The Political Economy of European Defence

25/01/2011 by Daniel Fiott, Research Fellow, Madariaga - College of Europe Foundation*

Introduction

Europe’s defence markets are at overcapacity, they are overprotected at a national level and they are operating in an inefficient manner. All of this is now seen in the context of a world moving towards multipolarity globally and austerity, job losses and defence budget cuts in Europe which gives the issue added importance. But national security is still important to member states, and sovereignty serves as a continued breaker in the debate. But the financial crisis has hit Europe not just in terms of budget cuts. As Commissioner Michel Barnier stated recently, the security risks of trying to recuperate capital shortfalls in the defence sector through sovereign wealth funds offered by non-European states now gives the whole debate an intrinsically international and political flavour. As this brief essay suggests, however, before the economics of European defence are made to work properly the politics needs to be put right first.

European Defence in Decline?

If Jane’s Defences’ forecasts are correct, the combined defence expenditure of the United Kingdom (UK), Germany and France will decrease by EUR 17 billion from 2010 to 2014.[1] But let us put these member state budget cuts into some perspective. Since the Cold War – with the exception of the period after 9/11 – defence expenditure in Europe has been on the decline following individual member state cost rationalisations over the years. From the period 2006-2009, for example, there was an overall decline in defence expenditure the European Union (EU) of 3.5% which has been coupled with a decrease in force numbers at a rate of 15.8%.  Over this same period spending on personnel has decreased in the EU by 11.8%[2], but overall European governments spend 50% of their total defence expenditure on personnel and in the United States (US) personnel costs total 20% of overall expenditure.[3] EU investment spending on equipment procurement and R&D (-1.2%), and expenditure related to operations and maintenance (-4.6%) costs have also decreased in real monetary terms over the 2006-2009 period.

Framed in this way, the economic rationale of greater pooling and of reducing costs therefore appears to be beyond dispute, but it is worth acknowledging that at present closer cooperation is not a foregone conclusion. In an era of austerity and unemployment, and if defence harmonisation implies some degree of market adjustment, other responses such as a lack of political will and, at worse, protectionism seem as likely. Protectionism would be an extremely regretful path given the potential market gains a single market in defence would lead to. R&D and R&T in defence hold potentially massive gains for other sectors of the European economy: let one not forget that GPS for example was developed by the military. The danger under this view would be that member states would seek to protect their own industries under the argument of internal security when in fact they are really trying to protect their own market position.

Furthermore, such reactions would appear completely cynical when one pans away from Europe to consider the continent’s global competitors in the defence sector. In 2008, for example, SIPRI calculated that of the world’s top 20 arms producing companies only 5 are European – BAE Systems and Rolls Royce (UK), EADS (W. Europe), Finmeccania (Italy) and Thales (France) – whereas 14 are from the US and 1 from Russia.[4] Interestingly, when one compares the totals for the world’s top 100 firms one sees that EU firms total 33, US firms total 43 and all others such as Israel, Russia and Japan total 24.[5] This points to the fact that while European defence firms are competitive overall they fail to really match the US for competitiveness in the higher parts of the ranking. The figures also show a high concentration of defence production in member states such as France, Germany, Italy, Spain, Sweden and the United Kingdom: 87% of the EU total to be exact. While it is true that BAE Systems and Finmeccania (Italy) have made inroads into the US defence market, one should recognise that Europe is largely shut-out of the world’s largest defence market. Of the top 20 defence contractor firms operating in the US only BAE Systems (UK) ranks among them.[6]

In this environment, one would have to ask whether even a unified European defence market would be able to compete with the likes of US companies. One would also have to ask whether a truly liberalised market – giving foreign firms access to European markets – would be beneficial to European defence. There are benefits to greater competition: for example, when US firms McDonnell Douglas and Boeing merged it stimulated a host of European firms to form the European Aeronautic Defence and Space Company (EADS) conglomeration, leading to joint European projects such as the A400M transport plane. This may be read as an argument in favour of greater firm conglomeration in Europe, but then one would need to deal with the threat of a potential monopoly and SMEs and innovation might suffer. From the economic angle one has to ultimately ask two essential questions: i) whether more transparent and competitive markets will necessarily lead to more coherent inventories and spending?; and, ii) what member states and industries stand to lose and gain from greater competition in defence markets and will this necessarily benefit the Union as a whole?

The Politicisation of European Defence Markets

But stimulating a single defence market in Europe is not just an argument about lowering design, development and production costs and there is also a strong political angle which must be borne in mind. Firstly, member states are unlikely to wholeheartedly support the notion of a unified defence market if jobs are lost on their own soil. Employment figures in the defence sector are difficult to accurately measure, but the European Commission estimates that 350,000 – 750,000 are directly employed in the sector in the EU, with a total, if indirect employment totals are added, of 1.6 million across the EU.[7] It is a significant labour sector, therefore, but one should also note that some member states are already accustomed to significant job losses – e.g. from 1993 to 2003 Hungary noticed a 70% reduction in defence sector jobs. Of course, the opposite is true; jobs can be created through defence markets but one should seriously ask where these jobs would end up being created.

Supporters of greater defence harmonisation also need to be mindful of the differences between member states in terms of the public-private “set-up”: the UK, Denmark and Netherlands keep the private and public spheres separate, whereas in France there is little distinction between the two. Larger member states still have the habit of thinking in juste retour terms about defence investments at a European level. That is, the more powerful member states are still inclined to spend money on defence in order for greater returns. One body where the juste retour ethos has been expressly rejected, however, is the Organisation Conjointe de Coopération en matière d'armement (OCCAR) Convention (1996) which manages and implements armament contracts on behalf of European states such as the Tiger Helicopter programme. However, OCCAR only operates between the UK, France, Germany and Italy meaning perhaps that the juste retour ethos does not really apply. It might indeed be a different scenario with more medium and small sized member states onboard.

Permanent Structured Cooperation (PESCO), as introduced by the Lisbon treaty, may have a role to play in the political sphere. Where the Lisbon treaty is concerned, member states have expressly recognised the need for PESCO as it would not have been inserted as a protocol in the treaty otherwise. And EU leaders should really do more to test and push the member states on this issue. However, the treaty only enables and does not force states into cooperation. One should also note that PESCO as stated in the Lisbon treaty says little about defence markets. Indeed, Article 346 of the Lisbon treaty (ex Article 296 of TEC) embeds the ability for member states to reject disclosure of information and hard defence equipment without it being considered an infringement of the internal market. There is, in short, always a way for the member states to cut loose if they so wish. A ray of hope is offered, however, by Directive 2009/81/EC which allows for an opening of markets for defence equipment procurement. But the Directive only presently covers “non-sensitive” equipment such as telecommunications devices and not armaments and munitions.

Furthermore, PESCO is not bound solely to the Lisbon treaty and as a forum for defence cooperation the mechanism has been around for a while. The EU Battle Groups and Eurocorps prove that member states are capable of putting multinational forces together, at least for joint exercises. But there is still a long way to go when one considers the operating costs of these forces, and the missions these forces would potentially be deployed for. There is also a lot of political posturing involved with defence cooperation in Europe, with states finding it easy to put forces together as a gesture but having greater difficulties in deployment. This is perhaps why one should not get too over-excited about the recently signed Anglo-French treaties. Sure, in terms of the joint work on nuclear weapons and the search for joint reduction in defence industry costs, there is room to be hopeful in that it is at least recognition of the present budgetary constraints. The downside to the treaties, however, is that they are clearly not “European” and the talk of a combined expeditionary force is slightly overdone considering existent initiatives such as the Battle Groups.

Doing European Defence Differently?

Any sizeable and meaningful market integration in defence will not occur, or mean anything, without the requisite political integration. Defence markets and closer defence cooperation are clearly needed now more than ever, but more important is the political strategy guiding their development and progress. The conflict of theatre, as it were, is not just austerity but also what strategy the EU will require. Are we really having a European conversation on what type of threats the EU will face in the next twenty or so years? Do we seriously know what military equipment we will need to meet these threats? The point is that presently defence firms are developing equipment in the dark, and they need clear political objectives but not just national ones. The rationalisation for defence spending continues apace at national levels, and Europe is inserted in a few paragraphs here and there.

What would be interesting to see, even as a simple intellectual exercise, would be a European-level dialogue to jointly define were defence markets should be headed in the long-term. It is true that the European Defence Agency (EDA) does useful work here in spite of strained resources. But in concrete terms such a dialogue would not just focus on pooling current equipment, but on what this equipment should look like in the future and what needs and strategy it should serve. This, of course, would imply a serious dialogue to ascertain the type of world Europe will inhabit in the coming years and this means strategising. For too long in and around Brussels there has been much talk of the need for an EU “grand strategy”, but one does not hear what this should be precisely because there is not a clear vision of the future international order. Once Europe knows what it should be buying in defence terms, market rationalisation may then perhaps follow. One has to ask the question: should politicians and the military establishments of Europe decide the future direction of European defence or should this be outsourced to the private sector?   

A greater defence dialogue should also focus on addressing a number of extremely important issues still dear to member states in the realm of defence: i) security of supply – what mechanisms can be developed that would assure states that importing defence equipment from state A to B would not become hostage to politics; ii) security of information – how can defence equipment from state A to B be exchanged without threatening a state A’s Intellectual Property Rights. Of course, from this perspective smaller states have more to gain from the larger states so there may have to be considerable bargaining. To some degree this has occurred: for example, rationalisation of defence spending has occurred in states such as Belgium which now focus on niche areas. But whether this bargaining will lead to a core grouping of states taking charge of European defence remains to be seen, there is also the question of whether the obvious leaders will indeed want to lead.   

A Loss of EU Leadership

But Europe must not just look to the member states for leadership. Since the Lisbon treaty there has been a distinct lack of an EU presence in the deliberations of the member states on defence. Member states have been allowed to discuss among themselves without any overall coordination. The EDA and the Belgian Presidency have done well in driving the process over the last few months, but there has been a disturbing lack of presence by the High Representative (HR). True, the HR has had a full agenda of late with the External Action Service (EEAS), but beyond this one is not too sure there is a clear comprehension of why defence is important. The Common Security and Defence Policy (CSDP) is no longer just about the EU’s excursions into remote parts of Africa – important as this may be –, but it is also now concerned with securing Europe in the face of great international changes.

The world is creeping towards greater multipolarity, which means that political power is being rationed. States and groups of states must do their utmost to secure their position and do all they can to boost it further. This may sound like an old narrative but Europe needs it in high dosage in its relations with the rest of the world. Ideas and economic power have been the mainstay of European foreign policy, but emerging powers do not share our ideas in their entirety and our economic model and credibility is still damaged after the financial crisis. Furthermore, is one so sure that values such as human rights and rule of law, which Europe rightfully holds dear, are so powerful as to be able to defend themselves? Seen through the lens of global governance, how can the EU be taken seriously in fostering multilateralism without military power?

What one notices from governance of defence in Europe is that agencies such as the EDA are hard at work, and certain member states are more assertive in pushing for greater cooperation than others, but overall EU leadership is lacking. As the dust now settles after the Lisbon treaty and the EEAS is put to work, now is the time for the High Representative to think long and hard about defence and to give it some overall direction. Leadership will begin first with forging a European strategy fit for the future world order in tandem with the member states, and then budgets, costs and needs will require rationalising on this basis. No European market for defence can be competitive without proper leadership from the member states and the EU High Representative.

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[1] M. Bell, “European defence companies must 'be wary' of sovereign wealth funds, commissioner warns”, Jane’s Defence, (30 November 2010).

* This article summarises the main arguments made by the author at a Young Professionals in Foreign Policy debate entitled “An Internationally Competitive Defence Market in Europe: Mission Impossible?”, held on 24 January 2011.

[2] See: www.eda.europa.eu/defencefacts/. (Accessed 23 January 2011).

[3] European Defence Agency, European – United States Defence Expenditure 2009, (21 December 2009). See: www.eda.europa.eu/defencefacts/. (Accessed 24 January 2011).

[4] See: www.sipri.org/research/armaments/production/Top100. (Accessed 23 January 2011).

[5] Note that these figures exclude those of China. See: http://books.sipri.org/files/FS/SIPRIFS1004.pdf. (Accessed 24 January 2011).

[6] See: http://washingtontechnology.com/toplists/top-100-lists/2010.aspx.(22 January 2011)

[7] European Commission, Defence Industry: Comprehensive Sectoral Analysis of Emerging Competences and Economic Activities in the European Union, p. 16.

 

This article summarises the main arguments made by the author at a Young Professionals in Foreign Policy debate entitled “An Internationally Competitive Defence Market in Europe: Mission Impossible?”, held on 24 January 2011.

*Daniel Fiott writes here in a personal capacity and his views do not necessarily reflect those of the Madariaga - College of Europe Foundation.