This Franco-Italian Naval Deal is a Litmus Test for European Strategic Autonomy

“We are at a moment of truth, which is to decide whether the European Union is a political project or just a market project. I think it’s a political project.”

– President Emmanuel Macron, Financial Times, April 16, 2020

Is the European Union a political project or a market project? Some, like French President Emmanuel Macron, see a political Europe as the means to secure the continent’s sovereignty and autonomy from America, China, and Russia. Ursula von der Leyen, president of the European Union, summed up this view when she promised to lead a “geopolitical Commission.” Other European countries — mainly in the more prosperous, northern part of the continent — tend to be uncomfortable with a more strategically ambitious European Union, confident that the status quo and their existing national economic models, and the alliance with Washington, are the best ways to advance their interests. Who wins this debate in Europe will have consequences for the future of the European Union, transatlantic ties, and global politics.

But how can one assess Europe’s ability to act geopolitically and in a strategically autonomous way? One indicator will be the continent’s ability to champion European strategic companies, like those in the defense, high-technology, and manufacturing industries. As it happens, a relatively small Franco-Italian agreement in the naval sector, currently under negotiation, could serve as a bellwether for European industrial and defense policy.

This month, the European Commission was supposed to determine whether to approve the acquisition of Chantiers de l’Atlantique, a French shipbuilding company, by the Italian state-owned company Fincantieri. Although at the moment everything is on stand-by due to COVID-19 — and the cost of the acquisition is financially marginal (only 60 million euros, or roughly $ 65 million) — this move could add teeth to a more “geopolitical” European Union that considers its strategic companies to be in competition with firms from China and Russia. This will also have implications for transatlantic relations given E.U.-U.S. frictions over trade policy, and American fears about Europe’s protectionist posture in strategic industrial sectors.

The crisis generated by COVID-19 is accelerating dynamics that have critical implications for the European industrial base, E.U. defense, and, by extension, for the continent’s relations with America, China, and Russia. The E.U.’s decision on Fincantieri’s acquisition of Chantiers de l’Atlantique may therefore represent a first test for the new European Commission in this regard, but given the deep divisions within Europe on these issues, it won’t be the last.

Paris, Rome, and a Troubled Agreement

In 2008, the South Korean group STX acquired the French shipyard Chantiers de l’Atlantique, based in Saint Nazaire, creating a new company called STX Europe. Founded more than 150 years ago, these yards make cruise ships, frigates, and military vessels. In 2016, STX Europe filed for bankruptcy and put the company up for sale. At this point, the Italian state-owned company Fincantieri acquired 66.66 percent of the company’s capital from the South Korean group. The very low offer by Fincantieri (79 million euros) reflected the financial and industrial difficulties that the South Korean group was facing. The remaining one-third of the company would have stayed in the hands of the French government, through the Agence des Participations de l’État (“Government Shareholding Agency”). The objective of the operation for Fincantieri was to add to its portfolio a leading shipbuilding business in order to face market competition in Europe (against the German Meyer Werft), but also globally (especially vis à vis Chinese and South Korean groups).

However, after the agreement with STX Europe, Fincantieri’s proposal was blocked by the French government. The idea of Macron and of the economy minister Bruno Le Maire was to avoid a foreign group’s control of the company. Paris proposed to Fincantieri a 50-50 split of the company. The Italians refused this offer, given also that STX had previously held two-thirds stake in the company, and in July 2017 the French government nationalized Chantiers de l’Atlantique (which had re-taken its historic name after the bankruptcy of STX Europe), in order to “defend the country’s strategic interests.”

In February 2018, Fincantieri signed a purchase agreement with the French state for 50 percent of STX France’s share capital for 59.7 million euros. The agreement also represented a sort of truce in the delicate relations between Paris and Rome. It provides that one percent of the French yard’s share capital would be lent by France to Fincantieri for a twelve-year period, giving it a majority stake. The Italian company is obliged to safeguard employment and protection of the yard’s technical know-how. At the end of twelve years, Fincantieri would have become the shipyard’s majority owner. In November 2018, Fincantieri submitted the deal to the French and German competition authorities.

Shortly after, France and Germany requested the European Commission to examine the deal. This was unexpected as the agreement does not have turnover thresholds that – according to European procedures – need to be notified to the Commission. However, France, joined by Germany, submitted a referral request pursuant to Article 22(1) of the E.U. Merger Regulation. This provision allows member states to request that the Commission examine a transaction that affects trade within the single European market and competition within the member states making the request.

Now, the European Commission will have to verify the agreement between Fincantieri and Chantiers de l’Atlantique. European Commissioner for Competition Margrethe Vestager has recently stated:

Chantiers de l’Atlantique and Fincantieri are two global leaders in this sector. This is why we will carefully assess whether the proposed transaction would negatively affect competition in the construction of cruise ships to the detriment of the millions.

High entry barriers into the civil shipbuilding market further complicate the situation. Global cruise-ship building is indeed dominated by three European companies — Fincantieri, Chantiers de l’Atlantique, and Meyer Werft. Fincantieri’s acquisition of Chantiers de l’Atlantique risks creating a monopoly. As a result, it’s unlikely that the European Commission will approve the deal.

The Old Rules vs. A New European Order?

This potential deal comes in a period in which Brussels is facing a difficult balance between sticking to longstanding E.U. competition rules and a renewed interest in industrial policy to create European champions able to compete against global players. On the one hand, the E.U. has traditionally privileged strict European competition rules to regulate the single market. European Commissioner Vestager has become a symbol of this orthodox approach. Previously, she engaged in a fight with U.S. giant Google in order to context its dominant market position. On the other hand, there are calls for the new “geopolitical Commission” to protect the European market from growing trade competition worldwide. The European Commission’s communication on E.U.-China relations clearly illustrates the shift from a purely economic to a more geopolitical approach.

Relatedly, the fact that the United States is increasingly restricting access to technology and domestic markets is further pushing the European Union to reshape its geo-economic agenda. Commissioner for Internal Market and Industry Thierry Breton is the main proponent of a renewed E.U. industrial strategy, and has said, “Europe today is the first industrial continent and our role is for it to keep this place” without being “naive” and taking into account “the geopolitical evolution of balance of powers”. In March 2019, the European Union presented its industrial strategy “to make sure European businesses remain fit to achieve their ambitions and cope with increasing global competition”.

The different approaches of Vestager and Breton seem difficult to reconcile. “Reducing prices for consumers has often been put front and center,” Breton said of the European Union’s competition law, but now “we need to put businesses back on the same level.” Vestager replied that, “You don’t build strong champions by picking a favourite, and protecting them from competition in Europe. You do it by giving everyone a fair chance.”

The difficult balance between E.U. competition and industrial concentration is also reflected in the different member states’ positions. A joint letter from France, Germany, Italy, and Poland asked the Commission to adapt its competition policy to counter the rise of Chinese state-supported companies and the excessive market power of American digital firms. France and Germany have already launched a “Manifesto for a European industrial policy fit for the 21st Century”. Paris and Berlin are also increasingly discontent about the European Union’s Commission competition policy because it recently blocked a rail mega-merger between France’s Alstom and Germany’s Siemens. France and Germany insisted the deal was needed to create a European champion — a train-building equivalent to Airbus that could compete with Chinese rivals. In financial terms, the 59.7 million euros Fincantieri-Chantiers de l’Atlantique deal is far smaller than Siemens-Alstom, which would have had combined annual revenues of some 15 billion euros . However, it is equally perceived as crucial to face the commercial threat posed by China.

In contrast, other European member states are opposing this renewed attention towards industrial policy. For instance, free-trading Nordic and Baltic countries see the approach as a political way to create European champions predominantly based in Paris or in Berlin. Brexit undermines the Nordic countries’ positions, as London could be counted on to oppose collective industrial policies and champion open markets and free competition. Swedish Trade Minister Anna Hallberg declared that, “the political landscape in Europe has been totally reshaped by Brexit ... For Sweden, as a country which always wants to promote free trade, it is very important for us now, when we have lost one of our closest allies, to shape new groups.”

Germany is the crucial “balancer” in these discussions. Sweden has indeed managed to convince Berlin to sit at the table of the five countries (Sweden, Denmark, Finland, the Netherlands, and the Czech Republic) that oppose the new European industrial policy. The Franco-Italian agreement between Fincantieri and Chantiers de l’Atlantique is also contested by the German government given that the main competitor to the merged Franco-Italian entity would be Germany’s Meyer Werft. In the past two years, Fincantieri delivered seventeen cruise ships; Chantiers de l’Atlantique, four; and Meyer Werft, nine. A deal between the French and Italian groups could therefore marginalize the German one.

Does Europe Need a “Naval Airbus”?

The military business of Chantiers de l’Atlantique is limited (from 10 to 15 percent of annual revenue), given that these yards mainly deal with civilian shipbuilding. However, the acquisition by Fincantieri could help create a “naval Airbus” — a pan-European champion with both a civilian and a military component. Even as the idea of a “naval Airbus” has been proposed from time to time in order to overcome problems related to overcapacity, fragmentation and redundant structures, the consolidation of the naval industry has been quite limited over the past three decades.

Fincantieri’s attempt to acquire Chantiers de l’Atlantique parallels the 2020 establishment of an equal joint venture between Fincantieri and Naval Group — the French national champion in the military naval sector. The new company, Naviris, opens “the way to a real construction of European naval defense,” as declared by the two CEOs of Fincantieri and Naval Group. The agreements between Italian and French groups crystallized longstanding joint military programs such as the Horizon-class destroyers and the Frégate Européenne Multi-Missions (FREMM) military frigates, and will set the stage to collaborate on the new European patrol corvette.

The Franco-Italian joint venture ideally fits with the new E.U. defense priorities, which aim to promote market consolidation, ideally through the formation of pan-European industrial consortia, joint ventures, and some mergers to be more competitive in the market vis-à-vis non-European players.  This animates U.S. skepticism about the newly proposed European Defence Fund becoming “a protectionist vehicle for the EU.” The creation of a new, specific directorate-general for defense industry and space within the European Commission and under the industrial portfolio led by Breton seems also to suggest a determination to promote “European champions” in the defense market.

However, even if the European Commission relaxes its stance towards the political creation of European champions, it seems unlikely to overcome industrial and national rivalries in the highly concentrated E.U. defense market. Not surprisingly, the Franco-Italian-led “naval Airbus” proposal has generated skepticism. Germany is concerned about a potential marginalization of its industries (Meyer Werft in the civil market and ThyssenKrupp in the military realm). Hein van Ameijden, managing director of Damen Schelde Naval Shipbuilding, pointed out that the call for European champions is exclusively led by political factors (given also the Franco-Italian groups are controlled by the states), rather than by real industrial needs, also considering that “the future belongs to the centers of technological excellence, not to national champions.”

Moreover, the Franco-Italian joint venture is still far away from a “naval Airbus,” and major progress will be achieved only through the joint development of weapon systems. The flagship project of Franco-Italian cooperation, the FREMM frigate, illustrated the difficulties in market consolidation: while sharing the same name, the ships’ commonalities are so limited that Naval Group and Fincantieri continue to compete with each other in the same market.

It is therefore clear that the focus on E.U. defense industrial policy does not lead automatically to European champions being able to compete with the American giants and with Asian rising industrial conglomerates. In aerospace, France and Germany are jointly developing the new sixth-generation Future Combat Air System fighter, while Italy is preferring, despite Brexit, to collaborate with the United Kingdom (and Sweden) to a substantially rival project, the Tempest. In spite of the rhetoric about the E.U. defense momentum linked to a renewed interest towards industrial policy and European champions, what we are actually witnessing is business as usual and a persistent fragmentation of the defense market. Intra-industry rivalries could also be key to understanding the difficulties in financing the new European Defence Fund or the so far limited ambitions of PESCO.

COVID-19 and Future Developments

The novel coronavirus is playing a fundamental role in the acquisition of Chantiers de l’Atlantique by Fincantieri. The Commission has postponed the decision on the deal to a future date, and has announced its intention to relax E.U. competition rules to allow member states to have the necessary flexibility to revive their economies ravaged by the virus. The directorate-general for competition is indeed already allowing unprecedented exceptions to state aid. In this regard, Vestager stressed that the European Union needs to defend its strategic assets from foreign takeovers triggered by the novel coronavirus. All European countries welcomed these announcements, asking also “the Commission to suspend the deadlines relating to the pending infringement procedures”. Moreover,
these developments intersect with the ongoing decisive discussion in Brussels about the so-called Coronabonds. A coalition of European states (France, Italy and Spain, among others) is supporting forms of mutualized sovereign debt instruments to relaunch the E.U. economy. Other more fiscally conservative countries are opposing the creation of new instruments.

The naval sector, especially the cruise industry, is certainly one of the most affected by the virus. Fincantieri hopes that the impact of the epidemic, which has prompted Italy to impose an unprecedented blockade, can soften the hard line of Brussels. A possible negative decision by Vestager could also further irritate the Italian government, already quite disappointed by the perceived lack of help from its European neighbours in the supply of medical and protective equipment and by the re-emergence of internal E.U. border checks. Some are also arguing that China is successfully filling this void. Allowing Fincantieri’s acquisition of Chantiers de l’Atlantique could also be a geopolitical message to reinforce EuropeanUnion’s unity during a crisis. However, a relaxed E.U. competition policy and a stronger industrial policy is unlikely to mitigate intra-industry rivalries in the traditionally fragmented defense market.

It is time for the European Union to choose its priorities, and the COVID-19 crisis is accelerating a longstanding debate in Brussels between the often irreconcilable E.U. competition rules and industrial concentration policies. Accepting or declining the purchase of Chantiers de l’Atlantique by Fincantieri will be therefore a first crucial test of many to assess European ambitions on strategic, industrial, and technological autonomy.

Antonio Calcara is a post-doctoral researcher at LUISS University in Rome. He won the Egmont and the European Security and Defence College “Global Strategy Ph.D. Prize” in 2019 and is the author of European Defence Decision-Making: Dilemmas of Collaborative Arms Procurement (Routledge).

Image: Wikicommons (Photo by European Parliament)