Not flashy but effective: Closer EU co-operation in defence investments

This month, European leaders will discuss how to strengthen EU military co-operation. It is the first time that defence has been on the European Council’s agenda since 2008 and EU officials had hoped the member-states would unveil bold initiatives to stem the deterioration of their armed forces. But governments remain wary of ambitious joint efforts in defence. So the best that can be hoped for is that the Council will endorse EU military reforms which are relatively modest, but easier for member-states to support. One of these should be closer co-operation in regulating private investments in European defence companies – somewhat technical and unspectacular but nonetheless useful.

European governments acknowledge that the case for EU defence collaboration is even stronger today than it was when France and the UK launched the Common Security and Defence Policy (CSDP) fifteen years ago: the US will not always be able or willing to help Europeans stem violence in their neighbourhood, so European states must be capable of upholding regional security alone. And EU countries could save money through closer co-operation amongst their armed forces, and by more integration between their fragmented defence markets.

Over the last decade and a half, however, EU states have often disagreed about which parts of their neighbourhood threatened their security and how to respond. Many governments have been averse to putting their troops in danger. They have also been wary of pooling military capabilities without knowing where or how the equipment would be used. And since the outbreak of the economic crisis, governments have also worried that voters would be angry if they funded large joint equipment programmes when ministries of defence are cutting civilian and military personnel.

As a result, EU defence co-operation has struggled. Member-states have deployed under the EU flag 29 times. But many of the missions have been civilian operations. At times, the security restrictions EU states have imposed on their personnel have hampered operations’ effectiveness. Recently, for example, some of the staff from an EU mission designed to help the Libyan authorities improve border security were evacuated to Malta because of concerns about their safety. 

The EU published a security strategy in 2003 (and updated it in 2008) in which governments committed to tackle global threats together. But member-states have not paid the strategy enough attention or based national defence planning on it. The European Defence Agency (EDA) has helped member-states improve some of their capabilities, by providing helicopter pilot training for example. But EU countries continue to do much of their maintenance and logistics alone. The EU has introduced rules to make it easier for governments to use competition to drive down prices when buying defence equipment, and to reduce the bureaucracy needed to send military equipment to the armed forces of another member-state. But many equipment programmes are still inefficiently duplicated across the EU. For example, according to the European Commission, there are 11 suppliers of frigates in the EU. Even Europe’s largest defence companies remain relatively small, limiting their ability to reduce costs through economies of scale and to be more innovative. The average American aerospace firm is over 20 times bigger than top EU companies. The challenge for the EU is to find the sweet spot between an oligopoly of suppliers who can raise prices at will, and a proliferation of niche manufacturers serving national markets, whose high unit prices reflect short production runs.

If EU governments want to boost their contribution to international security without increasing their defence spending, they will have no choice but to overcome their various aversions to closer European co-operation. As the CER’s Ian Bond argues, member-states ought to base their co-operation on a common security strategy. Otherwise they will continue to disagree on where to deploy, and refuse to own military equipment in common. But as the last 15 years attest, it will take time for EU states to forge a common military culture. So in the meantime, EU governments should exploit those collaborative measures which are relatively easy to introduce.

One example would be harmonising the system for regulating domestic and foreign investments in their defence companies. Large shareholders can influence a firm’s decisions and access sensitive information, so government checks on investors are essential to national security. But rigid and excessive state controls can unnecessarily restrict the ability of European defence firms to access capital. In France, an EU country with particularly cumbersome controls, the government can investigate attempts by foreign investors to acquire more than a 33 per cent stake in any French defence firm. The state also controls its defence industry through golden shares – enabling it to bloc acquisitions of more than 10 per cent of shares in Thales. And the government itself is a large, and sometimes exclusive, shareholder in several defence firms. In contrast in Sweden, where investment safeguards are lighter, the state has no equity or golden shares in Swedish defence companies. According to former US official Jeffrey Bialos, foreign investors need merely to receive the government’s approval in order to buy a Swedish defence firm (and the CEO must remain Swedish).

As the CER has argued in the past, EU states could streamline their controls on investments in defence companies by relying primarily on ministerial committees instead of inflexible rules and government ownership. As these committees draw on advice from officials and independent experts to examine investment requests on a case by case basis, they reduce the risk of blocking investors unnecessarily.

As a safeguard for the interests of other member-states, EU governments could also make it a legal requirement to consult each other before accepting a sizeable domestic or foreign investment in one of their defence firms. An investment in one EU state could adversely affect another country’s security of supply. For example, the German army might rely on radios produced by a company in Sweden. Deployed German troops could be put at risk if new owners of a Swedish firm decided to stop producing such equipment. The six European countries with the largest defence budgets are already committed to consult each other on such matters. And the EDA has been encouraging all EU member-states to do so. But according to EU officials, governments still rarely check with their neighbours. Legally-binding commitments would change that.

In preparation for the European Council, the European Commission has proposed that it should identify shortfalls in national controls on defence industries and explore options for an EU-wide monitoring system for investments. EU heads of state and government should encourage the Commission to pursue its proposal in close co-operation with the EDA, in order to avoid any duplication of efforts.

Not all European governments yet feel ready to jointly own fleets of drones, or rely on other countries to provide minesweepers for the entire EU. But it would be a missed opportunity if leaders did not use the December European Council to improve the workings of the European defence market in ways that do not require large sums of money or even shared security priorities.

Clara Marina O’Donnell is a senior fellow at the Centre for European Reform and a non-resident fellow at the Brookings Institution