A long-dormant treaty clause has become one Europe’s sharpest industrial weapons. It rewrites the rules of defence mergers, gives governments veto power over foreign buyers, and forces dealmakers to think like strategists.
Imagine you are a government of a EU member country. You genuinely strive to enhance EU defence collaboration, speed up the process, and scale up the production. But what if that entails handing over control of your prized defence enterprise to a corporation based in a neighbouring country, one with which you share a long history of mutual adversity? Are you committing suicide, politically or militarily?
Europe’s governments thus find themselves between the devil and the deep blue sea. They have discovered, however, that an obscure treaty clause, long dismissed as a Cold War relic, has suddenly—for better or worse—become one of the most powerful tools in their industrial arsenal.
A new industrial lever
Article 346 of the Treaty on the Functioning of the European Union allows member states to take measures they consider necessary for the protection of their essential security interests. Translated into English, this means governments may disregard EU rules limiting their ability to subsidy their countries’ companies. Up to a point, that is.
“Introduced into the Treaty of Rome in 1957, this article excluded defence equipment from Community competence. It was taken over unchanged by Article 346 of the Treaty on the Functioning of the EU,” Institut Jacques Delors points out the measure’s somewhat ancient origin in its Defence 25 paper. For decades, it sat largely idle, a legal escape hatch seldom pulled.
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That has changed. An analysis by Defence Finance Monitor (DFM), published earlier this month, stresses that member states now invoke the security derogation not only to withhold information but also to shape ownership structures, impose golden-share style veto rights and ring-fence sensitive know-how when cross-border mergers are reviewed. The clause has moved, in other words, from a rarely-used legal safe-harbour to an everyday industrial policy lever.
The timing is not accidental. Europe’s defence spending has surged since Russia’s full-scale invasion of Ukraine in 2022. Governments are under pressure—from NATO, from Washington and from their own electorates—to build capacity fast. Cross-border consolidation looks like an obvious route to scale. But scale, in the current political climate, must come bundled with sovereignty. That tension is reshaping every significant transaction in the sector. The result is a market in which dealmakers can no longer think in purely commercial terms.
The triple filter
Industrial logic dominates valuation. Buyers price in regulatory friction, conditional state-aid sweeteners and mandatory localisation spend; pure financial arbitrage is out of fashion. The era of the clean, swift defence merger is over. “It remains to be seen whether EU member states (…) make reference to provisions allowing for the protection of essential national security interests to facilitate mergers or procurement processes through subsidies that are not subject to challenge under subsidy rules,” a briefing by Clifford Chance, a powerful global law firm, quotes Italy’s Industry Minister Adolfo Urso.
Any cross-border defence transaction in Europe must now clear what DFM calls a “triple filter”. A deal must satisfy EU merger control under DG COMP for competition effects; it must pass through more than 20 national foreign direct investment (FDI) screening regimes for security effects; and it must survive parallel Article 346 and Article 21(4) of the EU Merger Regulation interventions when governments claim essential security interests. Each layer carries its own timeline, its own political logic and its own appetite for remedies.
(Article 346 TFEU) allowed Belgium to negotiate directly with a Belgian arms manufacturer without launching a public and competitive procurement procedure.
— TenderLaw, Belgian law firm
Real-life practice shows governments may be very eager to use the measure’s newfound clout. “Given that the protection of Belgium’s essential security was a key driver behind the partnership, the federal government decided to rely on Article 346 TFEU … This allowed Belgium to negotiate directly with a Belgian arms manufacturer without launching a public and competitive procurement procedure,” writes TenderLaw, a Brussels-based boutique law firm in its report on a Belgium’s 2024 ammunition contract.
Brussels shifts posture
The FDI dimension alone has grown formidable. Under the 2019 EU FDI Regulation cooperation mechanism, 23 or more national regimes now treat defence and dual-use assets as core sensitive sectors. France, Germany and Italy impose ex-ante commitments on governance and supply-priority.
Transactions now build in six-to-nine-month buffers and draft multi-speed closing mechanics to handle staggered FDI clearances, as DFM notes. For deals touching munitions, intelligence, surveillance and reconnaissance, secure communications or cryptography, the journey from signing to final clearance routinely takes 12 to 18 months.
At the EU level, the European Commission has signalled a shift in posture. It promises to “give adequate weight to the changed security and defence environment” in its guidelines review. Deals that clearly improve EU resilience, be it in ammunition, space launch or secure communications, are more likely to receive unconditional clearance. Others face behavioural or access remedies.
A door with a price tag
The Commission’s 2025 Defence Readiness Omnibus signals a softer stance on defence-related aid if it closes capacity gaps: “Where the security exception (Article 346 TFEU) applies, measures may avoid notifi-cation if they protect essential security interests without distorting competition,” it says. Merging firms increasingly package state-aid approvals into the same remedy bundle to guarantee post-merger investment.
The legal text of Article 346 is strict in its own terms. The treaty allows member states to act but insists such measures must be interpreted narrowly. In practice, the boundary between a legitimate security carve-out and a disguised act of economic protectionism has always been blurry. Academics and practitioners alike show growing recourse to Article 346 and Article 21(4) to ring-fence national assets during concentrations. Governments have learned that the threat of invoking the clause—credible or not—gives them leverage at the negotiating table long before any formal review concludes.
It remains to be seen whether EU member states (…) make reference to provisions allowing for the protection of essential national security interests to facilitate mergers or procure-ment processes through subsidies that are not subject to challenge under subsidy rules.
— Adolfo Urso, Italy’s Industry Minister
DFM sees governments using the derogation to demand golden shares, local intellectual property escrow or veto rights before clearing cross-border mergers. A classic divestiture is now rare. Authorities prefer open interface standards, third-party access to test ranges and mandatory dual-sourcing of critical sub-components. The remedy stack has been redesigned around sovereignty, not competition theory.
Sovereignty vs. scale
The practical advice DFM offers bidders reflects this new reality. Deal teams should build a remedy stack that can satisfy DG COMP and, simultaneously, the most demanding FDI authorities. They should anticipate requests for local research and development centres of excellence or dual headquarters to defuse Article 346 claims.
Above all, DFM urges firms to treat security derogations as negotiable commercial terms—for example, co-control arrangements or escrowed source code—rather than purely legal obstacles. The derogation, in this reading, is not a wall. It is a door with a price tag.
The mega-deals now reshaping Europe’s defence map in armoured vehicles, space assets and beyond illustrate how far the calculus has shifted. DFM argues that today’s transactions are no longer judged only on price or efficiencies; they are evaluated on whether they expand EU production mass, close capability gaps flagged by NATO and the EU, reduce third-country dependencies and respect each member state’s right to retain a veto over last-resort supply. Strategic fit with the EU’s Strategic Compass or NATO’s Defence Planning Process has become a precondition for political backing, not an afterthought.
A double-edged sword
This politicisation cuts both ways. Governments that invoke Article 346 aggressively risk fragmenting the very industrial base they claim to be protecting. A Europe of 27 nationally ring-fenced defence champions cannot easily generate the scale that modern platforms demand.
The Commission’s emerging openness to security-based efficiencies, the assertiveness of national FDI authorities and the readiness of governments to weaponise Article 346 are collectively reshaping Europe’s defence industrial map, and pulling in different directions simultaneously.
Where the security exception applies, measures may avoid notification if they protect essential security interests without distorting competition.
— EU Defence Readiness Omnibus
For now, the dealmakers are adapting. Bidders who map each asset to named capability gaps, offer early and binding security-of-supply commitments and design governance structures that allow a minority security veto without paralysing corporate control are finding a path through. Article 346 is no longer a clause that lawyers hope never to encounter. It is a term sheet item that, if handled well, can unlock a deal — or kill it, if handled poorly.
