COMMISSION PROPOSES EU DEFENCE FUND AS “CRUCIAL STEP” TO BOOST DEFENCE INDUSTRY

To counter the ill effects of market fragmentation and disparity of national defence expenditure, the EDAP suggests to strengthen the European Defence Single Market, reduce duplications in Member States’ defence spending and improve the competitiveness of the European defence industry.

In order to achieve that, the Commission says it is ready to engage at an “unprecedented level” in defence to support Member States and to exploit for that purpose “all EU instruments, including EU funding, and the full potential of the Treaties, towards building a Defence Union”.

Lending EU support to collaborative defence projects will not only help to achieve “a more efficient use of public money” but also lead to a stronger industrial base which is a key prerequisite for implementing the new level of defence ambition set out in the EU Global Strategy (EUGS) which identified a number of defence capability priority areas in which Europe needs to invest and develop collaborative approaches. “For Europe to be able to deliver on these capability priorities, it must create the conditions for more defence cooperation to maximise the output and the efficiency of defence spending. This should go hand-in-hand with a strong, competitive and innovative defence industrial base”, is stated in the EDAP.

In other words: a stronger EU defence with an appropriate level of strategic autonomy can only be built on the foundations of a competitive defence industry able to deliver the capabilities needed.

EDA expected to act as a “pivot”

The Commission is conscious that the EDAP cannot work in isolation but that “strong support from the Member States and EU Institutions will be required to realise its full potential”.

Federica Mogherini, the EU’s High Representative for Foreign and Security Policy, Vice-President of the Commission and Head of the European Defence Agency (EDA), also insisted on the importance of making sure the various stakeholders work hand-in-hand to accomplish the same objective: a stronger and more efficient European defence. “The European Defence Agency will have a key role in supporting and coordinating this work, acting as a pivot between Member States and the Commission”, she said in her recent speech at the 2016 EDA Annual Conference (see pages 31-38). “It will be important to work together - the [European] Commission, the Council, the European Defence Agency - that is one of the frameworks in which we can develop this cooperation”, she added when presenting the EDAP to the press on 30 November, together with Commission Vice-President Jyrki Katainen and Commissioner Elżbieta Bieńkowska. Under these conditions, “the European Defence Action Plan can become a game changer for more European defence cooperation and greater solidarity between Member States”, the Commission stressed.

Furthermore, the EDAP is not only closely linked with the EUGS but also with the implementation of the EU-NATO Joint Declaration (on which the EU Council adopted implementation conclusions on 6 December, see our ‘News’ section on page 5), because the actions proposed in the EDAP will lead to a stronger European Union in defence, “which ultimately means a stronger NATO”.

European Defence Fund

The EDAP, proposed to Member States on 30 November and welcomed by EU Heads of State and government at the 15 December European Council meeting (see box below), consists of four main pillars, namely: - launch of a ‘European Defence Fund’; - fostering investments in defence supply chains; - reinforcement of the EU single market for defence; - and promotion of civil/military synergies within EU policies “wherever possible”.

The most groundbreaking, ambitious and probably also challenging proposal in the EDAP is certainly the setting up of a European Defence Fund which would consist of two distinct financing structures ('windows'):

• research window’ to fund collaborative defence research projects at the EU level. This would be developed through the launch of a Preparatory Action on defence research and should lead to a dedicated EU programme in the post-2020 EU multiannual financial framework.

• capability window’ to support the joint development of defence capabilities commonly agreed by Member States. This would be financed through the pooling of national contributions and, where possible, supported by the EU budget.

Research window: funding collaborative defence R&T

It is common ground that defence research is key to safeguarding the long-term competitiveness of the defence sector and, ultimately, Europe's strategic autonomy which has been identified as an objective in the new EU Global Strategy. Nevertheless, defence R&T expenditure has seen significant cuts in national budgets: -27% between 2006 and 2013 in the 27 EDA Member States, with no compensation by greater cooperation because over the same period, collaborative defence R&T has also decreased by more than 30%. Against this background, the Commission is now ready to mobilise EU funds to support defence research at the EU level - a ‘first’ since defence was so far excluded from the EU’s research programme - through the Preparatory Action (PA) which will be launched in mid-2017 with a budget of €90 million for the period 2017-2019. The initial budget 2017 is €25 million.

The Preparatory Action will test the added-value of the EU budget supporting defence research. The Commission intends to conclude a delegation agreement with the EDA for its practical management and implementation The Preparatory Action will focus on a limited number of key research projects linked to defence capability priorities agreed by Member States.

Eventually, the Preparatory Action will pave the way for the ‘research window’ to take the form of a European defence research programme within the next multiannual financial framework post 2020 for which the Commission will “propose a dedicated defence research programme with an estimated amount of €500 million”. This amount would place the EU among the top 4 of defence research and technology investors in Europe.

Capability window: financing the joint development of defence capabilities

Besides research, the Commission also sees the need to ensure support for the whole development cycle of defence capabilities because Member States continue to face important obstacles (lack of coordination, joint capability planning and budget synchronization, etc.) hampering the development of collaborative programmes. The ‘capability window’ of the Fund would seek to address these obstacles through joint financing of the development and procurement of strategic capability priorities. These would be jointly agreed by Member States and could include dual-use priorities which are relevant to the implementation of EU policies. The window would focus on the post-R&T phases, including prototypes as well as the development and procurement of products and technologies

The Commission estimates that €5 billion/year could serve as an objective amount for the Fund’s capability window. “This would correspond to 2.5% of total national spending on defence within the EU and to 14% of national spending on defence capabilities. It would also fill the gap towards the target agreed by EDA's Member States to spend 35% of their equipment spending in collaborative projects”, the Commission explains.

The development of joint capabilities would be financed through the pooling of contributions from Member States deciding to participate. This will ensure their sustained co-financing over time. Each contribution would be confined to individual projects, which would be defined ex ante by participating Member States. The projects would hence be financially independent and limited in time as well as in size, thus excluding any form of financial cross-liability between projects. National capital contributions to the capability window will be treated as ‘one-offs’ under the Stability and Growth Pact meaning that they will be discounted from the structural fiscal effort expected to be accomplished by Member States.

The Commission said it was ready to “explore all financing options from the EU budget to the capability window, in accordance with the Treaties” and to support it with its financial and technical expertise. “Member States' experience and ongoing work in the context of EDA for the creation of a Cooperative Facility Mechanism should also be taken into account”.

The specifics of the capability window will need to be developed further in close cooperation with Member States, the High Representative, including in her capacity as Head of the EDA and other relevant stakeholders, it stressed. Despite the uncertainties remaining around the European Defence Fund, the Commission trusts it will be a “crucial step to support the competitiveness of the European defence industry”.

Fostering investments in defence supply chains

The second EDAP pillar is devoted to helping the defence industrial base to remain innovative and competitive. A particular emphasis is put on helping small and medium-sized enterprises (SMEs), which in many Member States remain the backbone of the national defence, to gain access to finance. Representing the most vulnerable part of the defence supply chain, SMEs constantly require fresh capital for new investments but mostly do not benefit from the necessary funding to further scale up, which ultimately hinders them to successfully integrate into the defence supply chains.

A change in the way the European Investment Bank (EIB) lends money to defence producers - especially SMEs - could help alleviate the problem. The Commission will therefore ask the EIB to adapt the lending criteria to the defence sector which would unlock new opportunities for certain parts of defence supply chain, notably SMEs. This could also have positive spill-over effects: EU financial instruments which are based on EIB lending, for example the European Fund for Strategic Investment (EFSI) or the Programme for the Competitiveness of Enterprises and small and medium-sized enterprises (COSME), could help in dual-use defence-related activities.

Another EDAP proposal is to strengthen the support of EU funds to investment in defence. European Structural and Investment Funds (ESIF), for instance, may be used by Member States in the defence sector as long as they contribute to the objectives of the fund. Therefore, the Commission said it will promote co-financing through the ESIF of productive investment projects and modernisation of the defence supply chains in the defence sector “provided that the investment strengthens economic, social and territorial cohesion”.

Strengthening the single market for defence

The logic behind the third main EDAP proposal - to make progress towards a genuine single market for defence - is plausible: more competition and a greater openness of the defence market in Europe will help suppliers to achieve economies of scale, optimise production capacities and lower unit production costs, thus making European products more competitive on the global market.

Were they fully applied (which is not the case today), the two EU directives on defence procurement and on EU transfers could make a significant contribution to achieving this goal. The Commission considers both directives “broadly fit for purpose” with no legislative amendment necessary at this stage. “However, they also identify a number of shortcomings that need to be addressed”, it says. The Commission will therefore focus on their “effective implementation (…) including through enforcement”. It will clarify the interpretation of specific provisions of the defence procurement directive through the adoption of guidance notices in 2017-18 and adopt recommendations for a harmonised functioning of General Transfer Licences in the first quarter of 2018.

Other support measures are planned, for instance to strengthen security of supply. The Commission will therefore support the initiative of Member States, through the EDA, for a political commitment to facilitate transfers of defence-related commodities and to provide mutual assistance in times of crisis.

Maximising civil-military synergies across EU policies

The 4th pillar of the Action Plan consists of measures aimed at increasing the coherence and synergies between defence issues and other EU policies. The recently adopted European Space Strategy is one example where this should be possible. Indeed, space services can also strengthen the EU’s and Member States’ capacity to tackle growing security challenges. The Commission will therefore seek to maximise synergies and complementarity with relevant activities of the EU Satellite Centre in the area of space security and defence.

Governmental satellite communications (SATCOM) is another field where civil-military synergies have huge potential. The Commission, in cooperation with the High Representative, the EDA and the European Space Agency, will launch an initiative to ensure reliable, secured and cost-effective satellite communications services for EU and national authorities managing security critical missions and infrastructures by the end of 2017. Regarding EU cyber policies, the Commission pledges to cooperate with Member States, the High Representative and relevant EU bodies (including the EDA) to establish a cyber-training and education platform to address the current skills gap in cyber security and cyber defence by 2018. In the field of aviation, “the civil-military coordination mechanism between the EDA, the European Aviation Safety Agency and the SESAR Joint Undertaking should help to better exploit the results of military research activities in the context of the SESAR 2020 programme and the associated safety rules and standards”. In the maritime field, the Commission will - in cooperation with the High Representative, EDA and Member States - develop specific actions to support a coordinated civil military maritime security research agenda and interoperable maritime surveillance capabilities.

EDAP follow-up

The Commission will, in close cooperation with Member States and the High Representative, “including in her capacity as head of EDA”, set up an EDAP Implementation Steering Group, meeting on a regular basis, to monitor and facilitate progress in the actions. A first meeting will take place in the first quarter of 2017. It will also establish a consultation forum with the European defence industry to best align the supply and the demand sides.