The European Defense Fund: What Does it Mean for Transatlantic Security?

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by Mary Capparuccini and Mitch Yoshida

Summary

The European Commission launched the European Defense Fund (EDF) on June 7, 2017. It will provide €590 million through 2020, and at least €1.5 billion per year after 2020, to incentivize collaborative defense research, development and acquisition within the EU. The aims of the fund are to reduce duplication in defense spending, produce more defense capability for every euro spent, and enhance the interoperability of European forces. While the EDF is likely to facilitate modest improvements in member states’ defense capabilities to the benefit of the EU and NATO, it has more potential as a model for future joint defense spending programs. As the EDF is implemented, European policymakers should be prepared to mitigate political risks that the fund may pose to itself, the EU, and NATO.

Background

Rationale

The EDF was first announced by President Jean-Claude Juncker of the European Commission – the executive arm of the EU – in his September 2016 State of the Union address. Arguing that “[s]oft power is not enough in our increasingly dangerous neighborhood,” Juncker urged a “move towards common military assets, in some cases owned by the EU. And, of course, in full complementarity with NATO.” He further noted that “the lack of cooperation in defense matters costs Europe between €25 billion and €100 billion per year,” and argued that “[f]or European defense to be strong, the European defense industry needs to innovate. That is why we will propose before the end of the year a European Defense Fund, to turbo boost research and innovation.”

Following this, in November 2016, the European Commission presented the European Defense Action Plan (EDAP), which positioned the EDF as the centerpiece of a broader effort to 1) improve the efficiency of member states’ defense spending through investment in joint defense capabilities, and 2) foster a competitive and innovative defense industrial base. The initiative was welcomed by EU heads of government during European Council meetings in December 2016 and March 2017, and the EDF officially launched on June 7, 2017.

While EU officials have emphasized a deteriorating security environment, and the consequent need for more efficient defense spending and greater interoperability, as reasons for the EDF’s creation, the move was also influenced by two other developments. The first was Britain’s June 2016 referendum decision to leave the EU, which could – depending on the outcome of “Brexit” negotiations – reduce EU defense capabilities by 25%. The second was the Trump Administration’s initial ambiguity about its commitment to NATO’s Article 5 collective defense provision. In remarks at a NATO summit on May 25th, President Trump noted that the U.S. spent more on defense over the previous eight years than all other NATO members combined and urged all members to spend at least 2% of their GDP on defense. But he did not reaffirm the U.S. commitment to Article 5.

Structure

As currently laid out, the European Defense Fund will disburse €590 million through 2020 and €1.5 billion after 2020. In both phases, this funding will be broken into two parts. One portion will go to collaborative defense research. Starting in 2017, the EU will offer grants for collaborative research on innovative defense technologies and products that focus on priority areas previously agreed on by member states. This “could typically include electronics, metamaterials, encrypted software or robotics.” The funding for these grants will come directly and fully from the EU budget. €90 million is allocated until the end of 2019, and €500 million per year after 2020.

The second portion of the fund will incentivize the joint development and acquisition of defense equipment and technology.  Only collaborative projects will be eligible, such as buying helicopters in bulk to reduce costs or jointly investing in the development of drone technology. This aspect of the fund will be co-financed – mainly by member states but also by the EU budget – with higher financing from the EU budget for projects that operate under Lisbon Treaty’s provision for Permanent Structured Cooperation. National contributions financed through higher deficits and debt will not be subject to the EU’s fiscal rules under its Stability and Growth Pact. For this portion of the EDF, the EU will provide €500 million for 2019 and 2020, and an estimated €1 billion per year after 2020. The Commission estimates that, post-2020, this part of the EDF “will leverage national financing with an expected multiplying effect of 5. It could therefore generate a total investment in defense capability development of €5 billion per year after 2020.” Altogether, Commission projects that the EDF – totaling €1.5 billion per year after 2020 – could generate €5.5 billion of joint defense investment per year after 2020.

Prospects and implications for transatlantic security

For the EU, the material impact of the EDF will be modest because of its size compared to total spending on defense research, development and acquisition across the Union. While €500 million for research and €1.5 billion for development and acquisition (before the 5x multiplier effect) will make the EDF sizeable compared to NATO’s €1.29 billion operations, strategic command center, training and research budget, EU members minus Britain collectively spent €25 billion on these areas in 2014.

But the EDF could have a more significant impact as a model for future joint spending on defense. If widely utilized and deemed a success by member states, an enlarged version of the EDF or a successor fund could reap much larger efficiency gains. There is significant scope for such gains at present. 80% of procurement and more than 90% of research are run on a national basis, and it is estimated that across the EU up to 30% of annual defense expenditures could be saved through a pooling of procurement alone. Furthermore, the continent’s fragmented approach to defense spending has led to unnecessary duplication and deficiencies in interoperability that negatively affect the deployability and effectiveness of forces – especially in multi-state operations.  

Similarly, the EDF’s prospective material impact on NATO, whose members spent more than €204 billion on research, development and acquisition in 2016 alone, will likely be positive but small unless it is expanded or becomes a model for a larger fund. There are, moreover, no indications that the EU intends the EDF as a step toward competition with NATO. Given the breadth and depth of transatlantic ties, and the fact that Commission has repeatedly stated that the EDF is intended to complement the Alliance, this is very likely to be the case.

The EDF does, however, pose political risks to itself, the EU, and NATO. If EU member states choose to free-ride on joint defense investments and reduce their defense budgets accordingly, politically-divisive debates over burden-sharing would likely emerge. In the event that this leads to a net reduction in European capabilities, U.S. concerns about burden-sharing in the NATO context would increase – thereby undermining the political cohesion of the Alliance. Intra-EU political divisions could also emerge over the asymmetric impact of the EDF on the EU’s defense industrial base. Only some of the region’s prime defense contractors, and the small, medium, and mid-cap companies that form their supply chains – which are concentrated in France, Germany, and Italy – would see their competitiveness increase while others would be left out. This could prompt some member states to demand industrial participation at the cost of the economic efficiency that that the EDF is designed to encourage. Poland has already voiced concerns that its defense industry could be sidelined by the EDF.

Recommendations

As the EDF is implemented, European policymakers should first and foremost monitor the fund’s impact on EU member states’ defense budgets. By continuing to encourage an increase in overall European defense spending, and increases in NATO members’ defense spending, the potential for free-riding can be minimized. If free-riding still emerges as a major challenge for the EDF, as it has in NATO, increasing the EU’s own funding for defense may be the only viable way to boost collective capabilities.

Second, policymakers need to strike a balance that favors the EDF if member states attempt to steer it toward the participation of their defense industries instead of the delivery of capabilities that minimize duplication and costs, and maximize interoperability. Faced with an arc of instability along its borders, Brexit, less certainty about the future of the U.S. commitment to NATO, and deteriorating fiscal outlooks, member states can no longer defer on defense integration. With sustained political support, the EDF can serve as a starting point for joint defense investment to help member states navigate this environment and deliver security.

Photo credit: European Defense Agency

 

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