Integration of the European Defence market

Is further integration of the European Defense market desirable or even possible?

On 27 September, French President Emmanuel Macron outlined his vision for the future of the European Union in a speech at the Sorbonne University. In terms of defence and security, he put forward ambitious proposals, such as the possibility for national armies to host nationals from other EU Member States, a fully deployable European common defence force “by the beginning of the next decade”, underpinned by a common budget, and a European civil protection force.

These ambitious proposals should aim at giving a common strategic culture to the European Defence Union – which, to President Macron, is the condition to achieving a fully-fledged Defence Union by 2025. This is also the objective European Commission President Jean-Claude Juncker who, in his State of the Union address on 13 September, called for the swift implementation of the Permanent Structured Cooperation (PESCO) and the European Defence Fund.

If successfully implemented, all these initiatives could lead to an integrated European Defence market with major advantages such as better interoperability, economies of cost in research, development and production of capabilities – and major challenges in what is a competence for the Member States and a matter of strategic sovereignty.

A fragmented European Defence market

The European Defence market is extremely fragmented at national level because Member States seek to strengthen their own Defence Technological and Industrial Base (DTIB). This leads to redundancies both in industrial programmes and equipment, and therefore to a lack of interoperability and efficiency. There are seven programmes of frigates, seventeen programmes of armoured vehicles, and seventy programmes of drones that are currently being developed in Europe. Together, the EU28 combine more than seventeen different types of combat tanks, twenty types of fighter planes, seventy hundred types of armament.

Even more detrimental are the redundancies in manufacturers. As a striking example, there are seventeen European shipbuilders currently competing with one another: TKMS in Germany, BAE in the UK, Damen in the Netherlands, Navantia in Spain, Fincantieri in Italy, Naval Group in France… In February 2017, Naval Group lost a major contract with Norway to TKMS in a rigged call for tender, putting an end to any hopes of merging the two companies, which would have allowed them to outweigh competing international shipbuilders, notably the Chinese CSSC now occupying a strong market share position.

At a time of reduced defence budgets, mergers can create synergies in R&T and maintenance costs, lower purchase prices, improve interoperability and enhance the European Union’s capacity to act autonomously and defend itself. As an example, MBDA’s Europe-wide partnership structure allowed the missile manufacturer to remain competitive vis-à-vis the two leading US companies Raytheon and Lockheed Martin.

Solutions to reduce the fragmentation

Taking this into account, Member States started to reflect on solutions to stem the fragmentation of the European Defence market. In 2009, the European Commission adopted a directive (Directive 2009/81/CE) to coordinate procedures for contract awards in defence and security in the internal market and to limit the use of article 346(b) TFEU according to which :

Any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes.

The Defence Directive had very limited results. Two years after its implementation by the Member States, in 2013, more than 50% of defence and security contracts were still escaping EU rules. The number of contract notices published was reduced to half between 2015 and 2016, going from 3165 to 1738 – 64% of which were published by France, Germany, the UK and Poland, proving that not all Member States are playing the game.

Another solution would be to strengthen the role of the Organisation for Joint Armament Cooperation (OCCAr) and the European Defence Agency (EDA). Both were created with the objective of monitoring common armament programmes and ensuring better integration of the European defence industry, and both had limited results, although for different reasons.

Since its creation in 1995, OCCAr only managed nine common programmes, in which Member States seeked to maximise positive economic, social and industrial spin-offs despite OCCAr’s golden rule that they should abandon the fair return principle. Divergences in strategic visions also led to delays, cost overruns and discontent with the final result, for example in the A400M programme when the final military transport aircraft included paratrooping parameters to favour Germany.

On the other hand, EDA’s ambitions are curtailed by the lack of means (only 120 employees and a budget of 30 million EUR) and lack of consensus between the 28 Member States. Although the long-term review of EDA currently underway should remedy to that by strengthening its role and generalizing the adoption of decisions by qualified majority voting, MEPs are most skeptical. In an exchange of views with EDA’s Chief Executive Jorge Domecq, on 25 Septembre, Anna Fotyga, President of the Security and Defence committee, expressed concerns that the absence of common perception of threats would lead the review to failure.

Another solution would be to let the defence companies establish consortia to meet mutual needs. The latest example is the agreement between the French and the Italian governments, on 27 September, for Fincantieri and Naval Group to start negotiating a merger. Hervé Guillou, President-Director General of Naval Group, had been pushing for a rapprochement for years, first with TKMS, then Navantia, and now Fincantieri, convinced that shipbuilders can only remain competitive at European level. However, difficulties will most probably arise regarding diverging strategies and unequal spin-offs, with Naval Group’s frigates equipped by Thalès and Fincantieri’s equipped by Leonardo.

Therefore, although both public and private decision-makers seem to be pushing for more integration, especially in the context of increased competition and increased security threats, it will take more than a consensus to build a truly integrated European market. Member States need to reach a common strategic culture regarding spin-offs, security of supply, security of information and sectors of excellence.



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