Defense spending challenge

Europe faces defense spending challenge

New plans meet old obstacles.

By JANOSCH DELCKER

Goaded by Donald Trump, scared by Russia and eager to give fresh impetus to integration, Europe is gearing up to spend big on defense.

The challenge the Continent now faces, according to politicians, industry leaders and experts, is to spend wisely.

To get value for money and armed forces that truly increase their security, governments will have to overcome a reluctance to buy from foreign suppliers and collaborate on multinational projects — even when that means fewer jobs for their own industries.

“We companies have paved the way for transnational cooperation,” a high-ranking industry official snapped at German parliamentarians during a recent closed-door meeting. “Now we need the support of governments and the EU — otherwise, we will end up nowhere.”

The argument over whether European countries should spend more on defense has already been fought — and largely won by the hawks.

Russia’s 2014 annexation of Crimea, its military intervention in eastern Ukraine and assertiveness elsewhere left governments across Europe worried about their own security.

Trump’s blunt demands that Europe should spend more on defense rather than count on America to protect the Continent via NATO — combined with the U.S. president’s mixed messages about his commitment to the Atlantic alliance — convinced many leaders they had to increase their military budgets.

And when the United Kingdom voted to leave the EU in 2016, one of the key opponents of closer defense cooperation in the bloc was marginalized — and proponents saw a chance to give the European project new momentum.

“The lack of security has become one of the primary concerns of Europeans again,” said Nathalie Tocci, a special adviser to EU foreign policy chief Federica Mogherini.

“What used to be the most contentious, the hardest and as a consequence the most immobile area of European integration has become the most promising,” Tocci, the author of Mogherini’s 2016 foreign policy and security proposal on how to develop Europe’s military autonomy, said during a recent panel discussion in Berlin.

Suddenly, European defense initiatives seem to be everywhere.

At their summit in Brussels this week, EU leaders will endorse the bloc’s new defense pact, known as Permanent Structured Cooperation (PESCO), in which 25 member countries will start working on a series of joint projects next year.

Earlier this year, Brussels launched a major incentive for countries to cooperate on military procurement — a European Defence Fund worth €5.5 billion per year. It is widely seen as the first time the EU has put serious money on the table for this purpose. This week, EU ministers gave the green light to one aspect of the fund, the European Defence Industrial Development program, intended to foster cross-border cooperation between companies.

And big-ticket procurement projects are already in the pipeline.

Last year, the German, French, Italian and Spanish governments commissioned Airbus, France’s Dassault Aviation and Italy’s Leonardo to develop a state-of the-art combat drone, officially known as MALE RPAS but nicknamed the “Eurodrone.”

And this July in Paris, France and Germany unveiled plans to develop a European fighter jet.

Spending spikes

After two decades in which defense spending in Europe was often cut or stagnant, budgets have been ticking up in recent years. In 2016, military spending in Western Europe rose by 2.6 percent on the previous year — its second successive increase, according to the Stockholm International Peace Research Institute (SIPRI). Spending in Central Europe rose by 2.4 percent.

But there is much more to come.

“In Europe, especially, there are definitely indications that there will be a significant increase in equipment spending,” said Aude Fleurant, director of SIPRI’s arms and military expenditure program.

Take Europe’s largest economy: By 2020, Germany will spend 53 percent more on equipment compared to 2016, according to a German defense ministry estimate.

Across Europe, as much as €97 billion of additional spending could become available annually by 2024 if all of the 28 current EU members plus NATO ally Norway spend the recommended NATO target of 2 percent of GDP on defense, a McKinsey study released last month forecast. At least one-fifth of that sum — more than €19 billion — should be spent on equipment, the consultancy firm said in a joint report with the Munich Security Conference.

Although the idea of all these countries reaching the 2 percent goal — which is also endorsed by the EU’s new military pact — in that timeframe seems unrealistic, there is little doubt that equipment spending will surge in the years ahead.

Some of that money will go on filling existing gaps, such as the lack of air-to-air refueling capability. But analysts suggest a large chunk should flow into digitizing armed forces — upgrading software and increasing bandwidth to make sure that, even in remote areas, troops are not cut off from interconnected weapons systems driven by virtual networks.

The consensus that more investment is needed stretches across the political spectrum — even as far as Germany’s Greens, whose roots lie in the pacifist movement of the 1970s.

Tobias Lindner, a Green MP who sits on the Bundestag’s budget and defense committees, said there is no question that Germany’s Bundeswehr armed forces — notorious for outdated equipment such as an aging tactical truck fleet and navy helicopters dating back to the 1970s — need to be reformed and more needs to be spent on procurement, particularly when it comes to making the troops fit for the increasingly digitalized warfare of the 21st century.

But Lindner cautioned that spending more would not be enough.

“My greatest concern is that we will invest a ton of money in the next couple of years, but in a decade we will end up in a similarly bad condition to today’s, just with a larger, more expensive army,” he said.

“It’s not just about equipping the army properly, but also about discussing what the Bundeswehr needs to be able to do by itself and what we could do better on a European level,” Lindner said. “And it’s about making procurement programs more efficient than in the past.”

That’s easier said than done.

In a study published in February this year, McKinsey argued that Europe could save almost a third of what it spends on military equipment if governments club together to coordinate investment and use fewer arms suppliers.

The argument is not new. But national politics often intervene to prevent the most efficient path being followed.

“People said the same thing 20 or 30 years ago,” said Moritz Weiß, a procurement expert who teaches international relations at the University of Munich. “But when things get serious, the French want to procure French equipment and the Germans want to procure German equipment.”

As governments are often the only customers for big military orders, they have a big say in setting the terms.

“They advance money for the development, thus take over the job of the capital markets — automatically making the procurement market political,” Weiß said.

“Let’s say a country provides 30 percent of the financing in a cooperation project,” he added. “Then the country also expects that 30 percent of the contracts associated with the project will go to its own companies, so that the money is not withdrawn from its economy but spent inside the country.”

Procurement protectionism

The EU has come up with procurement rules to try to prevent such protectionism. But countries have found ways round them.

Often, Weiß said, tenders are tailored to the profile of domestic arms manufacturers so that companies from other countries — although officially able to apply — have no chance of winning the contract. In addition, countries can claim that national security interests prevent them from issuing public tenders, although this has become more difficult in recent years.

“Most of the previous European procurement programs are no success stories,” Green MP Lindner said, citing the A400M military transport plane as one example.

Since its inception in 2003, the project — originally forecast to cost €20 billion — has been plagued by problems, which lead manufacturer Airbus has blamed, at least in part, on political meddling.

Originally, the European multinational, headquartered in France, picked a Canadian specialist to produce the A400M’s turbine engines, but buyer nations instead pushed it into cooperating with a European consortium, which led to repeated setbacks.

“The way we cooperated didn’t make things cheaper or more successful in the end,” Lindner said, adding that “in the future, we need to raise the question of how we could do something truly meaningful on the European level.”

Experts have argued that the European defense market should be rationalized, with countries withdrawing from sectors in which another has a competitive advantage. Some have suggested that France, for example, could hand over the production of its military land systems such as armored vehicles to Germany, known for ground force systems produced by manufacturer Rheinmetall. In return, France could become the main supplier of ships to the Germans.

However, this would also mean each country losing part of its defense industrial base and relying heavily on another nation to supply its armed forces — something that doesn’t come easily, even to close allies, despite leaders’ talk of ever-closer defense integration.

Calls for efficiency by big Western nations and major arms companies spark concern also in Central Europe, where industry officials and politicians fear their firms will lose out to larger competitors in France, Germany, the United Kingdom or Sweden.

Tomasz Szatkowski, an undersecretary of state at the Polish defense ministry, said at the Berlin panel discussion that procurement “should bring benefit to all of its stakeholders, promote growth and provide jobs across the EU.”

That’s not an argument that cuts much ice with the big industry players.

“You can’t achieve excellence without Darwinism,” the high-ranking industry official told German lawmakers.