Short-term readiness, long-term innovation: the European defence industry in turbulent times

ABSTRACT

The war in Ukraine, coupled with a more turbulent international system characterized by geopolitical competition between the United States and China, is leading to a simultaneous change in the demand and supply side of the European defence market. On the demand side, European countries are adapting their procurement plans to move from a crisis management phase dominated by asymmetric warfare against small states or non-state actors to an era of strategic competition and potential conflict against peer adversaries. On the supply side, European defence industries are preparing to meet the increased demand for major equipment from national governments in the short term, while at the same time trying to be ready to invest in long-term innovation, in order to anticipate future government requirements for the new era. This paper investigates the interactions between demand and supply in the European defence market and provides a first illustration of the trade-off between prioritizing short-term readiness over long-term innovation and vice versa

KEYWORDS:

• Defence industry
• European defence
• procurement
• technology
• Ukraine

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Since the government is the only buyer of military products, it is very difficult to see large increases in government demand, unlike other types of markets where there are multiple buyers. For a more detailed discussion, see Lichtenberg (1989).

2. We are aware, to be sure, that innovation can also take place in the short term. What we are interested in here is the temporal dimension, i.e. how supply and demand respond to shifts in defence budgets in the short term (in favour of readiness) or in the long term (arguably in favour of innovation). We are grateful to the Defence Studies reviewers for raising this point.

3. Technically, defence procurement was subjected to the common provisions of European procurement law as provided in the TFEU and the DIR 2004/17/EC – DIR 2004/18/EC. However, EU member states regularly made reference to the exception provided by ex-article 346, which permits to the state to take the necessary measures (even to not respect the Common European Procurement Law) for the protection of essential security interests.

4. During the Cold War, defence spending for NATO Allies (even putting the United States aside) routinely averaged more than 3% of GDP, with some significant variation over time, but rarely falling below 2%. In the post-Cold War era, there was a first significant drop in the early 1990s and a further 20% decrease roughly 20 years later. See Grand (2023)

5. With its 76.00 forces, Britain’s army is at its smallest since the Napoleonic era. See UK Strategic Defence and Security Review. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/555607/2015_Strategic_Defence_and_Security_Review.pdf.

6. Especially under the tenure of Defence Minister Guttenberg and the recommendations of the independent Weise Commission on the Structure of the Bunderswehr. See https://www.bundeswehr.de/en/about-bundeswehr/history/reforms-bundeswehr,

7. European countries enjoyed the so-called peace dividend, i.e. the possibility to limit defence spending by taking advantage of the favorable international situation characterized by the disintegration of the Soviet empire and the presence of non-state threats that did not require massive investments in advanced platforms and equipment. On the peace dividend, see Mintz & Huang (1990).

8. As noted by Camille Grand, “Allies are addressing capability shortfalls in domains that had been neglected during more than 20 years of focus on crisis management and counter-insurgency engagements (e.g. in the wider Middle East and Africa), which had focused on a different set of priorities and tools. The NATO Defence Planning Process has enabled Allies to identify these key capability shortfalls, and thus to begin rebuilding high-end capabilities in the land, maritime, or air domains through the acquisition of modern platforms and enablers.” See Grand (2023).

9. Although, according to some experts, these changes are difficult to implement. See Shurkin (2023).

10. “Il faudra aller plus vite, réfléchir différemment sur les rythmes, les montées en charge, les marges, pour pouvoir reconstituer plus rapidement ce qui est indispensable pour nos forces armées, pour nos alliés ou pour celles et ceux que nous voulons aider. See Macron (2022). Authors’ translation.

11. Under the aegis of the European Peace Facility. See https://www.consilium.europa.eu/en/policies/european-peace-facility/?utm_source=twitter.com&utm_medium=social&utm_campaign=20230427-fac-european-peace-facility&utm_content=visual-carousel

12. The Independent European Programme Group (IEPG) originated from a decision taken by Eurogroup Ministers in special session in November 1975 to seek to establish a new forum for collaboration in defence procurement.

13. As Adams, Adams et al. (2001): “Of the 35 satellites positioned over Kosovo during the conflict, two were European (overall the Europeans possess only five such assets, to the Americans’ 65). As a result, the United States supplied the bulk of the military intelligence. The Europeans lacked the ability to communicate easily or securely with each other or with the Americans; of the communications capability in theatre, 90% was American. They had virtually no inventories of precision-guided munitions (except for the British Tomahawks) and little capability (aside from some French) for all-weather or night fighter operations. As a result, 80% of the strike missions in theater (and two thirds of the total aircraft sorties) were flown by Americans. The Europeans depended on American support aircraft for their sorties, especially for battle control, refueling, and for jamming and destroying Serbian radar. At the mundane but critical level of transportation and logistics, European force projection capabilities included only two roll-on, roll-off sealift ships, on lease, as compared to 12 for the United States, no fast sealift capability (8 for the United States); and no large airlift capability (compared to 254 aircraft for the United States)”.

14. For instance, representatives of German industry complained about the uncertainty caused by the lack of contractual guarantees in the procurement policy for ammunition. See Freyrie (2023, 22).

15. The CEO of ammunition manufacturer Nammo bemoaned Europe’s slowness compared with the United States because the latter had a “more of a long-term view on the market” (quoted in Caverley and Kapstein 2023).

16. German Chancellor Scholz admitted that “we have a lot of catching up to do in Europe when It comes to defence against airborne and space-based threats.” See German Federal Government (2022).

Additional information

Funding

This work was supported by the Antonio Calcara acknowledges the support of the Flanders Research Foundation for the postdoctoral fellowship 1296022N on Cooperation and Competition in European Defence Policy.

Notes on contributors

Antonio Calcara

Antonio Calcara is FWO Researcher at the University of Antwerp.

Andrea Gilli

Andrea Gilli is Senior Researcher at the NATO Defence College in Rome.

Mauro Gilli

Mauro Gilli is Senior Researcher at ETH Zurich.