The Importance of Being Protectionist: A Long View of the European Defense Fund
In 2017, E.U. officials rejoiced. They claimed to have accomplished more in 10 months than in 10 years in the field of defense, having launched three new initiatives to strengthen defense industrial cooperation, first and foremost the European Defense Fund. But U.S. Permanent Representative to NATO Kay Bailey Hutchison seemed somewhat disconnected from the celebratory mood in Brussels. Stressing that “we do not want this to be a protectionist vehicle for EU,” she expressed concerns over the implications of the new E.U. initiative for transatlantic cooperation. Since then, the United States has been involved in a lobbying effort to slow down the European Union’s new defense drive. The dispute reached a new level in May, when high-level U.S. officials sent a letter to E.U. High Representative Federica Mogherini warning that the initiatives would “represent a dramatic reversal of the last three decades of increased integration of the transatlantic defense sector.”
The tension between European defense cooperation and the transatlantic alliance is nothing new. Perhaps best embodied by then-Secretary of State Madeleine Albright’s 1998 remarks on the risks of “de-linking, discrimination, and duplication,” it could almost be called a structural feature of the U.S.-Europe defense partnership. Twenty years later, NATO Secretary General Jens Stoltenberg shared the same concerns, and insisted that “it is important for Europeans to state again and again that [the Defense Fund] is not competition for NATO or an alternative to NATO.” In private, however, European officials had expressed hope that this dispute was a thing of the past, and suggested that the second term of the George. W. Bush administration followed by the Obama presidency had created a more constructive dialogue about European defense responsibilities.
So why the renewed skepticism? The fear of institutional competition is rather farfetched: As European defense documents emphasize, nearly all E.U. and national defense planners are now fully seized with the need to work effectively with NATO. And indeed, NATO and the European Union are already working together to better align their defense planning processes. A more serious issue is in fact industrial: Through the European Defense Fund Europeans aim to strengthen their technological and industrial defense base as well as fill capability gaps, which may reduce the number of weapons Europe buys from the United States. This is a new development: with the Defense Fund for the first time the European Union itself will be spending money on incentivizing defense cooperation. The E.U.’s defense initiatives will be an unequivocal boon to the United States, but only in the long term. It is important to be transparent – a stronger Europe in the field of defense will be a worse client for the U.S. defense industry.
Industrial concerns are having a toxic effect on an already tense transatlantic relationship. Even E.U. officials who are committed to the transatlantic defense partnership were taken aback by what they perceive as unfair attacks from the U.S. administration, and E.U. foreign policy chief Federica Mogherini’s comment that “the EU is actually much more open than the US procurement market is for the European Union companies and equipment” reflects the general frustration. The efforts of U.S. defense firms in Brussels to influence participation criteria in E.U. defense projects, as well as President Donald Trump’s personal obsession with the 2 percent rule, have fueled a damaging narrative in some European countries that the U.S. priority is to sell its own kit and increase dependency rather than help European allies become stronger defense partners.
Such suspicions lack merit. It is perfectly reasonable that the United States could both want European partners to assume more defense responsibilities and at the same time wish to keep these partners as defense customers. Indeed, the necessary scale for high-technology defense projects effectively means that the United States needs to maintain and grow Europeans as defense customers to sustain its own defense industrial base.
But even so, the American demands are missing a key point. The European effort to increase defense spending will only be politically sustainable if it entails economic benefits for domestic industries. At the same time, developing effective European capabilities will also require the U.S. defense community to further engage with E.U. institutions as the European Union becomes a more central actor in the European defense field.
E.U. Defense Initiatives and the Fear of European Protectionism
E.U. leaders created the European Defense Fund to help implement the E.U. Global Strategy, which outlined the ambition of “strategic autonomy” for the Union — that is, the E.U.’s ability to act, with partners if possible, alone if necessary. The industrial dimension of strategic autonomy for some in Europe — France in particular, but also Spain, Belgium and Finland — entails establishing a European defense industrial base that can produce the equipment that European countries require to defend their territory and their interests. The E.U. plans to spend €8.9 billion through the European Defense Fund to co-finance collaborative capability development projects and €4.1 billion to fund collaborative defense research between 2021 and 2027.
With a budget of 13 billion euros over a period of seven years, the Defense Fund will not transform the European defense market. But it is a start: even though E.U. member-states have progressively increased their overall defense spending over the last years, research and development expenditure remains low and continues to decrease. With 500 million euros per year for the research window, the Defense Fund would place the European Union among the top four defense research and technology investors in Europe, after the United Kingdom, France, and Germany. And if European leaders see it as successful, the next budget might include a bigger pot.
For the United States and other third countries the participation criteria for the Defense Fund are the key sticking point. According to the criteria, only collaborative projects involving at least three firms from at least three member states or associated countries (Norway, Iceland or Liechtenstein) can access E.U. funds. Non-E.U. firms based outside the E.U. will not receive any funding. The Fund does not exclude co-operation between E.U. defense companies and third-country firms on projects funded by the European Union, as long as their involvement does not put the Union’s security interests at risk — they will have no access to sensitive information, nor will they be able to control ownership of intellectual property, which under the new E.U. rules cannot be transferred outside the Union or associated countries.
The United States is not the only country that will be affected by the participation criteria of the Defense Fund. Britain, for instance, is concerned about the possibility that it might be excluded from new multilateral capability development projects after Brexit — the United Kingdom has worked with European defense partners on past big European defense programs, such as the Eurofighter Typhoon or the A400M transport aircraft, and worries about being excluded from future planned projects.
The European Union is careful to stress that it is not excluding anybody from the Defense Fund, but rather pursuing reciprocity, setting conditions to receive funding similar to the ones that E.U. companies face in third countries, including in the U.S. market. E.U. officials regularly underscore the need to design rules which are consistent with the ones of other major powers.
But the United States has taken a different view. Washington is concerned that European ambitions for industrial autonomy could shut out third countries that want to contribute. The United States has cautioned Brussels to slow down its defense industrial ambitions and has criticized the Defense Fund’s strict intellectual property right rules. U.S. officials have stressed that Europeans limited to just their own market would miss out on technological evolution and lose interoperability with the United States. Washington maintains that it supports the Union’s efforts to “do more” on defense, but that its posture could be strengthened by ensuring that European governments keep buying U.S. kit. A report by the American Chamber of Commerce to the European Union warns that if European policymakers were to pursue a “Buy European Act” in the defense sector, the United States could retaliate by closing off its own defense market to European companies such as Airbus, BAE Systems, Leonardo, Rheinmetall, Rolls-Royce, Saab, Safran, and Thales.
In fact, Europeans will remain free to buy U.S. defense equipment, but the Fund increases their incentive to work with other Europeans to build joint capability projects. In this sense, Americans have a point: The Fund makes it less likely European militaries will buy off-the-shelf equipment from non-European firms. But they miss a more central argument. Given the political situation in Europe, the best option for the United States is to manage this trend in European defense industrial policy rather than to fight it.
Europeans Need Industrial and Political Incentives
Even if the Trump administration does not have much time for its European allies, the broader political culture — including a strong consensus within the U.S. Congress — cares about maintaining the alliance. This view has often had an effect even on the Trump administration’s strategies and policies. The 2018 National Defense Strategy emphasized the need to work better with allies and partners, and the United States has increased its support to European defense and NATO initiatives in Central and Eastern Europe since 2017.
The problem, however, is that this support fails to reconcile strategic objectives and industrial goals. Europe’s transformation into a more reliable defense partner for the United States will not take place in a political vacuum. Strengthening European defense industries constitutes a key political incentive for European leaders. A more far-sighted U.S. approach to European defense cooperation would embrace this reality.
The “defense momentum” in Europe was driven by crises to Europe’s east and south, terrorist attacks inside Europe, and even Trump’s “tough talk” about NATO’s underspending. European governments are reacting to the changing threat environment they are facing in Europe.
For the French government, for instance, growing security responsibilities in North Africa and the lessons learned from the 2011 intervention in Libya and 2013 operation in Mali were a turning point. The series of terrorist attacks in France and the subsequent homeland security operations further stretched French capabilities. In November 2015, French president François Hollande declared that “France is at war” and was therefore forced to suddenly reverse the decline in the French defense budget. The 2017 French Strategic Review underlines that “converging threats against Europe require Europeans to commit more heavily to ensuring their own security” and highlights that “a collective awareness of shared security issues” has emerged and justified the “need to strengthen our joint defense.”
Germany’s defense policy underwent a very public shift in 2014, when Berlin announced the beginning of a new German “responsibility.” It has since tried to give this term meaning, through Bundeswehr deployments in Mali, participation in the anti-ISIL coalition, Germany’s leadership of NATO’s Very High Readiness Joint Task Force and participation in the Baltic air-policing mission and the NATO Battlegroup in Lithuania. The 2016 German Defense White Paper concludes that “a reoriented and streamlined Bundeswehr finds itself confronted with crises and conflicts of un-precedented simultaneity and dimensions,” and that this situation requires Germany to “fund, develop and provide the resources for a full range of foreign, security and development policy instruments on a sustainable basis with available financial resources.”
Germany’s defense investments, however, have been lagging behind this commitment, and far behind the 2 percent target set by all NATO allies in 2014. By contrast, many of the states to Germany’s east, including Lithuania, Latvia, Poland and Romania, have met the 2 percent target, clearly driven by the threat that Russia poses to them.
But the 2 percent target becomes meaningless without a sense of scale. If Spain alone was to spend 2 percent of its GDP on its military, its defense budget would be equivalent to the ones of Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary and Romania combined, at around $30 billion. Similar comparisons help understand the real landscape of defense spending in Europe: Italy currently spends $25 billion for defense and would need to add $18 billion more to reach 2 percent of GDP — the equivalent of four Romanian defense budgets; the Netherlands, spending only 1.35 percent of its GDP, currently puts as much money into its defense as Poland does. France’s GDP is equivalent to the economies of all NATO allies east of Germany combined. And Germany’s economy is again bigger than that of France.
Size matters. If Europe is ever to spend serious money on its defense (and on U.S. defense equipment), that spending will have to come from Western Europe. Honoring the 2 percent commitment does matter in Western Europe, but geography does too. For most of these countries, the remoteness of any military threat means that creating domestic political support for higher levels of defense spending is very difficult.
Therefore, while geostrategic considerations spurred Europe’s renewed interest in defense spending and cooperation, the political and economic dimensions remain critical. In France, Germany, Italy, and Spain governments need economic and political benefits to sustain larger defense investments. Otherwise, when the next economic crisis hits, defense spending will fall once again. Highlighting the impact of these investments on the European economy may be their best argument, particularly given that Germany is already showing signs of economic stagnation. The Defense Fund, while giving an economic incentive to spend money, at the same time helps to prevent national-level protectionism, inefficient spending and duplications within Europe.
Finally, the European Union also developed new defense initiatives because, after a decade of E.U. crises, developing new integrationist projects has become a political priority. After the Brexit vote of June 2016, attention turned to finding a new European project and governments saw security and defense policy as having the most potential. In this way, the strengthening of the Union’s defense policy serves as an additional measure to promote the cohesion of E.U. member states.
In Germany, the E.U. framework also gives domestic legitimacy to Germany’s defense-policy engagement. For large parts of the population, the idea of Germany going it alone is still unthinkable. More than a few Germans are also wary of NATO — when then-Foreign Minister Frank-Walter Steinmeier sharply criticized 2016 NATO military exercises in eastern Europe as “saber rattling,” this was indicative of a sense among particularly left-wing voters that NATO had escalated the crisis with Russia. The Social Democrats dismiss the 2 percent target as kowtowing to Trump and promoting spending for spending’s sake. And a recent poll found that support for the alliance dropped from 68 percent in 2017 to 54 percent in 2019. Many Germans have a skeptical view of the United States since Trump took office; instead they advocate close connections with European partners, above all France. Embedding German defense policy in the European Union takes the edge off it.
All of this should have implications for U.S. policy toward Europe. The United States should want to support a political narrative that would justify a sustained increase of the defense budget in these countries. It should also favor deepening E.U.-NATO coordination in capability planning, so that these additional resources can be used to stimulate greater European capabilities that are useful for transatlantic security. For instance, member states have plans to collaboratively develop and build a new European fighter jet, a European ground combat vehicle and a “Eurodrone.” The European Commission also wants to invest money from the European Defense Fund in cyber research and development.
The “Buy European Act” Strawman
There would be reasons to be concerned by the military implications of a genuine “Buy European” diktat. Pursuing such a strict policy would jeopardize existing industrial projects that require close cooperation with British and U.S. industries, as well as prevent European military forces from acquiring all the capabilities they need.
But there is no such diktat. The most assertive rhetoric — often promoted by French officials — is marginal and does not reflect the compromise reached at the European level. When President Emmanuel Macron declared on CNN that he “did not want to see European countries increasing their defense budget in order to buy U.S. and others’ arms and capabilities,” he was conveying a traditional French perspective that is a minority position within the European Union. In fact, the evolution of the intra-European discussions on third-country participation with the European Defense Fund illustrated a pushback against protectionism; the proposal to prevent E.U.-based companies partially or totally owned by non-E.U. capitals from participating in any Defense Fund project was supported by many in Paris, but eventually rejected and more accommodating criteria were agreed upon.
Indeed, some member states have raised objections when the European Commission has, in their view, overly favored European defense companies. Countries such as Sweden, Poland, Romania, the Netherlands and the Czech Republic, whose national defense industries specifically need to maintain close links to U.S. — and British — defense companies, have been able to influence the European Commission, which in the end rejected the idea of a “Buy European Act,” asserting that “the EU as a whole cannot afford to restrict public procurement.”
Member states’ defense spending today remains below a level that would allow European defense industries to sustain themselves with only European projects. In many cases, Europeans cannot afford to spend so much of their financial and political capital on European projects that will take years to develop at the expense of much-needed capabilities that only non-European industries can quickly provide. There have been numerous purchases of U.S. capabilities by European countries in recent years, from Sweden and Romania purchasing Lockheed’s Patriot defense system to Belgium’s acquisition of the F-35 Joint Strike Fighter.
The balance of power within Europe, the political culture of the European Union and the strategic interests of many member states will likely prevent a full-fledged protectionist regime. But the new E.U. defense initiatives may make life harder for U.S. firms in the European market in the future. The United States will have to accept these new barriers if it wants Europeans to become better strategic partners.
A Leap of Faith
The recent E.U. defense initiatives represent a qualitative shift in the way the European Union gets involved in defense. The introduction of the Defense Fund into the next E.U. budget constitutes an important step in the direction of a greater E.U. role in capability development. After years of staying out of the defense realm, long considered a bastion of national sovereignty, the European Commission is now slowly carving out a role for the European Union to address some of the underlying problems that weaken the European defense technological and industrial base.
At the same time, the Defense Fund is only the European Commission’s first foray into defense investment. The Union will have to learn by trial and error how to balance support for European defense firms with getting the best equipment for its money. Much can still go wrong. Industries and governments might decide that E.U. conditions to access defense fund money are too cumbersome and invasive, and not bring future big-ticket capability projects under the E.U. umbrella. The European Commission will need to prove that it is able to take on board industry feedback, as well as military advice.
The United States would do well to invest in better communication with the European Union’s institutions, as they become more closely involved in defense policy. Americans should acknowledge that an integrated European defense industry, combined with a common European defense strategy, will lead to a fairer distribution of the transatlantic security burden. On the other hand, the idea of a European defense market closed to U.S. companies is a strawman. In the current political environment, the European Union has neither the ideological inclinations nor the institutional power, nor the strategic incentive to implement such program.
Europeans for their part need to show that their defense efforts will yield results. The problem with selling the E.U. initiatives to the United States as Europe doing more on defense is that the projects currently under discussion have little immediate payoff in terms of operational capability. The European Union has yet to prove that its defense initiatives will actually create a stronger partner for the United States, rather than just helping European defense industries win market share from American firms.
The key will lie in the European capacity to invest in defense projects that directly address capability shortfalls, identified through the NATO Defense Planning Process and the European Union’s new planning instrument, the Coordinated Annual Review on Defense. In this context, E.U.-NATO cooperation should be a greater priority. E.U. member states should reassure their allies that they are more than ever committed to deepen E.U.-NATO relations and maintain transatlantic interoperability. The U.S. administration has a role in implementing an ambitious roadmap for cooperation with the Union, based on the constructive joint declaration of the Warsaw Summit.
These approaches might require a leap of faith from Washington, but they are signs of inevitable changes in the transatlantic defense relationship.
Sophia Besch is a Research Fellow at the Berlin office of the Centre for European Reform as well as Non Resident Senior Fellow at the Atlantic Council. She is on Twitter @SophiaBesch.
Martin Quencez is a research fellow and deputy director at the Paris office of the German Marshall Fund of the United States, as well as associate researcher at the European Council on Foreign Relations.
Image: Kevin White