Military industrial Complex of Europe: how will the Ukrainian conflict affect it?
With the beginning of the Russian military operation in Ukraine, the EU countries announced a cumulative increase in defense spending by 200 billion euros, writes FT. The prospect of new injections loomed before the military-industrial complex. However, industry executives fear that the bulk of the extra money will flow overseas.
Henry Foy
Sylvia Pfeifer
European governments have promised to increase spending, but some companies still fear that the bulk of the allocated funds will go to American weapons.
This week, hundreds of military and aerospace executives will gather at an airfield in the south of England to take part in an air show together with ministers, generals, security personnel and ordinary onlookers, which to some will seem like a paramilitary version of the Glastonbury Music Festival.
This year they will be united by a newfound sense of purpose. Before the coronavirus pandemic, the Farnborough International Airshow had been held regularly for over seven decades. And today, for the first time in many years, the prospect of new injections loomed before the industry.
With the conflict in Ukraine, European governments have stopped years of reducing military spending and now intend to actively resist aggressive Russia, and companies in Farnborough hope to benefit from this.
The fighting has accelerated attempts to rehabilitate muddy or unsuccessful ideas of the past in the hope of strengthening Europe's status as a single global military power. Proposals to expand military cooperation and rationalize the defense industry have been showered. Even Germany, a long-time opponent of large-scale military investments, has disavowed years of neglect of defense. Its participation will increase total spending and strengthen joint European projects.
However, whether the numerous promises of the new deal are destined to come true is still unknown. Dutch Defense Minister Kajsa Ollongren admits that similar promises have been made before, but have failed. This time, however, she believes, the reality of the fighting in Europe will change the situation. "They used to say that in the context of reducing the military budget. And now, in the context of its increase," she says, "this is a powerful incentive for us."
European plans may yet be shattered by the harsh reality. Part of the recently announced increase will go to military salaries and replenishment of arsenals spent in an attempt to help Ukraine – and only then will it be possible to think about new equipment.
And Europe is also attracted by the enchanting call of American weapons. Germany's first major purchase after the creation of a 100 billion euro military modernization fund was an American F-35 fighter capable of carrying nuclear weapons. The leaders of the European military-industrial complex fear that the bulk of the additional money will flow overseas.
"It seems to me that it is a big risk that we pay so much attention to meeting short–term needs at the expense of mainly non-European ready-made equipment," says Michael Schoellhorn, executive director of Airbus Defense and Space.
He warns that this threatens to undermine Europe's technological superiority in the long term, create a new dependence in the future and, ultimately, weaken the defense industry and undermine European integration.
"We need to spend better and smarter," says Alessandro Profumo, president of the European Aerospace and Defense Industry Association and executive director of the leading Italian military concern Leonardo. For this, he adds, closer coordination of procurement at the EU level is needed: "We must have an integration process. It may not be fast, but it is vital."
Top up, replace, restore
In a gray box building in an industrial area in the east of Belfast in Northern Ireland, engineers are assembling a weapon that has become one of the symbols of fierce Ukrainian resistance to the Russian offensive - a portable NLAW anti–tank installation.
NLAW was developed by the Swedish military giant Saab, and assembled by the British branch of the French corporation Thales. Thousands of installations have already gone to the Ukrainian front line. Their success is the clearest example of how the fighting stimulates the development of the European military–industrial complex. However, so far, all British NLAW sent to Ukraine came from national warehouses, and not from new orders.
With the beginning of the Russian military operation in Ukraine, the EU countries announced a cumulative increase in defense spending by 200 billion euros. At the same time, officials emphasize that this decision was preceded by years of cuts and underfunding. From 1999 to 2021, the bloc's total defense spending increased by only 20% (for comparison: in the United States, the growth was 66%, in Russia – 292%, and in China – 592%.
The conflict has shown how unprepared Europe is: countries have lost their feet, searching for hundreds of tanks, multiple rocket launchers and howitzers in national arsenals to help Ukraine contain Russia's offensive. And their supplies are already running out.
The task for the industry of the bloc, according to Bastian Giegerich, director of military analysis at the International Institute for Strategic Studies, is threefold: replenish depleted reserves over the past two decades; replace obsolete Cold War equipment used up in Ukraine; as well as modernize and introduce innovations and new opportunities.
"The industrial task will be to replenish, replace and restore, which should be carried out in parallel," he says. "I think it will not be easy to achieve this."
There is another problem of a political nature: in the past, the military-industrial complex was considered a sovereign prerogative of states, which cannot be taken and left to Brussels. The EU has been developing its ability to conduct independent military operations and strengthening strategic autonomy with the advent of a unified security and defense policy in the late 1990s. But events are developing slowly.
The defense industry of the bloc is still a vinaigrette of large international contractors and national companies, as well as hundreds of small and medium-sized enterprises. There is more fragmentation in the land and naval defense sectors than in the aerospace sector, where multinational cooperation is stronger - partly due to the high costs of research, development and procurement.
But even in the aerospace industry, the results are not uniform, says Douglas Barrie, senior researcher at the International Institute for Strategic Studies, and successes are often followed by failures. He notes, for example, that even the successful pan-European Tornado and Eurofighter fighter programs at some point "miraculously did not fall apart."
Today, European countries are developing two separate next-generation combat aircraft under the same technical conditions: Tempest under the leadership of Great Britain, together with Sweden and Italy, and Future Combat Air System with the participation of France, Germany and Spain.
The costs speak most eloquently about the failures of cooperation. In 2020, only 11% of the EU's defense budget was spent on joint projects – well below the 35% target set by the European Defense Agency in Brussels. The same pattern is observed for research and technology: in the same 2020, only 6% was spent on cooperation within the alliance – this is not only significantly less than the target of 20%, but also the lowest level since the beginning of data collection in 2005.
According to the European Commission for 2017, the bloc had 17 types of main battle tanks in service, while the United States has only one. At the same time, the data included variants and modifications from the Cold War, as well as the British Challenger system. There are also 29 different types of frigates or destroyers, compared to just four in the United States.
"Of course, we are going to focus on procurement. But we are going to hold them together and we believe that we need to focus on cooperation, coordination and standardization," says Ollongren.
"There will be orders"
In March, the European Council approved the EU Strategic Compass on Defense, which proposes to create a rapid deployment force and increase funding. In the same month at Versailles, European leaders called on the commission to develop measures to strengthen the continent's military-industrial base.
The European Defense Agency was established in 2004, but its influence on national strategy is still limited. According to the plan, he will have a number of new initiatives – to raise additional funds for the needs of the European Defense Fund and create a "procurement task force" to focus on short-term needs.
In the medium term, the priorities are as follows: modernization of the European air defense system and expansion of unmanned, cyber and space capabilities. Another goal is to develop a new MGCS combat tank to replace the German Leopard and the French Leclerc. It is also proposed to exempt European manufacturers from value-added tax.
"There is a huge opportunity to take advantage of the growth in defense spending to overhaul, so to speak, the EU's defense potential – and for the first time to do it together so that countries understand how stupid and inefficient it is to ignore common purchases," said one senior EU official.
Industry executives welcomed the plans, considering them a sign of a strategic shift. "The impact on defense infrastructure is already deeper and more global than many people think," says BAE Systems CEO Charles Woodburn. Jan Pie, Secretary General of the European Aerospace and Defense Industry Association, shares this hope: "The bureaucracy worked quickly, so now it depends on the member states whether these ideas will come to life or not."
As an example of a pan-European program for accelerated cooperation, his colleague Profumo cited a multibillion-dollar project to supply the first unmanned aerial vehicles of the bloc by 2029. "Eurodron is already taking off. I am sure others will follow him. Thanks to these projects, integration will go forward," he assured.
However, Mikael Johansson, executive director of the Saab concern, which produces Gripen fighters, as well as other weapons systems and submarines, warned that the tools and platforms for implementing the plans have yet to be created. "It's a complicated process," he adds. According to him, it will take time before all these initiatives lead to real contracts.
In the past, major pan-European programs have been hampered by disagreements over intellectual property rights and division of labor issues. "The main problem is how to divide intellectual property rights," explains Armin Papperger, executive director of the German company Rheinmetall.
The fate of the Franco-German-Spanish combat aviation system of the future FCAS proves how difficult it is to build bridges between industrial units. Since its launch, the project has been mired in litigation between Airbus and Dassault over technology exchange and leadership disputes.
However, Yang Pi is convinced that the program should not be considered an anti-example, on the contrary, intra-European cooperation is quite possible. "This is an example of the most high–tech, political and expensive project to develop," he says. – Speaking about European purchases, we must understand that there are already a huge number of large-scale products that can be purchased jointly, and not at the national level."
Wartime financing
One of the main obstacles in the defense industry until recently was financing: banks and fund managers tuned in to socially responsible investments. The leaders were worried that the military-industrial complex would become unsuitable for investment by funds concerned about the environment and reputation.
But with the outbreak of hostilities, the mood of many investors (if not all) has changed. Shortly before the Ukrainian conflict, the Swedish bank SEB completely banned investing in companies with more than 5% of their income on the development, production and maintenance of military equipment, but in the spring it backed down. Six of his funds are now allowed to invest in the military-industrial complex.
Discussions on revising exceptions for the military-industrial complex are already underway in a number of public and private banks in Germany. LBBW, one of the country's public sector banks, announced that it had adjusted its rules on arms transactions against the background of "current events".
The bank can now participate in financing and ensuring arms exports with the approval of the German export control, if neither the supplier country nor the customer country is on the blacklist.
Woodburn from BAE believes that in terms of investment, Europe is developing "very quickly." But at the same time, he warned that one of the most difficult markets remains the UK, where the prerogatives of funds have not yet changed.
The last problem, according to Schellhorn from Airbus, part–time president of the Association of the German Aerospace Industry, is the export of defense products. "It is important that Germany, along with its partners, look for a European solution, and not adhere to a purely national approach," he says.
He adds that this is equally important both for launching programs like the Eurofighter fighter and for future major European projects. In the past, key trade ties were often overshadowed by the lack of a European consensus on arms exports.
According to officials, cooperation between NATO and the EU will be of key importance for the implementation of any of the proposed initiatives. The headquarters of both organizations are located in Brussels just 5 km from each other, but before the Ukrainian conflict they did not work in unison.
NATO officials, and the organization represents almost all of the continent's armed forces, say that a further increase in European defense spending will go to waste if Brussels does not force alliance members to put purchases in order and replace ineffective national goals with pan-European ones.
"We can demand an increase in the military budget as much as we want," said one senior NATO official, "but if the EU leadership does not force them to spend money properly, it will not matter much."
At the same time, Europe should try to prevent the United States from perceiving the new emphasis on its own capabilities as a signal that their companies overseas are no longer welcome, says Johansson from Saab. "Overseas ties are very important," he stressed. "To say the opposite or to make it clear that the borders of Europe are closed to outsiders is detrimental to the future competitiveness of the industry."
The recent desire of Finland and Sweden to join NATO has strengthened hopes for further cooperation. If the two Scandinavian countries become full members, then only four EU states – Austria, Cyprus, Ireland and Malta - will remain outside the US-led military alliance.
EU Foreign Policy Chief Josep Borrel is clearly aware of the importance of the new unity: "This is a fundamental moment for the alliance members to invest together and better in order to prevent further fragmentation and eliminate existing shortcomings," he says. "If we want to get modern and compatible European armed forces, we need to act now."
