Spending cuts risk EU defence drain

Defence cuts in the EU could see military production moved offshore with a potentially damaging impact on Europe – unless it commits to sharing its resources

After clothing and car plants, the European Union may yet need to cope with another industrial drain. There is a risk that the production of defence capabilities will be relocated to lower cost countries, and therefore closer to new emerging buyers, following a drop in European governments' defence expenditure.

Europe's aggregate spending on defence decreased from €201bn in 2008 to €194bn in 2010 and is set to shrink further as the bloc enters a new phase of recession expected to last until at least mid 2012. Although it is welcomed by pro-peace movements, the cut in military expenditure could have a two-fold negative impact.

First and most obviously, it could hit its security. This is still more likely in a period when security challenges are multiplying and at the same time the main protector of the EU, the Unites States, is planning to significantly reduce its defence budget by $450bn over the next decade.

A reduction in defence expenditure will also hit the European security industry at a time of vulnerability, as it faces higher competition from emerging Asian manufacturers. With lower domestic demand, going global is more of a necessity than an option for European defence companies. Unsurprisingly, the industry has already spread its wings, to the extent that half of all new contracts are signed with Europe's partners. In the future this trend may grow stronger with possible incremental offshoring and the outsourcing of production.

"The risk of shifting production externally is quite a possible scenario. And this goes with the gradual loss of technology leadership," says George Wilhelm Adamowitsch, managing director of the federal association of German security and defence industry.

Manufacturing weapons is not quite the same as weaving clothes or shoes. Outsourcing and offshoring arms production may have serious consequences. Exports in the sector "often can only be achieved at the cost of technology transfer and licensed production," warns a paper issued by the European Defence Agency. If entire production lines were moved abroad, security and competitive dangers would become very real. "There are concerns of a possible demilitarisation of Europe," cautions Olof Skoog, chair of the EU political and security committee, the regular meeting point of the EU's top security experts.

His remarks are echoed by the EU High Representative for Foreign and Security Policy, Catherine Ashton. "A capability driven, competent and competitive European defence technological and industrial base is vital to ensure that Europe is able to respond to today's and tomorrow's security and defence challenges. Its reinforcement is not only an economic but also a strategic necessity for Europe," she argued at the annual EDA conference in Brussels on Tuesday.

The only way to avoid a dangerous industrial drain is by stepping up efforts towards the pooling and sharing of defence capabilities among EU member states. The process started in November 2010 when EU defence ministers launched the so-called 'Ghent initiative' aimed at intensifying EU military cooperation.

Since then, not much has been achieved. Member states guard their national capabilities jealously and are reluctant to share them. Only relatively minor projects on medical field hospitals or helicopter training are in the pipeline. The economic crisis may yet be the catalyst that spurs cooperation. It may prove to be the only possible option to avoid collapse and could address some of the longstanding shortfalls of European defence.

The sector's main problem in Europe is not the lack of available funding, but the way the money is used. "The EU spends defence budgets relatively ineffectively," argues Klaus Eberhardt, president of the association of aerospace and defence industries. Duplication of expenditures and a lack of common standards seriously reduce the possibility of synergies and savings.

A few comparative figures give a plain picture of the obsolete and redundant way Europe spends its money on defence. According to the EDA, between 2006 and 2010 EU member states spent half of their defence budget on personnel, while the US limited this expenditure to less than one third of its total budget – which is more than double the EU's. This emphasis on staff spending is to the detriment of research and development. The EU actually spent less than 4.5 per cent of its defence budget in 2010 on R&D, while in the same year Washington allocated over 11 per cent of its available funding to research investment.

Of the total money the EU spends on defence staff, 80 per cent goes to soldiers, while in the US the proportion stops at 66 per cent. Despite this, the US deploys a number of boots on the ground, 200,000, that is more than double the EU's figure, 66.000.

To counter this illogical use of public money "the only response is pooling and sharing," reiterates Belgian defence minister Pieter de Crem, whose country is a staunch champion of EU military integration. In the current economy, cooperation "is a must rather than an option," he added. Bigger member states should take note.