The reference to efficiencies is important, signalling openness to combinations that demonstrably enhance resilience and speed to field, while preserving competition where it matters. In parallel, the Commission is revisiting how Article 21 of the EU Merger Regulation interacts with Member State public-security measures, and how Article 346 TFEU — a narrowly framed exception that lets Member States deviate from EU provisions to protect core national security interests — informs scope and evidence where essential security interests are engaged.

These reviews are likely to reflect the positions taken in recent EU and national clearances of armoured platforms, mission systems, and aerospace joint ventures. These cases already show receptiveness to combinations that fill capability gaps or rationalise fragmented capacity, provided that they preserve design openness, access to interfaces, and supply alternatives.

The Commission cleared BAE Systems’ acquisition of Ball Aerospace unconditionally citing limited overlap in Europe, strong alternative suppliers, and significant buyer power in defence procurement.See Case M.11800 – BAES / LEONARDO / JAIEC / JV. And the Commission accepted access and non‑discrimination commitments in the Airbus Safran Launchers/Arianespace integration to ensure open interfaces and continued third‑party participation in Europe’s launcher ecosystem.See CASE M.7724 – ASL / ARIANESPACE. The national competition authorities reviewing Rheinmetall’s acquisition of EXPAL Systems emphasised the need to relieve critical bottlenecks in propellants and ammunition. They cleared the deal because of credible plans to expand capacity and continuity‑of‑supply assurances, alongside safeguards to protect sensitive Spanish facilities and maintain non‑discriminatory supply to European customers.

These decisions show that, if properly structured, strategic joint ventures can be positioned as integration conduits for European supply chains, scaling output while meeting EU-origin and control expectations in procurement and funding frameworks. Where overlap is limited, or where assets are natural complements, parties can support clearance with evidence on dynamic competition from emerging entrants, dual‑use innovators, and adjacent technologies. This can be combined with credible commitments to open architectures that preserve downstream competition, such as FRAND access to interfaces, reference designs, test suites, and escrowed IP. Such commitments dovetail with likely commercial insistence by Member States on interoperability between European defence equipment.

FDI Screening and Economic Security

While defence has always been at the core of most long-standing FDI screening regimes, the European defence sector has over the past decades become intertwined with, and in many cases reliant on foreign investors and companies. The White Paper for European Defence – Readiness 2030 now highlights the need for an EU “race towards military modernisation and technological and economic advantage”, with heavy investments in defence and critical technologies to close military capability gaps and enhance cooperation in the military industry. It emphasises the “collaborative” dividend resulting from Member State cooperation in defence initiatives. While the White Paper does not specifically address FDI screening, its effect (if implemented) will be that the Member States’ policy towards foreign investment into sectors related to defence will have to further tighten. The question will be, what types of products, activities, or technology will be considered relevant or critical to European defence in the broader sense.

Historically, the screening of foreign investments on national security grounds by EU Member States — to the extent a Member State had an FDI regime at all — were narrowly focussed on traditional defence companies and some limited types of critical infrastructure. However, over the last 10 years, but with a major acceleration in the last two to five years, these regimes have significantly expanded in terms of geographic coverage (with all Member States set to having a screening mechanism in place this year), substantive scope, and breadth of transaction type covered. Substantively, the national security screening remit of Member State FDI regimes now not only covers traditional defence companies but also critical technologies (the definition of which continues to expand), dual-use products, or other key input materials (including in the healthcare and food supply sectors), none of which necessarily has to have a clear defence application. They may nevertheless be viewed as critical to a country’s defence and/or resilience. Furthermore, the type of transactions caught by the regimes go far beyond acquisitions of control, often covering minority shareholdings as low as 10% (or even 3% / 5% in limited circumstances).

Emphasis on Critical Technologies

The Commission’s White Paper for European Defence – Readiness 2030 highlights the need for Member States to collaborate in order to close defence capability gaps and ramp-up European defence industrial capacity. As part of this, it calls for a strengthening of the EU’s technological base, including defence technology innovation. It sets out seven priority areas identified as critical to build a robust European defence, which include obvious defence capabilities (artillery systems, ammunition, missiles, etc.) but also, for example, systems that use AI and quantum computing.

The opposite side of the coin is represented in the ongoing push by the European Commission and certain Member States for the tightening of FDI screening into businesses operating in the EU in an ever-broadening range of technologies. These include, among others, space technologies, AI, semiconductors, robotics, quantum technology, biotech, or cyber security.

A Strengthened EU FDI Regulation

The flipside of investing in the establishment and expansion of the local defence-related industry is foreign investment control, to prevent European technology and products from being stolen and copied. In that vein, the relevant EU institutions reached a provisional political agreement in December 2025 to strengthen the current EU FDI Regulation pursuant to which Member States and the Commission can cooperate in the screening of foreign direct investments into critical sectors. In particular:

• Member States will have to justify instances when they do not take on board critical comments or opinions from other Member States/the Commission regarding screened investments. This will not only further increase transparency (making it harder for deals to go unscreened), but should also lead to a more coordinated review of transactions by Member States than has previously been observed.
• Already in 2024 (under the current EU FDI Regulation), Member States and the Commission exchanged information on more than 1,200 transactions via the cooperation mechanism, enabling heightened scrutiny of deals affecting security or public order. This will almost certainly increase in the current climate.

The revised EU FDI Regulation will reference a list of critical technologies (e.g., those included in the recommendation on critical technology areas for the EU’s economic security) that will have to be included in the mandatory regime of each Member State, i.e., setting a baseline level that Member States would be free to build upon.

Consequences for Investors

What is clear from FDI legislation and proposed amendments, current practice of FDI authorities, and the policy backdrop against which EU FDI regimes are operating, is that non-EU foreign investment into an increasingly broad list of sectors deemed critical for EU defence will be closely scrutinised.

Investors should plan:

• For an increased number of filings and approval requirements owing to the now widespread adoption of FDI regimes by Member States, and the expansion of their scope. This needs to be carefully managed as there are significant differences among national regimes regarding procedural timelines, sectoral coverage, and notification triggers. While the revised EU FDI Regulation is expected to lead to further harmonisation on all these fronts, it still leaves scope for Member States to go beyond the minimum requirements set in the Regulation.
• For more interventionist authorities. In the EU, most screened cases continue to clear unconditionally, and prohibitions / unwinding orders remain relatively rare. However, conditional approvals (or in some cases outright prohibition or unwinding) are increasingly used where a transaction involves a target active in a sensitive sector and/or an investor is domiciled in a non-EU jurisdiction, particularly but not exclusively if that jurisdiction is considered hostile. Importantly, in line with the EU’s aim to increase supply security and build an independent defence sector, commitments are more frequently imposed on investors from countries that were traditionally considered as “friendly”. Target-related risk factors include government supply contracts or sub-contracts; access to sensitive information, data, or sites; and manufacturing in the defence sector to the benefit of public sensitive clients. On the acquirer side, in addition to where the investing entity/firm is domiciled, risk may arise as a result of the nationality of ultimate beneficial owners, co-investors, or, in the case of funds, limited partners.
• To incorporate up-front solutions into deal planning to address likely concerns: While it will come as no surprise that mapping out potential approval requirements and timelines from the outset will be essential for non-EU investments into the broadly defined defence space, non-EU investors may need to consider upfront whether their deal structure or plans for the investment can be shown to be in line with the strategic goals of the White Paper. Potential avenues could be teaming up with a European strategic investor, which will have significant operational say, or coming up with technology management plans up front (to demonstrate the shared interest / concern).

Remedies required to obtain a conditional approval may include measures to maintain security of supply under government contracts/sub-contracts; governance firewalls limiting information flows to non-EU owners; localisation of critical functions, data, or IP within the country; secure facility requirements with vetted personnel and IT segregation; and access controls for source code, datasets, or defence-grade designs. In high-risk jurisdictions (either because the target is headquartered there or because the regulator is a more active enforcer), more material remedies may be required, including maintaining manufacturing facilities within the country, establishing EU-only secure facilities, appointing security trustees or government observers, and implementing ring-fenced governance for defence contracts and R&D activities. An important mitigation measure that is being applied more frequently in transactions relating to companies broadly active in relation to defence and dual-use goods, is the requirement not to co-mingle technologies developed by European companies with technologies and products subject to foreign export control rules. This is meant to ensure that European defence forces and governments are not dependent on export authorisations from foreign governments. This can have a significant practical impact on businesses, that now have to actively monitor their supply chains and ensure that none of their input materials become subject to export controls on a continuous basis.

While mitigation measures imposed in FDI filings are usually behavioural in nature rather than structural (as is typically the case for merger control remedies), they can nevertheless end up being very burdensome for investors. In this context, it is crucial to consider from the outset what kind of behavioural remedies a Member State might require, and how material an effect that remedy could have on the value of the business being acquired.

Challenges

Challenges remain for defence-related M&A in Europe. Overlapping scrutiny under the EU Merger Regulation, national security interventions, FDI screening, and the FSR is becoming the norm in defence transactions. The result is a complex variety of timelines, priorities, and appetites for commitments. The FSR applies to transactions involving third‑country financial contributions, with the Commission examining whether non‑EU support distorts bidding or market outcomes. Meanwhile, FDI authorities in Europe often seek behavioural commitments in defence transactions, seeking to secure supply for domestic use. Deals will benefit from a coherent legal (and, if needed, remedial) strategy from the outset, leveraging any commitments likely required under one regime to also secure clearance in others.

Public Financing, State Aid, and Private Funding of Defence Measures

Recent legislative developments aim to enable the financing of defence-related activities through a variety of sources, including the European Defence Fund (EDF), national budgets, and/or private capital. Projections indicate that in 2025 defence expenditure could reach €392 billion at current prices (€381 billion in 2024 prices) or 2.1% of GDP.European Parliamentary Research Service (EPRS), EU defence funding, October 2025.

In June 2025, the North Atlantic Treaty Organization (NATO) made a commitment to increase defence investment to 5% of GDP annually by 2035. Of that 5%, NATO will allocate at least 3.5% of GDP annually to meet core defence needs and NATO Capability Targets, and up to 1.5% of GDP annually to, inter alia, protecting critical infrastructure, defending networks, and ensuring civil preparedness.NATO, Defence expenditures and NATO’s 5% commitment, 27 June 2025.

EU Funding

EU funding for defence measures has substantially increased and constitutes the first financing pillar. The estimated total financial value of the benefits from the proposed EU measures ranges from €42.5 billion to €51.3 billion over the next 11 years (2026-2036).European Commission, Communication from the Commission to the European Parliament and the Council, Defence Readiness Omnibus, COM/2025/820 final, 17 June 2025 (Defence Readiness Omnibus). New EU funding programmes have been adopted, and existing programmes have been amended to increase the budget allocated to defence-related activities. For several of these measures, the relevant EU funds have already been allocated to more than half of the Member States through instruments such as SAFE.

On 3 November 2025, the Commission published a Staff Working Document analysing the measures proposed in the Defence Readiness Omnibus. As part of its inquiry, the Commission surveyed stakeholders from the private and public sectors on whether there is a need to streamline EU defence industrial programmes (such as the EDF, EDIRPA, and ASAP) to reduce delivery times, simplify procedures, and clarify the treatment of Member States’ co‑funding. In response, 91% of private‑sector stakeholders agreed, as did 100% of public‑sector stakeholders.EC SWD re Defence simplification omnibus, November 2025, pp. 38-41.

National Funding

National funding is a second financing pillar that must comply with the applicable State aid rules. More than half of the Member States have activated the national escape clause (NEC) within the framework of the Stability and Growth Pact, allowing them to deviate by 1.5% of GDP from the net expenditure paths set out in their medium-term plans.Council, European defence readiness; Commission, Defence Readiness Omnibus, p. 2. Investments in general infrastructure — such as widening railway tunnels or reinforcing road or railway bridges to create mobility corridors — and the functions of the Member States’ armed forces do not constitute State aid, as they fall within public-remit activities.European Commission, Communication from the Commission to the European Parliament and the Council, Defence Readiness Omnibus, COM/2025/820 final, 17 June 2025 (the EC Communication regarding Defence Readiness Omnibus), p. 10.

Where Article 346 TFEU applies to State aid measures, Member States are not required to notify such measures to the Commission. Measures aiming to support investment in production capacity for defence products and services can be deemed to support essential security interests without adversely affecting the conditions of competition in the internal market and thus fall within the scope of Article 346 TFEU.EC Communication regarding Defence Readiness Omnibus, pp. 10-11. State aid measures falling outside the scope of Article 346 TFEU can be declared compatible under the applicable State aid rules (General Block Exemption Regulation, Article 107(3)(c), and State aid guidelines).

Elements that can positively affect the overall balancing test include: (i) the fact that the aid is granted in the context of EU programmes; (ii) the contribution by the investment to the resilience needs of the Union; (iii) the need for Member States to protect their essential security interests; (iv) the cross-border cooperation supported by the project; (v) the positive effects on interoperability and security of supply of defence-related products or inputs; (vi) the reduction of dependencies on third countries; and (vii) the contribution of the project to closing critical defence capability gaps.EC Communication regarding Defence Readiness Omnibus, p. 11. Cases related to notified State aid measures in the defence sector will be prioritised, regardless of whether they are notified as individual aid or as aid schemes.EC Communication regarding Defence Readiness Omnibus, p. 11. Ad hoc guidance on State aid measures in the defence sector might be developed at a later stage.EC Communication regarding Defence Readiness Omnibus, p. 12.

Private Funding

Funding from private sources is a third financing pillar. The lending policies of public and private financial institutions can help unlock access to the required finance. The European Investment Bank (EIB), which has revised its lending policy, plans to allocate 3.5% of its 2025 financing (about €3.5 billion) to security and defence projects.European Parliamentary Research Service (EPRS), EU defence funding, October 2025. In May 2025, the EIB approved €9.1 billion in new financing to strengthen Europe’s security and defence, tech leadership, and critical infrastructure, and invested in the first European private credit fund exclusively dedicated to the security and defence sector.European Investment Bank, EIB Group approves €9.1 billion in new financing to strengthen Europe’s security and defence, tech leadership and critical infrastructure, May 2025.

In addition, the EIF will provide €175 million equity to venture capital and private equity funds investing in European companies developing innovative technologies with dual-use potential. This €175 million initiative is expected to attract additional private investments in the funds it supports, thereby mobilising about €500 million in total support for European companies.EC News Article, The European Commission and the European Investment Fund join forces to boost investment in defence innovation through the Defence Equity Facility, January 2024.

Defence Procurement

Procurement thresholds for the exemption of supply and service contracts from the scope of the Defence and Sensitive Security Procurement Directive (Directive 2009/81/EC) will be increased to €900,000.EC Communication regarding Defence Readiness Omnibus, p. 4. The so-called negotiated procedure without prior publication of a contract notice will be temporarily extended to common procurement and maintenance contracts, allowing Member States to pool resources together and benefit from economies of scale for quick acquisition of equipment and capabilities.EC Communication regarding Defence Readiness Omnibus, p. 4. A public consultation on the simplification of defence procurement rules is under way and open until 17 February 2026. Commission adoption is planned for the third quarter of 2026.EC Consultation Simplifying EU rules for defence and sensitive security procurement.

Key Takeaways for Market Participants

Europe’s defence policy recalibration creates a more permissive, but also more exacting, operating environment. The evolving policy framework rewards scale, European control of critical inputs, interoperability, and speed of deployment, while maintaining protections on competition and third‑country influence. Market participants that align their governance, collaboration structures, and go‑to‑market models to these parameters will be best positioned to access funding, win programmes, and close transactions on executable timelines.

Lead Contractors and System Integrators

Lead contractors and system integrators should carefully engineer cooperation models in order to navigate the combination of SAFE‑linked eligibility, national content expectations, and competition scrutiny. Joint ventures and consortia should be structured to satisfy EU‑origin and control requirements without foreclosing competition or locking in single‑vendor dependency. In practice, this means delineating work shares and IP contributions up front; building ring‑fenced EU governance where needed to manage sensitive tech and data; and preserving optionality for Member State customers through non‑discrimination, multi‑sourcing where feasible, and transparent interface access.

Open system architectures are now a strategic asset: They reduce merger‑control friction by mitigating foreclosure theories of harm, de‑risk FDI reviews by limiting dependency exposure, and meet procurement preferences for interoperability. Where concentration is contemplated, parties should evidence dynamic competition, supply‑chain resilience gains, and speed‑to‑scale efficiencies. Further, parties should be prepared to offer targeted access remedies (e.g., FRAND access to interfaces, escrowed IP, and clearly documented reference designs) that protect downstream competition without undermining integration benefits.

Mid‑Caps, SMEs, and Dual‑Use Innovators

For mid‑caps, SMEs, and dual‑use innovators, the policy mix is an entry ramp, provided they organise early around eligibility, compliance, and teaming. Priority actions include mapping applicable EU- and national-funding windows and aligning project designs to programme criteria, including value‑origin thresholds and third‑country control limits. Simplified procurement and higher thresholds can shorten award cycles, while pairing with primes in modular, standards‑based work packages can accelerate time‑to‑contract and scale.

Certification and security clearances are gating items. Management should plan phased pathways, facility hardening, personnel vetting, and IT segregation, and use mutual recognition or cross‑certification opportunities where available to avoid duplicative processes across Member States.

Dual‑use firms should codify internal controls to segregate civil and defence activities, ensuring compliance with export controls and information‑security requirements while preserving access to broader commercial markets and investment.

Financial Sponsors and Strategic Investors

For financial sponsors and strategic investors, the new environment demands integrated regulatory choreography across merger control, FDI screening, and the FSR, often alongside procurement‑driven stakeholder reviews. Executable deal timelines start with front‑loaded, multi‑jurisdictional mapping of triggers, including ex‑post call‑in risks and coherent remedy playbooks that can satisfy multiple authorities with a single package of governance, localisation, and access commitments. Portfolio de‑risking should prioritise EU‑controlled supply chains for critical inputs, localisation of sensitive functions and data, and governance firewalls where non‑EU ownership is present.

Access to finance is increasingly policy‑conditioned: Alignment with EU objectives on resilience, interoperability, and European control will influence eligibility for EIB/EIF instruments and private capital appetite. ESG frameworks should be updated to reflect defence‑as‑security materiality, with clear policies on end‑use, compliance, and human‑rights safeguards to support LP and lender diligence.

All Segments

Across all segments, strategies to design collaboration for antitrust defensibility include:

• documenting efficiencies linked to readiness, supply‑chain resilience, and interoperability;
• ensuring restrictions are indispensable and proportionate; and
• using available channels for legal certainty, including informal guidance where genuinely novel questions arise.

Strategies to materially improve closing certainty for transactions include:

• proactively aligning merger, FDI, and subsidy‑related workstreams;
• sequencing filings to minimise standstills; and
• coordinating stakeholder communications with contracting authorities.

Finally, programme success will favour parties that operationalise “European preference” pragmatically with:

• transparent EU content accounting;
• auditable control over sensitive assets; and
• open architectures that enable multiple European suppliers to plug‑and‑play into common platforms.

Looking Ahead

On 18 December 2025, the Council adopted the regulation incentivising defence-related investments in the EU budget to implement the ReArm Europe Plan. The regulation brings legal adjustments aimed at supporting faster, more flexible, and coordinated defence-related investments across the EU. The regulation facilitates the deployment of EU funding for defence and dual-use technologies, and to strengthen the EDTIB in the face of mounting geopolitical challenges.Council Press Release of 18 December 2025. The regulation, which entered into force on 23 December 2025, amends five key EU programmes to ensure they can be more effectively used to support defence-related activities.Regulation 2025/2653.

In 2026, several EU actions will shape programme access and regulatory pathways. Early implementation measures should include a temporary extension of the negotiated procedure without prior publication for common procurement and maintenance contracts, and an increase in procurement thresholds to €900,000 for supply and service contracts under the Defence and Sensitive Security Procurement Directive.

In parallel, the Commission’s review of the Merger Guidelines will continue. The Commission will refine the assessment of defence‑related efficiencies and their interaction with Article 21 EUMR and Article 346 TFEU. The Defence Readiness Roadmap is already in motion: It is driving capability coalitions and flagship initiatives, with milestones to 2030 and an interim target of a military‑mobility area by 2027.

The EU institutions are currently negotiating a revised FDI screening regulation; they aim for it to take effect by the end of 2027. The proposal expands the list of critical technologies and dual-use items — such as artificial intelligence, semiconductors, and quantum technologies-subject to automatic scrutiny in every Member State. It also harmonises timelines by requiring simultaneous filings across multiple Member States.

On financing, the EIB’s 2025 lending policy and the EIF’s Defence Equity Facility are now live. These channels will increasingly favour EU‑controlled supply chains, interoperable designs, and demonstrable resilience outcomes.