PANEL 1 - Effective defence collaboration – a business case for Europe

The financial crisis will continue to have a significant impact on European military capabilities. This is one of the important topics which will be addressed at EDA’s annual conference on 31 January 2012.

As EDA data shows, Europe’s defence expenditure has been declining steadily since 2005.  The current crisis has made matters worse. Yet Europe collectively still spends around 200bn Euros per year. The challenge is for Member States to invest in a more efficient way so that Europe can retain and sustain the effective military capabilities it needs to play its role in the world.

Given the budgetary pressures it would be all too easy to conclude that individually Member States have no option but to cut military capabilities. But difficult times call for imaginative policies and new approaches. The Pooling and Sharing concept provides Defence Ministries with an opportunity to “prosper” collectively rather than “decline” individually. It needs to be exploited to the full.

Defence Ministers have recognised that it is better to have excellent collective capabilities than unsustainable or unattainable national ones. Since the informal EU Defence Ministerial at Ghent in 2010 there has been a strong political will to pool and share capabilities more systematically. This powerful political dynamic for progress was evident in last month’s EDA Ministerial Board which saw overwhelming support for EDA's activities in support of Member States.
But the actual practice of pooling and sharing does not occur overnight. It needs hard work to get projects started. The move from a national approach to a collaborative one – such as pooling and sharing - is to a large extent about a change of culture. Member States need to consider whether they can live with giving up national control and accept a degree of interdependence.  These are challenging notions, particularly in the area of defence, where sovereignty often plays an important part in national decision-making.

And there are also important practical aspects related to sharing military capabilities: a likeminded partner (or partners) needs to be identified; and that “like-mindedness” must have a very good chance of being sustained in the long term and at moments of crisis and perhaps in extremis war. That is why much of pooling and sharing in the past has been regional - linking countries with the same geopolitical outlook. Member States with strong pre-existing patterns of co-operation and a largely common outlook: Nordic Defence cooperation being an excellent example.

There is a need to prioritise the work and to focus on those projects that will have the biggest impact - which will retain or deliver key military capabilities that are otherwise at risk, or which save significant sums of money. The first targets should be those activities which will deliver the most added value. Delivering major Pooling and Sharing projects will be important but of equal if not greater long term value is the need for a more sustainable, structured approach to multinational cooperation. There is a requirement to develop new, more efficient ways of doing collaborative business if Europe wants to sustain and develop its defence capabilities in this period of financial austerity given that these financial difficulties could well last for some time.
It is for Member States to decide whether and, if so, with whom they pool and share. But EDA can help them work more effectively: amongst other things by acting as a support hub, identifying best practice and the key lessons learnt from previous programmes,  including  important factors such as getting the business case right and understanding the industrial perspective.

Pooling and sharing is not always straightforward. Nor is it risk-free. Ministers have seen the enormous potential to unlock significant financial and military benefits - EDA's task is to help Member States deliver them. That will require imagination, innovation, risk-taking and hard work.

Yet given the budget situation, is there an alternative? Without transformation Europe risks having hollow forces: undermining the future effectiveness of national capabilities and Member States’ ability to contribute to crisis management.

The bottom line is that Europe’s role in the world can only be sustained through better cooperation.

PANEL 2 - Defence Market: Going Global – an Opportunity and a Necessity?

A globally competitive European defence industry is vital to ensure that Europe is able to respond with autonomy to today’s and tomorrow’s security and defence challenges. At a time of increasingly constrained defence budgets in Europe and the US, European (and US) defence companies have a choice of shrinking in line with their domestic defence budgets or seeking greater access to global markets to survive and perhaps thrive in a time of austerity.

Consequently, if Europe is to retain a robust Defence Technological Industrial Base we have to work towards maximising the global competitiveness of its industry. This and associated issue of reciprocal market access are key topics in the debate on defence at a time of financial challenge. The EDA Annual Conference 2012 will bring together some of Europe’s leading defence experts to examine these very issues.

Among its many advantages defence export success can help provide resources for continued investment in the critical defence research and development that determines future competitiveness and industry’s ability to produce the leading edge defence equipment necessary to capture military sales.

An unfortunate consequence of defence budget cuts in Member States has been reductions in government defence R&D. The R&D situation looks bleak and this is at a time when Europe’s significant R&D gap with the US is expanding and R&D investment among competitors is growing. While exports often can only be achieved at the cost of technology transfer and licensed production – with the associated risk of losing industrial capabilities, skills and technologies, to the detriment of the long term heath of Europe’s Defence Industrial Base (EDTIB) - they can also foster important partnerships and facilitate cooperation that can stimulate technological advancement and innovation. They also help spread some the high overhead costs often associated with defence procurement and provide economies of scale reducing the procurement cost for the domestic European customer.

Last year marked the fifth anniversary of the launch of the Intergovernmental Regime on Defence Procurement, a landmark agreement by EU governments towards opening up to competition some of the most sensitive areas of Europe’s defence market. The regime has pioneered a gradual transition from closed and fragmented national markets to a more open, transparent and competitive marketplace where value for money is the key procurement priority. Together with the European Commission’s new defence directives on procurement and intra-Community Transfers real progress has been made towards the creation of an internationally competitive European defence equipment market. These are laudable developments but not enough – by themselves – to ensure the future of Europe’s defence industry.

If the foreseeable growth in defence markets is, as it seems, to be found outside Europe then industry has to tap into these markets to stay competitive, innovative, and healthy. Better access to the global marketplace therefore has become crucial. At present, it is often hampered by various restrictions and obstacles embedded in national laws, rules, policies and practices as well as export control systems. Some of the challenges are just too great for industry to handle on their own.

No serious attention has yet been paid to this issue. Important questions must be addressed on how governments and institutions can play a constructive role in enhancing European defence industries competitiveness and innovative advantage in the global defence market and facilitating market access through concrete measures to limit barriers and inherent obstacles to defence trade. Collectively governments, institutions and industry must develop adequate policies and strategies that would address such issues as technology transfer requirements, local content and work share rules, offsets and juste retour and foreign investment policies.

One thing is certain fortress Europe policies and protectionism will not save Europe’s defence industrial base, this is simply a dead end. Europe’s defence industries future depends on looking outward and embracing the challenge of globalisation.

The EDA Annual conference will be a first step towards providing solutions on the way forward.
PANEL 3 - 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.