After decades of failed initiatives to deepen European security cooperation, the Russian invasion of Ukraine resulted in something that was previously deemed unimaginable. The EU sent weapons to a conflict zone…
Considering that the purchase of arms using EU funds is prohibited according to the foundational treaties of the bloc, it was indeed a miracle. And so it happened that the initial €500mn fund, which was made available through the European Peace Facility (EPF), was gradually increased by €3.1bn and bought Ukraine around 325 tanks, 36 attack helicopters and more than 200 multiple-launch rocket systems in the last 12 months. Not to mention that it started a whole new discourse on European defence policy with, hopefully, lasting impact. Still, there are three obstacles that must be pointed out and addressed as soon as possible.
Question of strategic autonomy
In Brussels, the term "strategic autonomy" has gained widespread usage, referring to the European Union's capacity to pursue its interests and foreign policy objectives without excessive reliance on other nations, particularly the U.S. in light of the security umbrella provided by NATO. While this aspiration is understandable, it is important to recognize that significant obstacles exist, necessitating long-term, coordinated efforts among member states. According to Meijer and Brooks, the EU is characterized by significant disparities across national defense policies, particularly with regard to threat perception and wide-ranging defense capacity gaps among member states. They conclude that a U.S. withdrawal would be detrimental to the stability and peace of the continent. This view is shared by Sala, who notes that divergent national strategic cultures do not undermine a single European culture, but rather a shared one. She also emphasizes that member states are more likely to challenge and question other member states in the interest of advancing their own national interests, which in turn undermines "common technological sovereignty and obstructs the path toward a more sustainable technological industrial base". In a CSIS brief, the authors add that differing strategic cultures and competing defense firms have led to a "fragmented defense landscape," with EU countries conducting just 11% of their total capability procurement within a European framework in 2020. They attribute this primarily to the fact that many European countries are overly dependent on U.S. security guarantees, which serve as their "main form of life insurance." The authors also note that Washington is a vocal opponent of a more integrated European defense industry, as U.S. defense firms benefit significantly from this lack of cohesion and capacity. Financial discrepancies are particularly apparent, as noted in an IISS Strategic Comments, with EU member states spending E2.5 billion on defense-related R&D in 2020, compared to almost $105 billion spent by the United States. Furthermore, as the same study observes, only "a few EU member states can carry out simple military operations such as evacuations or peacekeeping missions without U.S. support in the form of logistical assistance or strategic enablers". In a nutshell, this fragmented European defence landscape which derived from politics, broadly, prevailed for many years. After the Russian invasion of Ukraine there is clearly a growing will to strengthen EU defence capabilities, industrial and technological base in the framework of joint defence procurements. But determination itself is not enough to build a fortress, one needs bricks as well …
Lacking resources and dependency
The conflict also demonstrated that war between peer or near-peer adversaries cannot be waged without the ability to produce war materials on an industrial scale. However, Europe’s defense industry is highly dependent on critical raw materials and heavy metals that are mostly imported from non-EU countries.
The reliance on external sources poses a significant risk to the European Union's security, as it makes the defense supply chain vulnerable to geopolitical tensions, trade restrictions, and supply disruptions. According to a report by the European Parliament called Critical Raw Materials Resilience, the EU is heavily dependent on non-EU countries for critical raw materials like rare earth elements, which are essential in the production of many high-tech defense technologies such as drones, lasers, fighter jets or tanks.
The report highlights that the EU imports over 90% of its rare earth elements from China, which also has a monopoly on the global supply chain. Another paper from HCSS found that most strategic raw materials are either in the very high risk or high-risk category. This include aluminium, natural graphite, iron, steel, cobalt or copper for instance, all of these being imported mostly from China. Let alone advanced semiconductor chips that are also vital to military “smart” systems such as satellites, cruise missiles, radar systems and so on, and can only be manufactured in Taiwan. This overall dependence in terms of materials creates a significant risk to the EU's security as it may face supply disruptions and price volatility, which can ultimately impact its military capabilities. Besides confirming the above-mentioned facts, a new paper also observed that there is a “rising tendency in (1) the participation of non-EU firms concerning mergers and acquisitions (M&A) with high relevance for the EU defence industry, and (2) the share of defence-related EU tenders that are won by non-EU firms”. And now a bit about the market side of European defense industry…
Mirage of green defence
It is clear that armies also contribute to greenhouse gas (GHG) emissions that has negative impact on the environment. Neverthless, it is vital to keep in mind that the defence industry as whole and particularly armies are hard to decarbonize, considering the amount of heavy metals and rare earth elements needed for capabilities, the high-energy intensity procedures during manufacturing, and fossil fuels which are the main source of energy. Environmental, social, and governance, or ESG criteria, have been an important driver behind investments across a variety of stakeholder from governments to private entities in the last couple of years. This led to more investments into renewable energy sources while also pushed companies to be more transparent and responsible in the way their business affects the environment. Unfortunately, it can seriously undermine the aerospace & defense (A&D) industry. By branding them socially and environmentally harmful, investors simply shy away from defence stocks, which is particularly concerning in Europe where defence groups are not as widely accepted as government contractors as in the U.S. Another problem with branding is that smaller defence companies that only produce sonars, radars and other non-harmful capabilities are also being flagged. This exclusion by sovereign wealth funds and investment firms results in increased volatility, which leads to lower valuations and increases the cost of capital for A&D companies. Why is this important though?
Due to accelerating technological and investment trends, the centre of power behind defence companies in terms of research, development and innovation shifted from the domains of militaries and governments to emerging tech companies and venture capitals, turning the market into a defining factor. One of the main reasons behind this was the growing importance of dual-use and defence technology that go beyond kinetic capabilities (missiles, tanks and so on) and are produced by fast-growing, venture-backed (VB) startups, so called defence unicorns. Unfortunately, Europe has a lacking record in trying to build critical technology ecosystems from space, AI to energy, despite consistently growing defence spending in the bloc since 2016. The importance of startups in the defence sector is clearly visible in the U.S. where VB-backed firms injected more than $7 billion into aerospace and defense companies between January and October 2022. However, funding problems and European institutional challenges simply stop startups from scaling up and delivering much needed dual-use and defence capabilities.
Conclusion
Overall, the bloc needs to work on building a more cohesive and integrated defense industry and addressing these obstacles to strengthen its defense capabilities to enhance its strategic autonomy. The challenges mentioned above are indeed systematic and persistent. That is why I believe the following steps must be made:
- Best we can do is to strike while the iron is hot. The EU and its member states must capitalize on the opportunity presented by the invasion of Ukraine by breaking down taboos around European defense cooperation and further strengthening EU institutions like the European Defence Agency and the European Peace Facility. As a must, there should be a joint ammunition program between member states that would enable the bloc to not only supply Ukraine with the necessary amount, of which it uses more than 5000 a day, but to guarantee abundance in case of a prolonged conflict. Naturally, not all taboos can be broken down and political hurdles and back and froths shall remain about who is paying for what and when. Rather than concentrating on a distant European Army, we better strengthen the European pillar of NATO to ensure military equipment and technologies interoperability with those of the U.S., which is also supported by Macron and Pavel.
- The EU must enter into the contested ring of Africa, where China and the U.S. are already competing for their precious resources. Considering the dark history between the continents, the EU and its member states must also find ways to capitalize on their own mining spots by shortening bureaucratic steps required for opening one. A prime example is Sweden where a “game changer” deposit of rare earth elements was discovered, but it is going to take 10 – 15 years to get to the raw materials due to the lengthy permitting process. Then the materials must be processed and turned into magnets before they can be used in weapon systems.
- Finally, A&D companies must be removed from exclusion lists and a new investment framework must be created which not only supports defence unicorns in the EU but also incentivizes investors to support them.
Perhaps most importantly, the EU must finally become comfortable with being a powerful player in the international system, who is not led by external events but proactively working towards its own interest and values.
