Tuesday, 24 January 2012

The European Defence Technological and Industrial Base – what is strategic for the future?

Could the financial crisis be the final nail in the coffin for Europe retaining a widely-capable defence industry? Opinions vary on the damage likely to be inflicted by the latest round of defence cuts but it is clear it that they will make life even more difficult for European industry. EDA’s annual conference hopes to show that there are ways Europe’s industry can survive and prosper in austerity.

The first thing to say is that the European Defence Technology and Industrial Base (EDTIB) is not a statistical fact – it is almost impossible to comprehensively track developments, once you go beyond the prime contractors,  as there is no clear data on the industry; a gap that the Agency is working to  correct.  So it is difficult to make categorical judgements. The suspicion is that the bigger prime contractors, with their wide portfolios will manage better than the smaller supply chain specialists but challenging times are ahead for all. There are also likely to be differences by sector reflecting the different market conditions in the Air, Land, Sea and Space domains.
It used to be said that unlike most other industries, the defence business was different, because it depended critically on national governments in their role as regulators, customers and investors. Yet, in Europe at least, this position is changing with the European Commission increasing its regulatory role following its “defence procurement directive” and national governments’ position as dominant customers and investors often under challenge as budget cuts bite, export markets become increasingly important and national policies on the ownership and control of defence assets allow significant third party investment.

The defence industry in many ways is not that different from other markets. It responds to investment. Europe’s defence industry is increasingly service oriented as design, development and production work declines. The question is how far this trend should go; for example what design capabilities should Europe retain and which can it allow to disappear? And how do you ensure the key skills required for future programmes are maintained?

Should Europe care about the future of Defence Technology and Industrial Base?

Liberal market economists might say no. However, the EDTIB possesses specialist skills, processes, know-how and facilities which are not replicated in the wider commercial economy and not easily reconstituted if lost.  If you allow such unique industrial capabilities to wither away you are either consciously disarming (some commentators have already warned of a trend towards demilitarisation in Europe) or committing yourself to long term dependency on specialist skills and facilities outside Europe with the inevitable consequences for autonomy of action.

So a robust and competent EDTIB underpins the credibility of Europe’s Common Security and Defence Policy. Allowing the indigenous industrial capability to produce sophisticated defence equipment to erode makes no sense if your ambition is for Europe to play a greater role in world affairs. In fact the contrary is necessary: you must protect what is important by investing in the key industrial capabilities needed for the future.

The EDTIB is also a valuable economic asset providing hundreds of thousands of high quality jobs across Europe. With many EU economies on the brink of recession it is worth recalling the full economic value of defence expenditure. There are considerable spill-over benefits to the wider commercial economy from high tech defence investment. This has been demonstrated across all the sectors but most clearly on aerospace.

Europe’s problem is that demand, supply and investment are all fragmented. Recognition that a fully adequate DTIB is no longer sustainable on a strictly national basis is widespread but translating this understanding into changed practice is not that straightforward. Europeans need to achieve consolidation on both sides of the market aligning and combining various needs in shared equipment requirements and meeting them from an increasingly integrated EDTIB supported by a rational rather than a fragment approach to R&D investment.

Yet such a break from the past requires courage and strong political will if all the obstacles are to be overcome. There is clearly a significant cost associated with Europeans not co-operating on defence and the Agency has launched work to better define this “cost”, part of which relates to industry, and such empirical data will be important in making the case for a more integrated European approach.

The EDA Conference will help frame the debate on the prospects for Europe’s defence industries. Where defence equipment is manufactured, where the skills and know-how to maintain and support defence systems is retained matters. It is an important issue with ramifications for Europe’s future role in the world and one we need to get right.