Union’s search for its geopolitical role and role geopolitical for its Union’s search European of the process wider of the part is Fund the Launching had changed. times that showed Parliament European of the majority the and by states member the by proposal of the acceptance The past. the with break to initiative the took Commission Juncker The Union. European in the ataboo been had always in defence investing all, After a as many commentators by characterised was (EDF) Fund Defence aEuropean 2016November establish to of proposal Commission’s European The © Shutterstock be asked is whether the Fund has been been has Fund the whether is asked be to later, aquestion four years than More policy. and defence security its strengthening The real test is yet to come European DefenceFund 2021 FEBRUARY game changer . companies’ chains of national protection. chainscompanies’ of national protection. defence break to attempts several made Commission European the past, In the Launching the EDF success? EDF’s the guarantee to in order met be have to criteria and which pot: in the of amount money alarger with years seven of period a for start will EDF fully-fledged the year This expectations? match results the Do years. more afew take will of results delivery the although end, its approaching is far. so phase pilot initial The successful € 8 billion. What are the prospects prospects the are What 8billion.

Dick Zandee Clingendael Alert Clingendael Alert

Governments in European capitals relied connected to conditions for cooperating in on the EU Treaty’s clause exempting the multinational consortiums of technology defence industry from the common market institutes and defence industries. In other rules.1 The perpetuum mobile of national words: by using the Fund, participants are demand to supply cycles has resulted in forced to establish cross-border cooperation industrial fragmentation, intra-European formats, consisting of at least three different duplication and a waste of money. As a entities in three different member states. result the armed forces of the member states Furthermore, the EDF offers additional funds often operate with different equipment, for the inclusion of Small and Medium-sized which limits the potential for multinational Enterprises (SMEs) and for projects launched defence cooperation and integration while under Permanent Structured Cooperation increasing procurement and maintenance (PESCO).3 The percentage of financing costs. In the early years of the 21st century can vary from 100% for feasibility studies case law of the European Court of Justice to 20% in the case of the development of emerged, which ensured that member demonstrators. In essence, the financing states could no longer invoke the Treaty’s percentage is lowered when a project leaves exemption clause without the burden of the drawing board and enters the factory proof falling on governments. With the EU floor. Co-financing by member states and/ Directive on Defence Procurement – which or industry is essential to carry the project entered into force in 2011 – the Commission forward from the development phase into aimed to narrow the scope for activating full-scale production. the Treaty’s exemption clause. However, in its own evaluation in 2016, the Commission concluded that the percentage of cross- Trial, not much error border contracts had remained the same – about 10 percent – compared to the period In order to test the EDF the Commission before the Directive entered into force.2 launched two pilot programmes, together The launching of the EU Global Strategy worth € 590 million: the Preparatory (EUGS) in June 2016 provided an opportunity Action on Defence Research (PADR, to develop an alternative approach. 2017‌-‌2019) with a € 90 million budget and Several steps were taken to implement the the European Defence Industrial Development EUGS; one of them was prepared by the Programme (EDIDP, 2019-2020) with a Commission, resulting in the proposal for € 500 million budget. The implementation of the (EDF) with a the PADR was handed over to the European financial volume of€ 13 billion for the period Defence Agency. In total 200 entities 2021-2027, which was launched in 2017. (the private sector, academia, research centres) in 22 EU member states and The EDF is not meant to buy military kit for participated in 18 projects, some of which the EU, but to stimulate member states to are still ongoing. SME participation is 22% jointly procure the same equipment while at of the total financial volume. Most projects the same time strengthening the European are small and vary from basic research to defence technological and industrial base more mature technology levels.4 The largest through common defence research and project is OCEAN 2020 with a financial grant innovation. It offers financial incentives of € 34.5 million. In November 2019 the project resulted in the successful testing

1 In the (current) Treaty of the Functioning of the : Article 346. 3 Permanent Structured Cooperation (PESCO) is 2 Report from the Commission to the European a framework and process to deepen defence Parliament and the Council on the implementation cooperation between those EU Member States of Directive 2009/81/EC on public procurement in which are able and willing to do so. the fields of defence and security, to comply with 4 Preparatory Action on Defence Research 2017-2019, Article 73(2) of that Directive, COM (2016)762 final, June 2020, #EUDefenceIndustry, ec.europa.eu › , 30.11.2016 presscorner › api › files › attachment

2 Clingendael Alert

of a demonstrator for systems and multi- The next phase data integration for maritime situational awareness in the Sea of Taranto.5 The pilot phase has served its purpose. Now, it is time for the next step. The EDF The first EDIDP calls were launched in ­2021-2027 with a total budget of € 8 billion 2019 and the second batch still has to be has received criticism from two sides. awarded. The first batch consists of 16 Proponents argue that less money is projects for a total amount of almost € 200 available than the amount of € 13 billion million, in which 166 entities in 24 member as originally proposed by the Commission. states participate. SMEs form 37% of the They interpret the reduction of the budget total number. Larger EU member states as a sign of decreased political attention. participate in most projects: (27 Opponents argue that each from the entities), (23), (19) and EU budget accorded to the EDF has to be (18). Countries with a smaller defence rejected as the ‘militarisation of the EU’. industrial base score lower, although the Comparable views can be heard in member number for (18) is remarkable. states from parties on the left of the political Apparently, Athens was well prepared to spectrum. Furthermore, in some countries tender for a large number of projects while such as the , populist parties also other smaller countries still had to catch object to the EDF as they reject the EU as up in terms of establishing coordination such. These political considerations entail a structures between governments and future risk for the EDF. Both in the European defence companies with little or no cross- Parliament, which has decision-making border experience. Financial grants varied authority on the EDF budget, as well as in from € 875,000 to € 44 million. Exceptionally, national parliaments considerable opposition two projects were granted ‘direct awards’ is likely to persist in the years to come. by the Commission: the Eurodrone and the European Secure Software-defined From the financial perspective only, the EDF Radio (ESSOR) with € 100 million and is a small fund: it represents 0.74% of the € 60 million respectively – both addressing total EU Multi-annual Financial Framework important European capability shortfalls. 2021-2027 budget of € 1.074 trillion. Those projects were launched several years The (civilian-driven) innovation and research ago and are approaching the demonstrator programme (€ 95.5 billion) phase. Although such direct awards are not is twelve times the size of the EDF budget.6 in line with open competition, an important However, the EDF is not meant to turn the argument in support thereof is the ‘visibility’ Union into the centre of defence investment. and concrete output in the near future. They The bulk of the money has to come from will serve as examples for politicians and the the member states.7 To a large extent the public that European taxpayers’ money has success of the EDF will depend on the justifiably been spent on improving European investment of the member states and their capabilities. Based on the selected EDIDP national defence companies. The following projects so far, the conclusion can be drawn five preconditions are key for positive results that they fulfil to a large extent the essential of the EDF. criteria: capability-driven and strengthening cross-border defence industrial cooperation.

6 In March the will launch its Action Plan on Synergies between the civil, defence and space industries. This might unlock additional money for (dual-use) related research and innovation. 7 In 2019 the EU member states spent € 41.4 billion on defence equipment procurement, including 5 See video: https://ocean2020.eu/the-­ R&D. See: Defence Data 2018-2019 – Key mediterranean-sea-demonstration-presentation/ findings andanalysis, , The Baltic Sea demonstrator is planned for https://eda.europa.eu/docs/default-source/ August 2021. brochures/2019-eda-defence-data-report.pdf

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1. The further down the road from research 4. The Commission’s financial incentives to the development of defence equipment, require defence industries as well as the larger the investment share of the governments to increase cross-border member states has to be, up to 80% at cooperation. For the larger member the beginning of what is often called states with sizeable defence companies ‘the valley of death’: the phase in which this is increasingly becoming their bread research and development has to turn and butter as their national markets into industrial production. It marks the have become too small to sustain the turning point for moving from relatively defence technological and industrial limited to large-scale investment. The first base within their borders. For the test to come are the multinational smaller EU member states it is still a big Eurodrone and ESSOR programmes as challenge, in particular as their business they are approaching this milestone. firms – often Small and Medium-sized Thus, co-financing by the member states Enterprises – have had no access to the is a key factor for the EDF’s success in the markets in the larger European countries. years to come. More cross-border cooperation requires a 2. In most Ministries of Defence the synchronised and proactive attitude from EU is still a strange bedfellow as for both governments and industries in order generations the military worked mainly to participate in multinational defence in the NATO context. Furthermore, while equipment programmes. capability priorities defined by the EU and 5. Finally, a presence in Brussels is NATO are taken into account, national important. Larger member states defence planning continues to be driven have more human resources available primarily by national demand and defence to participate in the activities of the industrial supply, even in countries with a international institutions. Smaller member relatively small defence technological and states, whose pools of experts on defence industrial base such as the Netherlands. R&D and procurement are relatively In order to open the box for large-scale small, have to prioritise international investment by a group of member states, assignments. Nevertheless, if smaller the EDF has to become a major input member states aim to maximise their factor for national defence plans and participation in the EDF, they need procurement programmes. If the train is to invest in human capital including missed here, the EDF locomotive will pull secondment to the European it into the wilderness sooner or later. Commission’s new Directorate-General 3. The PADR and EDIDP pilot programmes on Defence Industry and Space. are capability-driven and it is essential to ensure that the EDF projects in the The EDF offers potential for breaking 2020s will also address key European national defence planning and industrial military shortfalls8. A precondition is to production cycles, which in the past have connect the Fund to the activities of the resulted in intra-European duplication, European Defence Agency: on defining a waste of taxpayers’ money and a lack the military shortfalls (the Capability of standardisation and interoperability Development Plan); on monitoring the among the armed forces of European plans of the member states to improve countries. If EU member states are European military capabilities and to serious about improving European military explore the potential for collaboration capabilities in order for Europe to take more (the Coordinated Annual Review on responsibility for its own security, the EDF Defence); on the commitments and offers an important opportunity to take steps projects in the context of Permanent in that direction. Structured Cooperation.

8 The EU Capability Development Plan – 2018 CDP Revision, European Defence Agency, https://eda. europa.eu/docs/default-source/eda-publications/ eda-brochure-cdp

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About the author

Dick Zandee is Head of the Security Unit and senior research fellow at the Clingendael Institute in The Hague.