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The European Investment Bank could help meet some of the challenges facing Europe’s struggling defence industry
European countries face significant challenges in funding defence research and development programmes. Among the most important are declining defence budgets, fierce international competition, and the increasingly expensive nature of high-end technologies. Daniel Fiott argues that the European Investment Bank could play a much greater role in Europe’s defence sector and serve as a life-line to defence research and development, dual-use projects and small and medium sized enterprises.
However highly one might rank the importance of security and defence, the reality is that governments have to make difficult decisions as to how national budgets should be spent. Nevertheless, at the December 2013 European Council meeting on defence, heads of government agreed that “defence matters”. In mid-2013 I suggested that the European Investment Bank (EIB) could potentially finance certain defence-industrial initiatives at the EU-level. The suggestion has since been echoed by a number of groups and individuals. Furthermore, the December 2013 draft conclusions specifically invited the European Commission and the European Defence Agency to draw ‘on the financial expertise of the European Investment Bank’, even though this line did not appear in the final conclusions.
The European Investment Bank
The EIB is owned by, and works in the interests of, the EU member states. With over €242 billion of available capital, the bank made project loans totaling €71.7 billion in 2013 – this amount is more than the combined total of French and German defence expenditures in 2012. The Bank principally finances up to 50 per cent of total costs for public and private projects that exceed €25 million in value: all projects must be economically, financially and technically feasible and environmentally sound. The Bank, along with the European Commission and participating public/private banks and institutions, is also a shareholder in the European Investment Fund – the Fund has a range of financial products to offer small and medium sized enterprises (SMEs).
The Bank can directly issue loans to SMEs or it can make loans through public bodies (called ‘intermediated loans’). The Bank also offers guarantees and securitisation to businesses so that projects can be made more attractive to other investors. Alternatively, the ‘Risk Sharing Finance Facility’, which is jointly run by the EIB and the Commission, provides a maximum of €10 billion in loans, guarantees and investment for complex, long-term and public/private research, development and innovation projects such as applied or industrial research, feasibility studies, experimental development and pilot projects.
Furthermore, the European Investment Fund (EIF) specialises in venture capital investment for SMEs and the Bank holds a 62.1 per cent stake in the Fund, along with the Commission (which represents the EU with a 30 per cent stake) and a number of private banks (a total stake of 7.9 per cent). The European Investment Fund comprises two financing vehicles. Firstly, the Joint European Resources for Micro to Medium Enterprises (JEREMIE)allows national and regional authorities to redeploy part of their structural funds into market-driven financial instruments. Secondly, the fund provides risk capital to fund managers for SMEs developing projects that use advanced technologies.
How the European Investment Bank could help support the defence industry
Many of the aforementioned products and facilities potentially offer financing options for the European defence industry, albeit in very specific ways. For example, while the EU’s structural funds and budget comprise an important element in the development of dual-use projects and support to SMEs, these instruments cannot be used for ‘purely’ military projects. However, under Article 309 of the consolidated version of the treaties, EIB and EIF instruments can theoretically be used in all sectors of the economy to modernise, convert or develop fresh activities that benefit the internal market.
This certainly applies to those elements of Europe’s defence sector that are increasingly seen as falling under the internal market. The Bank could sure up the attractiveness of defence-relevant SMEs to other investors; lend credibility and resources to SMEs seeking investment to develop innovative dual-use projects; and encourage civilian SMEs to engage in defence-relevant research and development (R&D) and demonstrator projects. Such an initiative could tick the boxes of promoting economic knowledge, skills and innovation and it could eventually also enhance the international competitiveness of those SMEs involved in such R&D programmes. The spin-off technologies that derive from such initiatives may eventually benefit the commercial sector and lead to the type of profits that can be used to repay loans.
Additionally, regional clusters specialising in industrial niches (also known as “clusters of excellence”) could benefit from EIB/EIF involvement. Such clusters are premised on the idea that large firms, SMEs and research centres are combined in close geographic proximity in order to increase R&D collaboration and specialise in a specific technology area (e.g. aircraft engines). Financial and political investment in these clusters – specifically for pilot projects – is critical if defence firms are to commercialise their technologies, internationalise their business and benefit from the structural funds; smart specialisation is a pre-condition for access to structural funds. Such investment could have positive knock-on effects for regional skills development, the high-tech knowledge base and scientific/industrial interdisciplinarity.
However, while the Bank potentially offers a range of useful instruments, it would not be a panacea for Europe’s defence industry. Bank finances cannot fill the gaping holes in the defence budgets of member states, nor could they be used to maintain and acquire new military equipment and capabilities. The intrinsic nature of loans and investments is that they need repaying (with interest); defence, as a public good, does not always result in the kind of returns necessary to service loans.
There are some further, more specific, restrictions involving the EIB. Firstly, should member states want to draw on Bank loans they would still have to put up the other 50 per cent of the funds needed for EIB participation in projects over €25 million. These loans would also come with interest payments and expenses (legal costs, project-appraisal, etc.) which may drive up the costs of a loan. Secondly, the Bank takes seriously the EU’s principles on public procurement: equal treatment, non-discrimination and transparency. Despite the provisions of the EU Directive on defence procurement (2009/81/EC), this could be a big hurdle in the EU defence-sector where open procurement is not the norm. From August 2011 to March 2013, for example, the European Commission estimates that only 3 per cent of total contracts awarded under the procurement Directive were cross-border in nature.
Finally, loans made under the EIB are not free from political considerations. While the EIB is an independent institution, its shareholders are the member states. France, Germany, Italy, Spain, Sweden and the United Kingdom (Europe’s major defence-industrial players) contribute approximately 76 per cent towards the EIB’s capital base of €242 billion. These states are likely to be reticent about what EIB support will entail. Therefore, it is little wonder that heads of government dropped any reference to the Bank in the final conclusions of the December 2013 European Council on defence.
Nevertheless, despite the sensitivities and obstacles involved in drawing on the EIB for defence-industrial initiatives, there is still scope for the Bank to play a positive role. It is principally the European Commission, given its connections to the EIB and its 30 per cent stake in the EIF, that can make the case for greater involvement of the Bank in European defence. Building on its policies aimed at SMEs and regional smart specialisation, the Commission could investigate the ways in which the Bank might play a role in promoting economic knowledge, skills and innovation in the European defence sector.
LSE EUROPP Blog, 2014
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Relations with the Rest of the World: From Chaos to Consolidation?
Our 2012 review painted a picture of an EU pulled between a seemingly inexorable series of internal crises, on the one hand, and myriad external demands, on the other (Hadfield and Fiott, 2013). The year 2013 largely continued the theme of balancing slow-paced internal consolidation with increasingly demanding diplomatic requirements arising from within the Eastern Partnership, and specifically Ukraine. Despite the tentative recovery of the Eurozone, the challenges of confirming its own budget (the Multiannual Financial Framework, or MFF) and the continuing difficulties in its neighbourhood, the EU arguably gained greater confidence in diplomatic terms in 2013.
Journal of Common Market Studies, 2014, Vol. 52, No. S1
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Europe after the U.S. Pivot
Insofar as Europe’s security and cohesion have for decades been premised upon a strong American political and strategic engagement, Washington’s intention to “rebalance” to Asia casts a shadow over the sustainability of a stable and coherent geopolitical order on the continent. This article argues that as the United States seeks to rebalance strategically towards the Asia-Pacific region a number of “indigenous” geopolitical trends are becoming increasingly important in Europe: an Anglo-French entente for a “maritime” Europe, a German-French “continental” project of economic and political integration, and Russia’s resurgence across Europe’s East. The growing prominence of competing geopolitical visions for Europe might even call into question the cohesion and direction of the institutional expressions of the U.S.- engineered Western order in Europe, namely the Atlantic Alliance and the European Union. Increasing geopolitical and institutional contestation, we contend, pose a number of challenges for both U.S. interests and European security.
Orbis, 2014, Vol. 58, No. 3 (written with Luis Simón)
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The Juncker Commission and Europe’s Defence
The decision by the incoming President of the European Commission, Jean-Claude Juncker, to merge the internal market and industry portfolios under one commissioner is an intelligent move. Of course, it is not the first time this has been attempted. Some may recall that Étienne Davignon was the Commissioner for Internal Market, Customs Union and Industrial Affairs under the Jenkins Commission (1977-1981). Yet, from the perspective of Europe’s defence industrial policy – an area that was not well-developed when Davignon was in office – the decision could be incredibly important.
Firstly, Juncker has appointed a Pole, Elzbieta Bienkowska, as head of the super portfolio: ‘Internal Market, Industry, Entrepreneurship and SMEs’. Ms. Bienkowska has substantial government experience. Indeed, she previously served as Minister of Regional Development in Prime Minister Donald Tusk’s cabinet (2007-2013) and after this went on to become Deputy Prime Minister of Poland and continued in the same ministerial role, albeit of a renamed portfolio: ‘Infrastructure and Development’. More specifically, she also has previous knowledge of European Union (EU) structural funds and cohesion policy.
The decision to assign this important portfolio to a Polish national (and one from a liberal-conservative party) is indicative of the growing importance of Poland in the EU, and it also serves as a statement of intent that the completion of the internal market along liberal lines is a key priority for Juncker. The appointment of Ms. Bienkowska – should the European Parliament sign-off on the Juncker Commission – is bound to have been greeted with relish by the British, Dutch and German governments, at least on the overall objective of completing the Single Market. The fact that Ms. Bienkowska will work primarily with Vice-President Jyrki Katainen (another liberal-conservative) further underscores Juncker’s intent.
Indeed, in President Juncker’s mission letter to Bienkowska he states that her overarching aim is to ‘ensure that Europe maintains its global leadership in strategic sectors with high value jobs such as the automotive, aeronautics, engineering, chemicals and pharmaceutical industries.’ She is also tasked with ‘stimulating investment in new technologies, improving the business environment, easing access to markets and to finance, particularly for SMEs’. More specifically on defence-industrial policy, Ms. Bienkowska’s aim is to encourage ‘Member States to create more synergies and stronger cooperation in defence procurement in order to avoid duplication of national programmes and match resources to our foreign policy ambitions.’
This will be a change of perspective for Ms. Bienkowska, especially given that she was a government minister during the modernisation of the Polish Armed Forces and the re-structuring of Poland’s defence industry: which emphasised increased investments on research and development and exports. During this period of modernisation – which saw the Polish government commit approximately €33.5 billion (£26.4 billion; US$43 billion) to defence procurement – Poland had been a vocal critic of EU legislation on procurement. This is legislation which seeks to prevent member states from making use of offsets to favour national industry. While the country put into motion a new ‘EU friendly’ offset law on 7th July 2014, its immediate aim during the modernisation period was to ensure that defence contracts mainly went to local arms producers. As was reported in the Financial Times at the time, ‘the military’s goal is for Polish companies to eventually take an 80 percent share of incoming contracts, up from just over 50 percent at present.’ It is little wonder that the Polish government was quick to stress the importance of the intergovernmental European Defence Agency (EDA) rather than the European Commission in its 2013 Strategy of Development of the National Security System of the Republic of Poland 2022 (see specifically p. 24). As head of the internal market portfolio Ms. Bienkowska will be responsible for ensuring that all member states, including her own, abide by offset regulations – offsets are forbidden under EU law.
Some might say that the decision to fuse the internal market and industry portfolios was on the cards, especially when one considers Michel Barnier and Antonio Tajani’s efforts to work closely on defence industrial policy. It was at the request of Mr. Barnier and (now) MEP Tajani that a Commission ‘Defence Taskforce’ be established in order to better coordinate Commission initiatives aimed at bolstering the European Defence Equipment Market (EDEM) and the European Defence Technological and Industrial Base (EDTIB). Ms. Bienkowska’s ‘super portfolio’ will be an important step to further consolidate this trend, and it will be incumbent on the new commissioner to stress the strategic importance of the defence sector and to emphasise the essentiality of using internal market tools to support the sector.
Time will tell how effective Ms. Bienkowska’s team is in challenging the member states’ recourse to Article 346 (which allows a derogation from the treaties on national security grounds under strict conditions). It will also be interesting to see how, if at all, the Commission’s ‘roadmap’ on defence industrial policy will change in the run-up to the July 2015 European Council meeting on defence. A healthy relationship with High Representative/Vice-President (HR/VP) Federica Mogherini and the Chief Executive of the EDA, Claude-France Arnould, is also vital.
Other reshuffles and appointments under the Juncker Commission are interesting from a defence industry perspective too. The decision to merge transport and space may raise a few eyebrows. Under the Maroš Šefčovič – the former Commissioner for Inter-Institutional Relations and Administration – the task will be to ensure that space policy does not decouple itself from the wider strategic importance to areas such as internal market, industry, research and defence.
The decision to assign the ‘Research, Science and Innovation’ portfolio to the Portuguese Carlos Moedas is wise given his industry and economic expertise and experience. Nevertheless, it will be up to Mr. Moedas to deal with the sensitive relationship between research and defence. Research and development is crucial to the defence industry and the EU sits on sizeable amounts of funding for research, but the use of these funds for purely military projects has caused problems in the past.
Finally, the media coverage of Ms. Mogherini’s appointment as HR/VP has largely overlooked the fact that she will also become the new head of the EDA. The outgoing HR/VP did not really take to defence policy. Time will tell if Ms. Mogherini really does believe that ‘defence matters’. For the incoming HR/VP the main challenge will be balancing the interests of the EDA and the European Commission. These two institutions have historically been suspicious of each other, so perhaps the greatest gift the new European Commission could give to Europe’s defence industry would be to better manage relations between these two institutions.
The more cynically minded might, from a defence industry perspective, view the changes brought in under the Juncker European Commission as an exercise in merely ‘re-arranging the deck chairs on the Titanic’. Indeed, it can be reasonably argued that more than new appointments and super portfolios are needed to deal with the strained state of Europe’s defence industry. It is certainly true that the member states still ultimately hold the key to a more effective EDEM and EDTIB. Nevertheless, Juncker’s mantra is that he wants ‘the European Commission to be bigger and more ambitious on big things, and smaller and more modest on small things’. Over the next five years one will learn if Europe’s defence industry is a ‘big thing’ or a ‘small thing’.
European Statecraft, 2014 – By Daniel Fiott
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Defence R&D in Europe
Introduction
Research and Technology (R&T) and Research and Development (R&D) are critical ele- ments in the production of defence capabilities: without scientific and engineering inge- nuity, technological advances in the defence sphere cannot be made. R&T is the critical beginning phase in the development of defence capabilities. It is in the R&T phase that initial scientific modelling and applied science occurs, after which point the production phase moves into R&D, a phase where technologies are brought up to the testing and demonstrator levels and eventually transformed into finished products. R&T and R&D are not only critical for adapting traditional naval, air and land platforms for continu- ously evolving defence requirements, they also play an important role in developing new defence industrial capabilities related to Chemical, Biological, Radiological and Nuclear defence (CBRN), cyber, unmanned systems and nanotechnologies. Furthermore, spend- ing on defence R&T and R&D is important in order to retain highly skilled employees such as engineers and scientists, and not to lose them to the civilian sector or to competitors in third countries.
The role of governments in defence R&T and R&D is crucial. Indeed, defence firms tend not to have the capital resources or the appetite for the level of risk involved in defence R&T and R&D projects. The costs and risks associated with R&T and R&D derive from the fact that, unlike civilian markets, there are limited numbers of customers that can buy finished defence products. A lower number of end-users drives up R&T, R&D and per unit costs associated with each defence product. This is the reason why governments become critical in the investment phase, as not only are they typically the only end- users of defence products but they have a key role in defining the overall direction of R&T and R&D programmes based on defence requirements. Ministries of Defence are intimately associated with the R&T and R&D phases both as customers and investors. Defence budgets are used to help initiate R&T programmes and to deal with unforeseen costs that arise over the whole capability development cycle. Therefore, governments rather than firms take on much of the risk of defence R&T and R&D. The cost to the firm is usually that procurement contracts will involve profit caps and specific end-user requirements, although R&T may lead to the accrual of intellectual property rights and the ability to sell spin-off technologies in civilian markets.
This is not to diminish the importance of defence firms in R&T and R&D processes. While governments put up much of the investment and take on risk, defence firms have the scientific and industrial infrastructure to develop defence capabilities. R&T and R&D therefore involve a two-way process with, on the one hand, governments transmitting particular defence requirements to firms, but, on the other hand, firms setting the techno- logical and scientific parameters in which a specific defence capability can be developed. Such is the close relationship between governments and firms that in some cases defence firms may be able to anticipate the types of defence capabilities needed by governments. Major firms play a critical role in R&T and R&D processes, and SMEs – which tend to specialise in specific niche areas of production – are sources of innovation. Dedicated research institutes and universities play a vital role in the R&T phase too.
R&T and R&D cost significant amounts of capital investment, but there is increasing pressure on defence budgets in Europe at present. Governments are making the difficult choice of whether to invest in defence or to allocate more resources to civilian R&T and R&D. As Figure 1 shows, the tendency across the EU-28 since 2000 has been to allo- cate available R&D budgets to the civilian sector rather than defence. Indeed, the almost perfect correlation between civil-defence allocations can be noted; what is allocated to civilian R&D is deducted from defence R&D. The emphasis on civilian R&D might be reflective of the notion that the civilian sector is more internationally competitive than the defence sector. However, it is unclear how much civilian R&D spins into the defence sector and vice-versa. In the United States defence R&D has traditionally provided spin-off technologies for the civilian sector (e.g. GPS or the Internet), whereas in the EU there is a greater reliance on spin-in technologies that emerge from civilian R&D programmes with defence applications (e.g. aeronautics). While it is true that European defence markets are increasingly characterised by dual-use products, the lack of empirical data on the level of R&D cross-fertilisation (or lack thereof) between the defence and civilian sectors poses certain challenges for defence capability planning purposes.
As one can see from Figure 2 below, there has been a steady decline in the levels of government allocations to defence R&D as a percentage of overall outlays on R&D (GBAORD) by the EU-28 over the 2000-2013 period.2 This began with a notable downward trend in 2003. It should be noted that the EU-28 increased allocations between the 2011-2012 period (from 4.52% to 4.97%), but this would not see allocation levels return to their high peak in 2000 (at 12.95%). Therefore, over a twelve-year period the EU-28 has experienced a 7.98% decrease in total defence R&D budget allocations as a total of overall government R&D budget allocations. In contrast, the United States has the highest levels of total budget allocations, although it experienced a dip in 2009 and a downward trend since 2010. Canada has maintained stable levels of defence R&D budget allocations, albeit at a lower level than the EU-28, the United States, the Republic of Korea and Japan in certain years.
The EU-28’s downtrend is reflected in some of the individual figures of European coun- tries. As Figure 3 highlights, Spain has witnessed the most severe downward trend in defence R&D budget allocations – from 26.2% in 2000 to 3.7% in 2012 (a decrease of 22.5% over a twelve-year period). France and the United Kingdom have also witnessed sizeable decreases in allocations. France witnessed a 15.1% decrease from 2000 to 2013, and the UK experienced a sharper decrease of 19.8% over the 2000 to 2012 period. After a progressive increase in allocations from 2000 to 2002 (a 7.51% increase in the space of two years), Sweden’s allocations have reduced to levels close to that experienced in 2000 (7.1% in 2000, 8.1% in 2012). Although at a traditionally lower level of allocations than France, Sweden and the UK, Germany has also experienced a downward trend in its al- locations over the 2000-2013 period.
While it is true that EU member states are cooperating through mechanisms such as the EU Framework Programmes and the European Defence Agency (EDA), collabora- tive R&T and R&D programmes at the European level – which could potentially plug spending gaps and reduce costs – have also experienced spending decreases. Figure 4 illustrates the overall level of European collaborative defence R&T, and the overall level of investment in R&D (including R&T) as a percentage of total defence expenditure among the 27 participating member states of the EDA. Investment levels in R&D have remained stable over the 2006 to 2011 period, but there was a drastic decrease in invest- ments with levels falling from 4.1% in 2011 to 2.5% in 2012. The total level of European collaborative defence R&T has been in decline since 2008, and from a high in 2008 of 16.6% the level fell to 7.2% in 2012 (a decrease of 9.4%).
EUISS Yearbook of European Security 2014
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One Size to Fit All? Setting Standards for European Defence
Abstract
While the crisis in Ukraine may contribute to a revision of defence expenditures in a number of European countries, the task of finding the right balance between cost-effective and strategically-relevant defence spending in Europe is still critical. As defence expenditure generally remains in decline across Europe, a range of innovative measures to ensure that defence budgets are spent more efficiently and effectively are being devised. One such measure – being pursued by the European Defence Agency (EDA) and the European Commission – is the greater standardisation of defence equipment in the European Union. Yet the European defence market is fragmented, paradoxically resulting in higher costs for national treasuries. At present, it is characterised by a plethora of national standards: national defence establishments and industries have become used to catering for their own military needs.
EUISS Policy Brief, 2014, No. 13
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Reducing the Environmental Bootprint? Competition and Regulation in the Greening of Europe’s Defense Sector
As part of the European Union’s (EU) renewable energy and climate targets and its drive for sustainability, energy efficiency, and environmental protection, various elements of the defense sector in Europe are undertaking their own green initiatives. This is particularly important as the defense sector is one of the biggest public consumers of energy in the EU. This article asks to what extent, how, and why elements of the defense sector in Europe have engaged in greening. By examining four categories in a relevant typology of greening—ceremonial greening, holistic greening, regulatory greening, and competitive greening—this article argues that the defense sector in Europe is far from being a holistic green actor. Rather, Europe’s militaries, defense institutions, and defense firms exhibit a strong sense of self-interest in greening—embodied in defense market competition and regulation—and tend toward delegating green innovation to the market within an increasingly regulated context.
Organisation & Environment, 2014, Vol. 27, No. 3
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No TTIP-ing Point for European Defence?
Abstract
The EU-US Summit on 26 March will mark eight months since the partners decided to formally launch negotiations on a Transatlantic Trade and Investment Partnership (TTIP). The aim of the TTIP – if finalised – is to remove tariffs, align regulatory standards and open up government procurement. Born out of the need to boost economic growth on both sides of the Atlantic and to respond to the rise of emerging markets, the Partnership will add an extra €120 billion to the EU economy annually, according to estimates by the European Commission. While President Obama’s first visit to Brussels will likely be dominated by an agenda focusing on Ukraine and economic recovery, it is also worth thinking about some of the more sensitive areas involved in the TTIP discussions. One such area relates to defence industry and markets. Back in June 2013, public procurement of defence and security goods was included in the Commission’s negotiating mandate. Given the sensitive nature of defence procurement, however, both sides have, for the time being, agreed to drop a ‘defence TTIP’.
This situation is indicative of a broader negotiating environment that has seen a moratorium on including an investment chapter in the Partnership and other sectoral exclusions. Therefore, at first glance, the TTIP’s overarching aims of abolishing tariffs, enhancing the compatibility of the EU and US regulatory environment and ensuring a greater flow of goods, services and investments in the transatlantic space will not apply to the defence sector. But is this necessarily the end of the story?
EUISS Policy Brief, 2014, No. 19
Introduction
The EU-US Summit on 26 March will mark eight months since the partners decided to formally launch negotiations on a Transatlantic Trade and Investment Partnership (TTIP). The aim of the TTIP – if finalised – is to remove tariffs, align regulatory standards and open up government procurement. Born out of the need to boost eco- nomic growth on both sides of the Atlantic and to respond to the rise of emerging markets, the Partnership will add an extra €120 billion to the EU economy annually, according to estimates by the European Commission. While President Obama’s first visit to Brussels will likely be domi- nated by an agenda focusing on Ukraine and eco- nomic recovery, it is also worth thinking about some of the more sensitive areas involved in the TTIP discussions.
One such area relates to defence industry and markets. Back in June 2013, public procurement of defence and security goods was included in the Commission’s negotiating mandate. Given the sensitive nature of defence procurement, however, both sides have, for the time being, agreed to drop a ‘defence TTIP’. This situation is indicative of a broader negotiating environment that has seen a moratorium on including an investment chapter in the Partnership and other sectoral exclusions. Therefore, at first glance, the TTIP’s overarching aims of abolishing tariffs, enhancing the compatibility of the EU and US regulatory environment and ensuring a greater flow of goods, services and investments in the transatlantic space will not apply to the defence sector. But is this necessarily the end of the story?
The dual-use conundrum
In today’s defence markets it is no longer possible to speak of purely ‘defence’ goods and technologies, with dual-use goods and technologies increasingly blurring the lines between the defence and civilian sectors. In order for finished plat- forms (such as jet fighters, aircraft carriers and armoured vehicles) to function, componentry made in the civilian sector is essential. Accordingly, de- fence procurement contracts are just as likely to involve electronics firms as they are system inte- grators. The semantic confusion caused by this blurring may therefore still see, albeit indirectly, a number of defence-relevant goods and technolo- gies fall under the provisions of a future TTIP. As just one example, while it is unlikely that attack helicopters will directly fall under the provisions of the TTIP, on-board technologies sourced from the civilian sector (such as sensor equipment and landing gear) may well be included.
Firms and governments may view the removal of tariffs on defence-related civilian goods and technologies as a positive outcome of the TTIP negotiations. However, the removal of tariffs would mean relatively little in the face of remaining non- tariff barriers. For example, despite recent moves by the US government to ease market entry for certain third-countries, the ‘Buy America Act’, the ‘Berry Amendment’, the Committee on Foreign Investment in the US and the International Traffic in Arms Regulations (ITAR) continue to serve as barriers to defence market access.
Based on the premise of national security, the ITAR in particular makes it difficult for US exporters to trade their defence products with third-countries. Yet, under the ITAR, the US government has the power to move goods that are presently classified under the ‘munitions list’ (USML) to the ‘commer- cial list’ (CCL). This process has already begun, with the US government relaxing ITAR controls on satellite components and technologies in 2012. While the USML items would not be covered by any future TTIP as it currently stands, items under the CCL could become subject to the TTIP provisions. Moving items from the munitions list to the commercial list could thus ease US exports to the EU and other countries around the globe.
What is more, while the US could ease export restrictions on their own firms, the country could still use its non-tariff barriers to hamper market access for third-countries. This is not to say that European firms are completely barred from the US market: through a Special Security Arrangement, European firms can operate in the US – albeit under strict conditions. There are also several ex- amples of European firms breaking into the US market and making sizeable sales. For example, BAE Systems recently sold two naval gun systems worth $20 million to the US Navy and Coastguard. Despite such success stories, the TTIP in its present form will not remove existing regulatory barriers and European firms wishing to gain a foothold in the US market will continue to face familiar dif- ficulties.
The situation outlined above could potentially af- fect the more than 1,350 small and medium-sized enterprises (SMEs) that operate in the European defence sector. These SMEs trade almost exclusively in dual-use goods and technologies. While a TTIP could make it easier for European SMEs to export defence-relevant civilian goods and technologies to the US market, US firms already have a competitive advantage over their European counterparts. For example, SIPRI calculates that between 2000 and 2012, ten EU member states exported a total of $4.4 billion worth of major conventional weapons to the US, whereas the US exported $21.8 billion to twenty-six EU member states. While European SMEs are good sources of innovation, they tend to lack the critical mass needed in terms of capital investment and R&D resources to be able to compete in the US market.
TTiP-ing the balance?
The TTIP may therefore have an indirect, if important, effect on the European defence industry. While tariffs may be removed on a host of defence-related civilian goods and technologies, non-tariff barriers may still be used to impede im- ports and facilitate exports. The term ‘dual-use’ may allow for sufficient flexibility to re-label ‘defence’ goods as ‘civilian’ and move them under the TTIP umbrella. This would allow the most valuable elements of the proposed TTIP to be re- tained, whilst also using the exclusion of defence from the TTIP negotiations to use non-tariff bar- riers in a strategic manner. The consequences of this scenario are still unclear for Europe’s defence industry, and particularly for the mass of defence- relevant SMEs.
Whether or not the TTIP moves forward, and aside from the direct or indirect impact it could have on Europe’s defence markets, the debate may reveal a more germane point about the state of defence-industrial policy in the EU today. Indeed, the increasing competition from the US and other emerging markets, and the depression in defence expenditure in Europe, beg some serious ques- tions. One could begin by asking what the ‘E’ in the EDTIB (European Defence Technological and Industrial Base) actually represents.
If preserving and defending the EDTIB means boosting the competitiveness of Europe’s defence firms through market openness, then it must be conceded that non-EU firms may also set foot and gain ground in the European market: would these firms then be part of the EDTIB? If the EDTIB is viewed as a means to sustain high-skilled employment in the Union and to promote European capability development programmes that have a positive knock-on effect on jobs, growth and R & D investment, the answer is likely to be yes. Conversely, if ‘national’ champions (or SMEs, for that matter) move business outside the EU – for whatever reason – would these still be considered part and parcel of the EDTIB?
At any rate, the prospect of a TTIP may force Europeans to finally address long-standing de- fence market fragmentation. The July 2012 Commission Communication and the December 2013 EU Council are steps in the right direction, but the uncertain effects of – and the potential opportunities contained in – the TTIP may yet serve as a further catalyst for progress.
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An Industrious European Council on Defence?
The December 2013 Council meeting set in motion a number of important “roadmaps” for defence-industrial policy in Europe. Now the member states, the European Defence Agency and European Commission need to be aware of the potential roadblocks ahead.
Egmont Institute, 2014, No. 53
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The State of Defence in Europe: State of Emergency?
When a doctor calls for a thorough examination of the state of a patient’s health, he hopes that everything will turn out to be alright, but it really means that he fears there is a serious problem. Likewise, when Herman Van Rompuy called for the European Council of which he is the President to examine “the state of defence in Europe”,1 he was asking for more than a routine check-up. In this joint Egmont Paper, the Institute for European Studies of the Vrije Universiteit Brussel and the Egmont Institute offer their diagnosis. In the opening essay, Claudia Major and Christian Mölling cannot but conclude that “the state of defence in Europe” is nearing the state of emergency. The “bonsai armies” that they fear we will end up with are nice to look at – on the national day parade for example – but not of much use.
In addition to the diagnosis though, we also want to propose a treatment. The method of examination proposed by Van Rompuy already hints at an important part of the cure. The fact is that we never examine “the state of defence in Europe”. We assess the state of the EU’s CSDP, of NATO’s military posture, and of course of each of our national armed forces. But we never assess Europe’s military effort in its entirety. In fact, we are unable to, simply because there is no forum where we set capability targets for “defence in Europe”.
On the one hand, we pretend that it is only a specific separable (and, in the minds of many capitals, small) part of our armed forces that can be dedicated to the CSDP and the achievement of its Headline Goal, the capacity to deploy up to a corps of 60,000.2 That is of course a theoretical fiction: in reality any commitment to either the CSDP or NATO or both has an impact on our entire defence budget and our entire arsenal. A decision to invest in an air-to-air refu- elling project through the European Defence Agency for example implies that that sum cannot be spent in another capability area of importance for the CSDP or NATO or, usually, both, whereas once delivered the resulting air-to-air refu- elling capability will be available for operations in either framework. Schemes to encourage states to join capability efforts, like the EU’s Pooling & Sharing and NATO’s Smart Defence, obviously can only make the most of opportunities to generate synergies and effects of scale if all arsenals are taken into the balance in their entirety. On the other hand, the NATO Defence Planning Process (NDPP) supposedly does encompass (nearly) the whole of our forces, but it sets targets for individual nations in function of the targets of the Alliance as a whole, and does not separately define the level of ambition of NATO’s European pillar even though it becomes increasingly likely that the European Allies will have to act alone.
We are thus confronted with a curious situation. In political terms it continually is “Europe” that we refer to and expect to act. Even the US has sent a clear message to “Europe” that it should assume responsibility for the security of its own periphery and initiate the response to crises. “Europe” for Washington can mean the European Allies acting through NATO, or the EU acting through the CSDP, or an ad hoc coalition of European states. Washington really no longer cares under which “European” flag we act, as long as we act and the problem is dealt with without extensive American assets being drawn in. As Luis Simón points out in his essay, the US is ‘geared towards figuring out how to get the most “bang” out of a “low cost” and “light footprint” approach to European security’. In terms of defence planning however, “Europe” does not exist. If he succeeds, Van Rompuy is to be congratulated for bringing it into being.
Defining Europe
A call to look at “the state of defence in Europe” thus implicitly is a call to define a level of ambition for “Europe”, against which the existing capabilities can be assessed, shortfalls identified, and priority objectives defined. As the High Representative, Catherine Ashton, states at the outset of her Final Report Preparing the December 2013 European Council on Security and Defence, this ‘warrant[s] a strategic debate among Heads of State and Government. Such a debate at the top level must set priorities’.3 Put differently, the key political ques- tion that the European Council needs to address, before it can address any mili- tary-technical question, is for which types of contingencies in which parts of the world “Europe”, as a matter of priority, commits to assume responsibility, and which capabilities it commits to that end. On the basis of the answer to that question all other dimensions of the European Council’s broad defence agenda can be tackled – absent that answer, Europe’s defence effort will still be left hanging in the air. It is often said for example that “Europe” needs its own strategic enablers, such as air-to-air refuelling and ISTAR. But to be able to do what? Air-policing in the Baltic? Air-to-ground campaigns in the Mediterranean? Or even further afield? And at which scale? Without an answer to such questions, it is impossible to design a sensible capability mix and decide on priority capability projects.
Yet, who is “Europe”? Who can define the level of ambition that serves as polit- ical guidance for operations undertaken and capabilities developed by Euro- peans through both NATO and the CSDP? Again, we are facing the same problem that there is today no institutionalised venue where Europeans can take decisions about their posture in NATO and the CSDP simultaneously – it is always either/or. Under these circumstances, the European Council is the best option. It is of course an EU body, but they are our Heads of State and Govern- ment, meeting in an intergovernmental setting, adopting not binding law but political declarations, and that by unanimity. Surely they, if anybody, have the legitimacy to declare that they will consider the political guidance which they agree upon to guide their governments’ positions in both NATO and the CSDP?
Politically, “Europe” can either mean each and every European state, or an ad hoc coalition of some of these states, or, when they make foreign and security policy together (which alas they do not do systematically enough), the EU. In political terms, “Europe” neither means the CSDP nor NATO: these are instru- ments, at the service of the makers of foreign and security policy. Instruments, moreover, both of which “Europe” is more likely to use in the near future than the US, in view of the “pivot” of its strategic focus to Asia. If Washington no longer takes the lead in setting strategy towards Europe’s neighbourhood, the only alternative actor is Europeans collectively, i.e. the EU (for individually, no European state can defend all of its interests all of the time). The European Council thus really is the best placed to address “the state of defence in Europe”.
This does not in any way prejudice how, in a real-life contingency, “Europe” will undertake action: using NATO, the CSDP, other EU instruments, the UN, ad hoc coalitions or a combination thereof. Indeed, if action entails larger-scale combat operations, “Europe” will need the NATO command & control struc- ture, which is its main asset. According to Jamie Shea, ‘NATO’s choice, there- fore, will be to focus on high-end operations built essentially around a conventional military core structure and organised through an integrated command system’. The best way to make sure that all instruments are put to use in an integrated way, from the planning of any type of action to the post-action and long-term involvement, is to politically put any intervention under the aegis of the EU, even when acting under national or NATO command in the case of military involvement. The fact is that in almost every scenario, the European Commission and the EEAS will either from the start or eventually have to take charge of the political, economic and social dimension, regardless of how we address the military dimension – better to integrate all from the beginning thereunder the political aegis of the Union. Furthermore, that flag still is much less controversial whereas there always are countries and regions in which it is advised not to operate under specific national flags or the NATO-label.
Egmont Institute, 2013, No. 62 (edited with Sven Biscop)
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Daniel Fiott 
