Insecurity is cash cow for Europe’s defense firms

After a decade of slashing defense budgets, European leaders are about to start investing significantly more in arms, citing “a challenging geopolitical environment.”

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A resurgent Russia on Europe’s eastern flank, increased terrorism on the Continent and an incoming U.S. president who has questioned America’s commitment to NATO may give some European capitals the jitters. But for Europe’s defense companies, fears about the Continent’s security means big business.

Just before Christmas, EU leaders agreed to dramatically increase spending on defense research from €25 million now to €500 million beginning in 2021, which would make the EU the fourth largest investor in Europe in defense industry research after the U.K., France and Germany.  The investment program needs approval by both the European Parliament and national capitals.

The Commission also plans to start assisting European governments that want to buy military equipment together, a market officials estimate will be worth as much as €5 billion a year. In practice, that means that if a number of countries decide they want to buy drones, for example, they can decide to procure them from one company as part of a single contract.

The European Investment Bank, which lent around €70 billion to European companies in 2015, will also start investing in defense projects. Additionally, there are plans for a defense fund, set up by the Commission, that could issue specially-designed bonds to fund big-ticket items such as aircraft carriers. If a country is struggling financially, the Commission may disregard national contributions to this fund when checking that the government’s budget is in compliance with the EU’s fiscal rules.

“This is a game-changer,” Commission Vice President Jyrki Katainen told POLITICO, “in the sense that there is a change in the member states’ sentiment towards strengthening European defence cooperation.”

Russia, a motivator

The Commission’s plans have been underway for years but have only recently become attractive to EU leaders.

“We appeared just at the right moment and, unfortunately, everything around us — around Europe and inside Europe — sped up the process,” said Internal Market Commissioner Elżbieta Bieńkowska, who is overseeing the plans. “Times are such in Europe and globally that if you want to feel safe, we have to do things like this.”

Although EU governments collectively spent €200 billion on defense last year, this figure is still 12 percent less than in 2007, before the economic crisis.

“Inefficiencies are much more than they were 10 years ago,” said Bieńkowska, pointing to the existence of 154 different weapons systems in Europe as opposed to only 27 in the U.S. “Everybody produces something completely individual. There aren’t common goals, even though the majority of the EU member states are also members of NATO.”

While European leaders may be motivated in part by Moscow’s annexation of Crimea in 2014, as well as fears that the Kremlin is sponsoring cyberattacks on the West, Katainen dismissed any suggestions that Russia might be provoked by the increased spending, saying the plans are simply intended to make European defense spending more efficient.

“Russia has invested heavily [in its military] as have other world powers, whereas the EU has reduced expenditure,” he said. “We are very strong in soft power but quite weak in hard power.”

Despite assurances that the EU’s new plans are not intended to provoke Russia, Moscow may not see it that way.

“It is unclear how we threaten the sovereignty and territorial integrity of NATO countries,” Maria Zakharova, Russian foreign ministry spokeswoman, said in a statement last week. “After all, the Americans and their allies demonstrate increased military activity, push the boundaries of the alliance and bring their military capability closer to our borders.”

An unusual market

Since governments are the only customers for military equipment, the relationship between states and industry is one of interdependence.

“If there’s no money and commitment from the government, a defense company will not develop anything because there’s no other customer out there,” said Burkard Schmitt, a director at the Aerospace and Defense Industries Association of Europe. “It’s not like an iPhone.”

Despite repeated attempts by the Commission to create a single European defense market, the 28 member countries have until now preferred to buy equipment from their own national defense companies rather than from companies located elsewhere.

But high-profile terror attacks in Europe, fears about Russia and about President-elect Donald Trump’s commitment to the NATO alliance, have given new impetus to cross-border cooperation.

“It’s a bit nasty but, unfortunately, these external factors give a prominence to these sorts of initiatives,” said Schmitt, adding since there’s now “money on the table,” governments are more likely to cooperate. “Money makes the world go round, and if you have €500 million per year, that really is not nothing,” he said.

Antoine Bouvier, the CEO of missile manufacturer MBDA, a joint venture between France’s Airbus, the U.K.’s BAE Systems and Italy’s Leonardo, which has a 21 percent share of the world market in missiles, believes creating a common defense market is just a first step.

“The EU wants to be more than just an internal market and a set of regulations,” Bouvier said. “The ambition cannot just be to have a competitive industrial sector in the EU. Some military capabilities have to be secured within Europe.”

Going alone

Previous attempts to better coordinate defense at an EU level met with resistance, in part because some countries, including the U.K., preferred to work within NATO instead. But the U.K.’s vote in June to exit the union and concerns about heightened insecurity has changed that.

In July, the leaders of NATO and the EU signed a declaration committing to further cooperation in response to what they described as “unprecedented challenges from the South and the East.”

“NATO has said very clearly that they warmly welcome further defense cooperation,” said Katainen. “Now everybody understands that the EU doesn’t want to replace NATO in any sense.”

Beyond that, EU countries in November endorsed a plan to increase military cooperation so that the bloc will have “strategic autonomy.”

That, in part, is in response to suggestions from Trump that the U.S. should “be properly reimbursed for the tremendous cost of our military protecting other countries.” In a comment that set alarm bells ringing in European capitals, he also said of those who can’t or won’t pay up: “Congratulations, you will be defending yourself.”

Katainen said that while Washington has long grumbled that European allies weren’t pulling their weight in defense spending, Trump’s language was more pointed.

“For 15 years, the EU member states have discussed how long Americans will be willing to invest in European security as much as they have done,” said Katainen. “Even though President-elect Trump hasn’t said anything new, the way he said it was maybe more harsh than before.”

This article has been corrected to clarify what kind of defense spending could be discounted from EU deficit and debt calculations.