B. THE EUROPEAN DEFENSE FUND: A MAJOR TURNING POINT THAT REMAINS TO BE CONFIRMED
“The European Defence Fund aims at fostering the competitiveness and innovativeness of the Union's defence technological and industrial base by supporting defence-oriented R&D activities.” 42 ( * )
“The general objective of the Fund is to foster the competitiveness, efficiency and innovation capacity of the European defence industry, by supporting collaborative actions and cross-border cooperation between legal entities throughout the Union, including SMEs and midcaps, as well as fostering the better exploitation of the industrial potential of innovation, research, and technological development at each stage of the industrial life cycle, thus contributing to the strategic autonomy of the Union. The Fund should also contribute to the Union's freedom of action and autonomy, in particular in technological and industrial terms.” 43 ( * )
1. Rationale and context for the creation of the European Defence Fund
It is the general consensus of the persons heard by your rapporteurs that the creation of the European Defence Fund (EDF) constitutes a major turning point for European defence. It would be useful to take a look back at its origins, which show the importance of this development, and also to locate this tool within the broader whole of what one interviewee referred to as a “ European defence dynamic. ”
This new dynamic is based on three pillars :
• a political pillar : PESCO ;
• a capability pillar : the Capability Development Plan (CDP) developed by a joint effort of the EDA and the Member States. In this context, 11 capability priorities were approved in June 2018, to cover the entire capability spectrum on the pan-European level for the first time. Each of the capability priorities is the subject of a “Strategic context case,” which serves as a blueprint to allow the preparation of an overall assessment and the identification of possible actions to be carried out in cooperation. The first version of these Strategic Context Cases was to be approved by Member States before the summer;
• a budgetary pillar , initially built around a Preparatory Action on Defence Research ( PADR ) for R&T; and a European Defence Industrial Development Programme ( EDIDP ) for R&D. These two measures will then be taken over by the EDF starting in 2021.
a) The political rationale for the creation of the EDF
The EDF was created upon a proposal by the European Commission. The idea was presented for the first time in a speech by President Juncker in 2016. Several contextual elements doubtless played a role in the emergence of this project:
- on the one hand, there is the new course taken by the United States with the election of a president who has appeared to question the American guarantees provided under Article 5 of the Washington Treaty (regarding Montenegro, in a televised interview of July 2018);
- on the other, there is the rise of threats on the eastern and southern fronts, and the general context of a weakening multilateralism;
- thirdly, there is the prospect of the UK's exit from the European Union, which has produced a shockwave in defence matters because of the essential role of this country in the continent's security architecture;
- and lastly, the increasingly aggressive opposition to the European Union and its institutions by European populist movements , which culminated with Brexit, has doubtless justified the European Commission taking a turn back to basics, since the primary objective of building European integration after all was to protect the peoples of Europe against war. This goal having been achieved with regard to relations between European countries, it has naturally come about that the European Union is now concerned with protecting Europeans against external threats.
b) The economic rationale for the creation of the EDF
It is very clear from the hearings and visits conducted by your rapporteurs that a consolidation of the various national defence industries at the European level is now urgently required . This would involve bringing about the rise of a European Defence Technological and Industrial Base (EDTIB), which must be maintained if the European nations intend to be able to defend themselves and choose their own course independently one day.
Two elements combine to make this consolidation a compelling necessity: on the one hand, defence markets are increasingly competitive, with the appearance or reinforcement of new stakeholders (China, Turkey, Israel, South Korea, etc.). On the other hand, the technological content of armaments is constantly increasing, and this implies ever more significant investment in order to have equipment meeting the highest standards. To finance these investments, we must have companies that are capable of reaching a critical size and bidding on more extensive contracts.
The consolidation of European industrial leaders is essential to the survival of a defence industry very directly attacked by our American allies.
It is an old theme, and there are several examples of industries that have consolidated at the European level to then become global leaders: in this regard one naturally thinks of Airbus. But the example that comes to mind most readily in the defence domain, and is something of a model in the field, is of course MBDA.
As we will see, the EDF was designed in consideration of the prospect of bringing about a veritable EDTIB. It is not a new concern, but one that has clearly taken on greater urgency. It is apparent from the work of your rapporteurs that the majority of European defence companies are strongly convinced that if the different defence industries of the European countries do not join forces , or worse, if they continue to compete directly for the same contracts as they most often tend to do, they will all be eliminated relatively soon. One foreign manufacturer estimated this time frame to be between 5 and 10 years at most for most segments of the defence industry.
This is therefore a matter of real urgency and a vital issue in terms of the sovereignty of European nations. This is undoubtedly why the Commission's proposal has met with fairly rapid success, though it is in fact a major innovation.
c) The revolutionary nature of the EDF
By concretely addressing the capability angle with the creation of a budgetary tool, the Commission has taken a revolutionary step, in that it will be the first time in the history of European integration that Community funds will be used to directly finance a defence policy.
For the most part, defence had until now been the exclusive responsibility of Member States, one that they did not wish to relinquish to the Commission. This remains true across broad segments of the defence field, and for the entirety of the operational segment in particular, for obvious political reasons: it remains impossible to imagine, at the present stage of European integration, that the lives of the soldiers of the national armies would be risked on the basis of a Community decision taken by qualified majority.
The Commission has approached the matter astutely from the capability angle. Naturally, the European Union had already been involved in capability matters since the Lisbon Treaty, notably through the European Defence Agency (EDA). But the novelty here is in the concrete allocation of Community funding to defence projects, which is entirely unprecedented.
The groundwork for this major Commission project, the principle of which was approved by the European Parliament a few months ago, was laid by two tools: Preparatory Action on Defence Research (PADR), and the European Defence Industry Development Programme (EDIDP).
2. The forerunners of the EDF: PADR and EDIDP
a) The Preparatory Action on Defence Research
The first step in the European Union's new commitment to capability was the Preparatory Action on Defence Research (sometimes referred to as PADR). It focuses on pure research in the defence domain (R&T). €90 million in funding have been allocated to the action. This budget has allowed it, in particular, to start work on the project Ocean 2020 , totalling €35 million, which involves the production of a maritime surveillance demonstrator drone. The project includes the participation of 42 partners from 15 countries of the Union. It is intended to allow for work to be done on the basis of a Patroller drone in the fields of connectivity and data aggregation in the maritime surveillance domain. The project leader is the Italian company Leonardo, with the participation of the French engine manufacturer Safran. Two demonstrations will be carried out, one in the Baltic Sea by the Swedish Navy and the other in the Mediterranean Sea by the Italian Navy.
This project merits mention here because one day it may be said that this was the first defence research project financed by the European Union using Community funds. We also note that a great number of European stakeholders may be able to come together around a single project, and start to build an EDTIB around such projects.
b) EDIDP, forerunner of the R&D segment of the EDF
The next step was to set up a European Defence Industrial Development Programme (EDIDP) 44 ( * ) that would be focused on R&D. This programme is on an entirely different level than the preparatory action, since it includes a budget of €500 million over two years (2019-2020).
It is the subject of a regulatory text which establishes operating procedures, specifically the co-decision procedure, and which also defines eligibility rules. More precisely, these rules define the EDTIB. This is a first and a fundamental step forward , and it should be emphasised that while this objective did not seem easy, it was reached fairly quickly.
In concrete terms, the EDIDP allows the European Union to provide funding for capacity projects, in proportions that vary according to the phase the project has reached:
- 100% of the cost of the projects in the prototype development phase;
- 20% of the cost of projects working towards the development of a prototype. It should be noted that most projects funded are likely to fall into this category;
- 80% for projects in the post-prototype phase. 45 ( * )
Financing may also be provided for indirect project costs up to 25%. 46 ( * )
The main requirement is that projects submitted must involve the participation of companies from at least three countries of the Union.
To these base amounts are added two possibilities for increased funding:
• for PESCO projects, incremental financing may be provided to cover another 10% of project costs;
• For projects including the participation of SMEs from a country other than that of the primary project developer, a second bonus may be added depending on the degree of participation of such SMEs.
Thus there is a potential leverage effect , which will paradoxically become greater as European funding becomes more limited. The Member States will have every interest in benefiting from European funding, but to obtain it the projects they will need to present must correspond to the capacity needs identified by the European Union, and above all must involve at least three countries.
The common definition of what the projects included in the EDIDP could include resulted in a working programme and a definition of project categories. A competitive bidding process was then opened in these categories. It should be remembered that this programme operates within the context of classic community governance, and therefore under a committee oversight (comitology) procedure: the Commission's proposals must be accepted by a qualified majority of Member States.
The proposed projects are analysed on the basis of six criteria, but also in light of the capabilities plan defined by the EDA. They are submitted upon the proposal by Member States (thus, in the case of France, the presentation of projects is incumbent upon the DGA [Directorate General of Armaments]). This is an important procedural element, since it leads to the emergence of a Europeanised approach to projects among all national DGAs.
In this institutional context, it is clear that it is entirely in Member States' interest to cooperate ; beyond the financial aspect, this is probably the most significant element of this new capacity oriented approach in the EDIDP and EDF: the aim is to promote a change in the culture so that ministers of defence in the various European countries progressively develop the reflex to think European first .
The other incentive involved, obviously, is that it pushes the major systems integrators to open up to SMEs from other European countries, which should gradually lead to closer links amongst the various national DIBs. Moreover, it is also a way to integrate those European countries that have no major defence contractors.
Another fundamental point is the classic functioning of qualified majority rule in the comitology procedure: it offers a guarantee for “small” countries, since the alliance of France, Germany, Italy and Spain would still not permit a qualified majority to be attained.
This approach should make it possible to go beyond the issue of geographical return , which as we have seen in earlier European capability projects can be extremely burdensome and counterproductive. Here, the logic is reversed : States that want to win contracts in calls to tender must rely on the overall efficiency of their projects (which will be evaluated in view of their operational impact and their contribution to European strategic autonomy), and on the cross-border cooperation they involve.
It is important to appreciate how fundamentally this approach differs from the traditional French approach. Our country already has a strong DIB, built around large contractors, many of which are global leaders. That France might support such a scheme, therefore, would not necessarily be obvious at first glance. It also raises questions about the future of relations between the major French systems integrators and French defence industry SMEs. Indeed, since the system is designed to facilitate cooperation between companies from different countries, large French companies will obviously seek to integrate non-French SMEs into their projects. There is however no guarantee that a proportional number of foreign companies will seek to partner with the French SMEs over which the French systems integrators will have preferred foreign SMEs. This is an aspect of the system to which your rapporteurs' attention was called by the Delegate-General for Armaments.
The primary programmes that will benefit from EDIDP include the MALE EuroDrone and ESSOR radio (European Secure Software defined Radio) programmes.
3. The EDF, a capability action for the medium term
The EDF was approved by the European Commission/ Council/ Parliament in trilogue, 47 ( * ) and was incorporated in principle into the financial outlook for 2021-2027.
It will involve both R&T and R&D components, but will cover considerably larger amounts , which ultimately are likely to come to €4.1 billion for the R&T segment and €8.9 billion for the R&D segment.
As for the R&D side, a leverage effect will be implemented under the same conditions applicable for EDIDP. Under these conditions, if we assume that European funding covers 20% of these projects, Member States will ultimately add €35.6 billion, making a total of €44.5 billion in defence R&D funding. Finally, if we add the direct financing of R&T, the entire EDF would be a supplement to the European defence effort of €48.6 billion over seven years, i.e., approximately €7 billion per year for that period.
The European Commission's initiative will therefore have a knock-on effect that will encourage Member States to mobilise to submit their projects in a cooperative framework. It will also of course be necessary to ensure that these new efforts do not crowd out projects initially intended to be carried out at the national level.
This initiative clearly represents a magnificent example of the contributions of European integration. Indeed, it allows multiple objectives to be reached simultaneously:
• strengthening European defence by enabling European countries to achieve their capability objectives;
• strengthening cohesion between European countries by encouraging them to work together;
• reinforcing European strategic autonomy by significantly promoting the emergence of a real EDTIB that will progressively move towards transnational consolidation, which as we have seen above is a precondition for the survival of the defence industries of the European countries.
4. The indispensable European preference
a) European taxpayers' money
The purpose of EDF, as we have seen, is to consolidate the European DTIB. Naturally, the system will not allocate European taxpayers' money to support the industries of non-EU countries. Thus, aside from certain exceptions, the system does not apply to third countries or their enterprises: “Applicants and their subcontractors shall be eligible for funding provided that they are established in the Union or in an associated country, have their executive management structures in the Union or in an associated country and are not controlled by a non-associated third country or by a non-associated third country entity.” 48 ( * )
Therefore, access to the EDF can only be granted to companies that are based in Union territory and not controlled by a third party. The criterion here is not shareholding, but decision-making power.
However, the regulation does not prohibit third country companies from benefiting from the fund. This is particularly the case of companies from associated countries (i.e. EFTA members that are members of the European Economic Area-EEA).
But this may be the case for third-country companies as well “if this is necessary for achieving the objectives of the action and provided that its participation will not put at risk the security interests of the Union and its Member States.” 49 ( * ) The critical check imposed by the mechanism covers three control criteria:
- Contractors are required to guarantee the security of their supplies;
- Contractors are prohibited from removing any intellectual property rights (IPR) from the Union. Thus, a subsidiary of a US company cannot transfer ownership rights to the US company to which it belongs. Furthermore, IPRs developed with the help of EDF cannot be made subject to the IPR rules of third countries (such as the American ITAR 50 ( * ) system, for example). This is an essential point : with the EDF regulation, the European Union is beginning to adopt legislation comparable to that of the United States in controlling of the fruits of its defence investments. But the European framework is still much less strict than the one imposed on European companies in the United States;
- Contractors are prohibited , as part of the same approach, from removing classified information from Union territory.
b) The negative reaction of the Americans is unjustified
On 1 May 2019, the United States sent a letter to the High Representative of the Union formally presenting their grievances against the EDF project and PESCO on the grounds that these systems would damage the Transatlantic relationship by shutting US companies out of European defence contracts.
As the European Union pointed out in its response of 16 May 2019, these criticisms are unfounded for several reasons:
- first of all, neither the EDF nor PESCO have changed European rules on defence contracts in any way. Therefore, nothing prevents Member States from buying American, which is clearly shown by the considerable volume of European purchases of American military equipment;
- secondly, the system, intended to consolidate the EDTIB in a way that preserves the interests of the member countries of the Union, is still merely a restrained copy of the American system, which is both far more extensive and far more rigorous in its application, and even has an extraterritorial dimension. 51 ( * ) The European Union has therefore logically asserted to the United States that the European defence markets are much more open to US firms than US markets are to European companies.
From this perspective, the figures are quite telling : the ratio is approximately 1 to 10. Whereas between 2014 and 2016 the Union exported $7.3 billion worth of defence goods and services to the United States, in that same time frame it imported... $63 billion worth! The detailed analysis reveals that in fact the situation is even more unfavourable to the Union, since the United States imports mainly raw materials and basic services, and thus its “defence” imports are quite small. 52 ( * )
A final figure provides an enlightening supplement to the situation: the US Department of Defence (DoD) makes one-third of its foreign purchases from European companies. But insofar as that Department obtains 94% of its supplies from the United States, that third in fact represents quite a minimal amount, only around 2%. Finally, the European companies that ultimately supply that 2% of its purchases are always those with strong links to the United States.
Thus, the American criticism of these questions is both unfair and inopportune.
Furthermore, in political terms, it clearly shows the contradictory nature of the American rhetoric about “burden-sharing.” Logically, the United States should not be able both to ask Europe to assume more responsibility for its own defence, and deny it the industrial and technological means to do so. Here we see a form of tension between American middle- and long-term strategic interests (having a strong partner in Europe, which would allow the United States to concentrate its resources on its competition with China), and its shorter-term economic and industrial interests .
We might overlook this contradiction , which could be attributable to the natural reflex of elected officials to defend their constituents' industries in the short term, if it did not tend to weaken the solidity of the security architecture of the European continent. When US authorities' defence of the interests of the US arms industry goes so far as to suggest the conditionality of the US guarantees provided under Article 5 of the Washington Treaty, concrete consequences arise, because this weakens the credibility of the Alliance . This American tendency thus poses a major risk to the European member countries of NATO. As such, it is important that we remind our American friends and allies that such discourse is both unacceptable and detrimental to the long-term interests of the United States itself. As the French Minister of the Armed Forces succinctly put it, “it's called Article 5, not Article F-35.”
c) The case of the United Kingdom
Although at the time we are preparing this report, the United Kingdom still remains part of the Union, and although the past months have shown that it is difficult to anticipate political developments in that country, a major risk remains today that the United Kingdom may exit from the Union on 31 October, and very likely in the worst possible manner, i.e., without an agreement with the Union.
We will enter into a more in depth discussion of the role of that country that is so essential to the defence of the continent further on, but at this point it is appropriate simply to analyse the United Kingdom's situation within the framework of the EDF.
First of all, we need to look at the orders of magnitude to be used in our examination: if we add up R&T, R&D, and equipment purchases , the American budget comes to €160 billion per year. On the other hand, the combined budget of the 28 countries of the European Union comes to €40 billion, which is four times less.
The United Kingdom accounts for approximately €10 billion of that €40 billion , France for another 10, and the remaining €20 billion is borne by the other 26 countries. Maintaining an EDTIB equal to one-quarter of US spending was already a formidable challenge. If the British effort were to be cut off, the equation would become even more difficult. Admittedly, the creation of the EDF came about in part as a reaction to the prospect of this reduction due to Brexit as well, and some analysts have even concluded that it may almost compensate for it. 53 ( * ) But the question of whether it will be possible for British companies to benefit from the EDF will arise very quickly.
Naturally, this point will be part of the comprehensive negotiations to be held between the United Kingdom and the Union after 31 October. But your rapporteurs wish to point out here that in line with their general view of the United Kingdom's role in European defence, they would hope that a specific status could be reserved for the United Kingdom in regard to the EDF, and more generally in connection with the security and defence issues of Europe.
As such, it would be appropriate in particular to consider the situation of MBDA , the European leader and a model of European integration by the acceptance of mutual dependencies. Your rapporteurs have had the opportunity to express the position that the defence of Europe is impossible without the participation of the European nations themselves. But neither will it be possible to defend Europe without the EDTIB, of which British industry is a vital part.
Naturally, the special treatment the United Kingdom would be entitled to in such an approach , will need to allow every guarantee that the interests of the European Union will be protected, in particular vis-à-vis the American interests which are likely to assert themselves with increased vigour in a post-Brexit United Kingdom.
* 42 Proposal COM(2018) 476 for a regulation establishing the European Defence Fund.
* 43 Regulation Proposal COM(2018) 476, op. cit., art. 3
* 44 PEDID in French.
* 45 Regulation Proposal COM(2018) 476, op. cit., paras. 18-20 and art. 14.
* 46 Idem, art. 16.
* 47 Pursuant to agreements reached at the Council on 19 February 2019, and at the European Parliament on 18 April 2019.
* 48 Regulation Proposal COM(2018) 476, op. cit., art. 10
* 49 Ibidem.
* 50 The US International Traffic in Arms Regulations (ITAR) require manufacturers of any defence equipment that includes one or more US components to obtain US authorisation to sell such equipment. As one might easily expect, this authorisation is difficult to obtain when the equipment in question is competing for an export defence contract with equivalent American equipment. Thus, in 2018, the sale to Egypt of an additional order of Rafale jets was blocked because of an American component present not on the aircraft but on the SCALP missiles from MBDA with which they are equipped. A full description of the American system is given in Daniel Fiott's article, “The Poison Pill: EU defence on US terms?” in EUISS, June 2019.
* 51 See in particular the Daniel Fiott article cited above.
* 52 Ibidem.
* 53 See Frédéric Mauro: Le Fonds européen de défense , Confrontations Europe, no. 122 (July-September 2018), pgs. 26-27.