Until 2025, the European defence sector operated as a collection of 27 separate national boutiques that produced high-end equipment in small batches for domestic use. The production has been highly specialised, relatively costly, and smaller in quantity. That era ended with “Europe’s independence moment”, as presented in the Commission’s 2026 Work Programme.

Today, the European Union is officially on track to transition into a coordinated defence economy. The goal has now evolved from buying together to building together, at a scale that can satisfy the needs of the continent in a major peer-to-peer conflict. The Russian invasion of Ukraine, now in its fifth year, and shifting US priorities have forced a larger focus on sovereignty in Brussels. Thus, the European Union now aspires to become an active industrial leader in defence. For the stakeholders involved in the industry, this represents one of, if not, the most significant shift in market dynamics since the end of the Cold War: an accelerated transition from national procurement to a world of industrialisation on a wider European scale.

The Kubilius White Book: 500 Billion Euro Investment Project

The White Paper for European Defence Readiness 2030 (commonly referred to as the Kubilius Book after its author European Commissioner for Defence and Space), presented last year, remains the foundational text for current defence policy. With the key message if you want to avoid war, you must prepare for war, the White Book highlights an urgent necessity for all Member States to build defence capabilities together. For industry players, the EU has identified an investment gap of 500 billion euros to achieve credible deterrence by 2030.

One of the most critical regulatory shifts in 2026 is the activation of the National Escape Clause regarding defence spending. The EU’s strict debt and deficit rules (such as the 3% limit) traditionally forced governments to choose between social spending and defence. In the new reality where the goal is strategic autonomy, defence spending is now exempt from the fiscal calculations if it is directed toward EU-coordinated projects. This has unlocked a big wave of national orders that were previously at a standstill. Defence contractors are experiencing a multi-year order book, which allows for more long-term planning and capital investment that was nearly impossible in the era of year-to-year budgeting.

Flagship Capabilities

Kubilius’ report identifies four flagship areas where the EU centralises its funding:

• Integrated air and missile defence, bringing the bloc closer to the unified European Air Shield;
• The EU cyber shield to protect critical digital infrastructure;
• The eastern flank infrastructure – introducing the high-tech “smart borders” from the Baltic to the Black Sea;
• Military mobility 2.0 to harden the continent’s transport logic for rapid deployment.

The European Defence Industry Programme: New Rules

As the White Paper is not legally binding, EDIP is one hard-law example. The Programme became fully operational in February 2026, and focuses on the mechanism that changes the way of bidding for contracts. It is specifically designed to reduce market fragmentation by making it financially irrational to purchase non-European or non-coordinated equipment.

The EDIP introduces the Structure for European Armament Programme. This is a new legal entity that allows Member States to cooperate on a specific project (for example, a new armored vehicle or a tactical radio system). If a project is run via a SEAP involving at least three Member States, it is fully VAT exempt and is eligible for a 25% direct EU cash funding for production costs. Defence companies should recognise that this means bidding alone is not as preferrable as it used to be. To access the highest profit margins and EU subsidies, a company must form a cross-border industrial partnership. A project involving a prime contractor from one country, an engine manufacturer from the other, and a sensor specialist from the third is now significantly more profitable than a completely national bid.

The EDIP has set a quite enthusiastic target. By 2030, at least 50% of the defence budget of Member States must be spent on products manufactured within the European Defence Technological and Industrial Base. This is a sign that the EU is starting to incentivise regional self-reliance compared to global procurement. While American and Israeli tech remain vital for Europe’s immediate readiness and the global defence supply chain, the financial incentives are now tilted heavily toward firms that manufacture and hold intellectual property within the EU.

The Drone Report: The Shift from High Quality to High Quantity

In early 2026, the European Parliament adopted the “Drones Report” presented by Latvian MEP Reinis Poznaks, which brins the experience of world-class frontline drone operators, research and real-time war experience from Ukraine, Israel, and their partners. It mainly argues that Europe’s current drones are too expensive to lose and at the same time too slow to produce. The report mandates a regulatory change that would be directed towards standardised interfaces – the Commission is now drafting technical standards for drone components (like batteries or flight controllers). Future EU-funded contracts will require that hardware is interoperable by design.

The EU will likely move from buying several very high-quality drones to buying higher volume of drones that are tactical-grade and easier to produce. Additionally, the report included a strict ban on high-risk components from jurisdictions that are deemed non-democratic. For manufacturers, this means an immediate supply chain audit is required to purge components that could lead to an ENISA-led ban under the Cybersecurity Act.

Omnibus and ESG

Arguably one of the biggest issues for the defence industry has traditionally been bureaucratic red tape and the banks’ reluctance to lend to certain arms companies. Both issues are likely to be addressed in the immediate future by the Commission’s Defence Omnibus act, a package that attempts to lower the regulatory burden on the bussiness. The Act has introduced a 60-day fast-track permit for every industrial project deemed critical for defence readiness. If a corporation is building a new munitions factory or a secure R&D center, the usual environmental and local zoning inconveniences can be bypassed in two months. This is a pretty significant departure from traditional EU administrative law.

Alongside bureaucratic relief, the Commission and the European Investment Bank have now clarified that the defence can be compatible with ESG goals. The EIB has opened a 3 billion euros lending facility specifically for dual-use and resilience infrastructure. This has effectively lowered the cost of capital for defence firms in Europe.

The Immediate Horizon: Next Months

In the next three months, the first joint procurement call under European Defence Industry Programme is expected to happen. Specific technical requirements for the products will be of interest, as those will set the standards for the foreseeable future of European military equipment.

By the end of the year, the Commission is expected to publish the high-risk vendor list for defence supply chains. This list will explicitly name companies whose components are banned from any defence projects funded by EU.

Defence companies can also expect the rollout of European Defence Equity Facility in the next 12 months. EDEF will resemble a venture capital fund designed to prevent promising EU defence start-ups from being bought out by the investors from China or the US.

To increase the likelihood of succeeding in this new regulatory environment, businesses should be mindful of several key changes.

First, defence companies could embrace dual-use designs. One of the simplest paths to funding is to demonstrate that a company’s technology has both civilian (e.g. in energy or logistics) and military application. Resilience funds are larger than the funds limited to defence only. Simultaneously, the EU aims to increase industrial interoperability by having fewer types of tanks and radios. Companies that lead the way in standardisation and align with the modularity rules will become the platform that others will have to build upon. Finally, securing a clean supply chain is of utmost importance, as even a single high-risk component in the product can disqualify a multi-billion euros SEAP bid. Sovereignty of the supply chain is now both a security necessity and a competitive advantage.

The next months will be an essential window for strategic positioning. Companies should start to identify potential partners in at least two other Member States to partner up early and be ready for the SEAP calls. Naturally, auditing the shadow supply chain and making sure that the suppliers are trusted vendors by the EU standards will be crucial. Defence contractors should also leverage the new Omnibus rules – if there is an expansion that has been delayed due to the local red tape, this is the time to apply under the new 60-day rules. In this new era for the defence industry, competition is set to grow, and the champions of the sector will be those who adapt fastest to the new rules and start thinking beyond national borders and local industry.

Read the full Regulatory Horizon Report by B&K Agency: