EU initiatives for defence industry: breaking the curse of the ‘juste retour’?

The European Commission’s European Defence Fund and associated initiatives are necessary but small steps on the long road to increased European defence-industrial cooperation, says Lucie Béraud-Sudreau.

Press conference on european defence

By Lucie Béraud-Sudreau, Research Fellow for Defence Economics and Procurement

Prompted by a deteriorating security environment, the European Commission (EC) is taking steps to strengthen defence-industrial cooperation among member states. But serious obstacles remain, in particular overcoming member states’ continuing reluctance to increase mutual interdependence at the expense of nationally based defence groups.

New European defence-industry cooperation initiatives

Since 2013–14, a flurry of defence-related cooperation initiatives has been undertaken at the European Union (EU) level, most of which were launched by the EC. This process accelerated in 2016 and 2017. Among the most notable recent announcements is the European Defence Fund (EDF), which was unveiled in June 2017.

The EDF announcement follows the previous ‘defence package’ launched in 2007, which was announced as ‘the first step towards the establishment of a sound industrial policy and legislative framework’ and contained a communication and two directives related to the EU defence market. The package’s regulatory approach has had limited effects so far. This might explain why, ten years later, the EC is taking another approach, this time based on financial incentives.

Indeed, some of the most convincing defence initiatives relate to direct EU funding for defence research and development (R&D) and procurement. Support for defence-related research was first floated in 2013, and from there led to today’s EDF.

The first incremental step was the ’pilot projects’, on which €1.4 million (US$1.5m) from EU budgets was spent in 2015 and 2016. Pilot projects were small development programmes that covered three topics, including, for example, Unmanned Heterogeneous Swarm of Sensor Platforms, and paved the way for the second step, the Preparatory Action for Defence Research (PADR), which consists of €90m (US$96m) spread over three years (2017–19) for defence R&D. The third step will be the full implementation of the EDF, which contains three different mechanisms:

1. The first of these mechanisms is the EDF’s ‘research window’, which follows on from the pilot projects and the PADR. If voted for, it is expected to begin post-2020, through a dedicated EU programme under the next Multiannual Financial Framework (MFF) – the financial framework regulating the EU budget. The estimated budget will be €500m (US$531m) per annum throughout the MFF covering the years 2021–27. However, only defence R&D projects involving at least three member states will be able to receive funding.

2. Secondly, the ‘capability’ window, or ’European Defence Industrial Development Programme’, will support the joint development and acquisition of defence capabilities. Contributions for this window will mainly come from member states, but the programme itself will co-finance part of the development costs. The window will initially cover the years 2019–20, with a budget of €500m spread over these two years. Only projects involving at least three companies from at least two member states will be eligible. EU funds could support up to 100% of the costs of projects in developmental phases, but up to 20% for prototype costs.

3. Thirdly, the EDF’s financial ‘toolbox’ includes various mechanisms to help member states overcome discrepancies in budget timing and procurement processes, and to facilitate access to financing for small- and medium-size enterprises.

Game-changer or business as usual?

The EDF, from a political standpoint, has come to symbolise the EC’s determination to step up its role in defence. It is the first time that common EU money will be used for defence programmes. Significantly, if the project is adopted, the funds from the EDF’s ‘research window’ will make the EC the fourth biggest defence R&D spender in Europe (see Table 1).

Top defence R+D spending in European Union

The EDF potentially positions the EC as a key player in the defence-industrial sector. It also rekindles the role of the European Defence Agency, which will be responsible for implementing the PADR annual work programmes.

But to be successful the EDF will also have to be accompanied by efforts to discuss the implications of industrial consolidation and ‘shared’ sovereignty in terms of defence among member states. One impediment is the notion of ‘juste retour , which has weighed over most European joint defence programmes so far. Only by overcoming member states’ reluctance to sacrifice part of their potential share of jobs and contracts in order to achieve common savings can there be a significant rationalisation of the defence-industrial base across Europe.

Meanwhile, as funding will be drawn from the common EU budget, another challenge to implementing the EDF is the ability to demonstrate benefits for countries, notably in eastern Europe, that do not have a domestic defence industry.

Nevertheless, the EDF and associated initiatives are necessary but small steps on the long road to increased European defence-industrial cooperation.

The content of this analysis relies on joint research conducted with Alice Pannier, Assistant Professor at Johns Hopkins University.

This analysis originally featured on the Military Balance+, the new IISS online database that enables users in government, the armed forces and the private sector, as well as academia and the media, to make faster and better-informed decisions. The Military Balance+ allows users to customise, view, compare and download data instantly, anywhere, anytime.

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