The European Defence Fund precursor programmes and the state of the European market for defence

ABSTRACT

The fragmentation of the European defence market hampers the establishment of a unified European defence. The European Union (EU) has implemented initiatives like the Coordinated Annual Review on Defence, Permanent Structured Cooperation, and the European Defence Fund (EDF) to address this issue. However, a comprehensive understanding of the European defence market and its consolidation, which is essential for evaluating these programs, remains insufficient. This article aims to observe the configuration of the European defence market and its evolution over time, exploring potential trends towards consolidation. The authors contend that despite the fragmented nature of the European defence market, a few larger companies from four countries hold significant positions. They also identify a positive trend towards consolidation, although institutional incentives perpetuate market fragmentation. To delve deeper, the authors analyze the funding allocation for defence companies through the preparatory programs of the European Defence Fund. Their analysis encompasses 65 projects awarded to 430 companies between 2016 and 2020, supplemented by insights from three focus groups and an expert survey conducted in the Netherlands, Italy, and Sweden. This article suggests avenues for future research on the EDF, emphasizing the need for a comprehensive understanding of market consolidation and the efficacy of current initiatives.

KEYWORDS:

• European Union
• European defence
• consolidation
• European Defence Fund
• EDF precursors

Introduction

The European defence market is characterised by significant fragmentation indicated, for example, by the duplication of resources (Duke 2019) and the variety of weapons systems that EU member states acquire compared to other international actors such as the United States (Díaz and Lucas 2021; Koppa 2022). Some authors have identified this fragmentation as one of the main hindrances to the establishment of a European defence (Meijer and Wyss 2018). The Treaty of the Functioning of the European Union (TFEU) does not mention defence as one of the competences, but some EU institutions have either become interested in or been given tasks in defence. This is why, for example, the European Union Global Strategy published in 2016, which laid out broad visions for EU foreign policy, also included new initiatives in the field of European defence. Examples include the Coordinated Annual Review on Defence (CARD), Permanent Structured Cooperation (PESCO), Military Planning and Conduct Capability (MPCC), a Military Mobility project, as well as the European Defence Fund (EDF) (Hakansson 2021). Building on earlier EU-level action, a number of these initiatives aim to reduce defence-market fragmentation and contribute to the creation of a common technological basis at the European level, which would facilitate joint procurement programmes and increase the interoperability of defence systems independently purchased by member states (Karampekios and Oikonomou 2018). It is too early to assess the effectiveness of these programmes, but any future assessment will have to start from a comprehensive knowledge of what the European market for defence looked like when the programmes were started, which is currently lacking.

The aim of this article is to fill this gap, investigating the European defence market and its consolidation with a twofold objective. First, it intends to empirically observe the actor configuration of the European market for defence. Who are the main defence companies? In which of the EU members are the most active companies located? The second objective is to observe the evolution of the market for defence over time to explore whether there exists a trend toward consolidation. We will present two arguments. First, the European market for defence is fragmented, but there exist conditions for consolidation as there are a few larger companies mainly based in four countries, especially France, Germany, Italy and Spain, that already hold a central position in the defence market. Second, we have detected a positive – yet not decisive – trend towards further consolidation of the European market for defence. However, we also argue that there are still institutional incentives that are likely to hamper market consolidation for some time. In particular, there is a tension between the goal of market consolidation and the need to foster the legitimacy of EU initiatives, which might reproduce market fragmentation.

We will address these two issues/ambitions/objectives by studying the funding allocation for defence companies under the preparatory programmes of the EDF. The EDF aims to facilitate member-state cooperation in defence capability development and thus to contribute to a European Defence Technological and Industrial Base (EDTIB). The first call for consortia of defence companies to apply for EDF funding was published in 2021 but the shape it took is, at least in part, the result of three precursor programmes run from 2016 to 2020. These are the Pilot Project (PP), the Preparatory Action for Defence Research (PADR), and the European Defence Industrial Development Programme (EDIDP), sponsored by the European Parliament (EP) and, later, the European Commission (EC). Therefore, we are using EDF precursor programmes as proxies to observe the defence market and its evolution in the timeframe 2016–2020. We do not make a causal claim between the precursors and market consolidation patterns. We looked at the distribution of companies and their member states of origin in (research) consortia that were awarded funds under the PP, the PADR and the EDIPD. In a novel approach to studying the European defence market, our results were reached by conducting document and network analyses of the 65 projects awarded to 430 companies. The results of these analyses were complemented by the findings from three focus groups with experts, representatives of defence industries and national authorities held in the Netherlands, Italy, and Sweden in 2019, as well as an expert survey filled out by 19 defence experts from the Netherlands and Germany. These two countries were selected to represent the population of the 27 EU members.

The analysis is divided into four sections. The first part presents the role of European institutions in the area of defence and it shows that there is a knowledge gap regarding the configuration of the European defence market. The second introduces the theoretical and methodological choices that guided the investigation in mapping the state of the art of the defence market as well as its trends. The third part presents the results of the document and network analyses of funded projects with a view to assessing whether the awarding decisions under EDF precursors are indicative of market consolidation. The fourth part discusses the theoretical and policy-relevant implications that emerge from the analysis. Finally, the conclusion summarises the main findings of the investigation and suggests ways to carry out further research on the EDF and, more generally, on the European Defence market.

The European defence market

The need for European action in defence research and development was recognised as early as the 1960s (Markowski and Wylie 2007; Martins and Mawdsley 2021), and concrete European Commission initiatives in the field of defence industrial policy started to appear in the 1980s, and were then reinforced by rising security challenges, such as the Kosovo War, in the late 1990s (Besch 2019; Lavallée 2011, 2012; Menon 2011; Merand 2008), and the Russian annexation of Crimea, in the mid-2010s (Calcara 2020a; Fiott 2018, 2019; Hakansson 2021). The lack of European capabilities was partially justified by a missing EDTIB, therefore the European Commission and ad-hoc agencies, such as the European Defence Agency (EDA), launched several initiatives towards the consolidation of the market and the creation of a common technological platform from which European defence capabilities could be strengthened. With the exception of some joint projects, for example the NATO Helicopter, the Eurofighter, and the Airbus A400 (Calcara 2020b), fragmentation persists in the European Union (Meijer and Wyss 2018). The most recent initiatives, such as PESCO, CARD and, especially, the EDF, aim at consolidating the European market for defence, but the sine qua non condition to assess their effectiveness in the future is to know what the market for defence looked like at their start, which we currently lack. This article aims to fill this gap.

The defence initiatives of European institutions did not manage to overcome the problem of market fragmentation (Chappell, Exadaktylos, and Petrov 2020). For instance, the European Defence Agency (EDA) was created in 2004 with the objective to “to support the Council and the Member States in their effort to improve the EU’s defence capabilities in the field of crisis management and to sustain the ESDP as it stands now and develops in the future” (European Union 2004, Article 2). A few years later, the steering board of the EDA published its “Strategy for the European Defence Technological and Industrial Base” in May 2007, setting targets and priorities on how to achieve an EDTIB (Briani et al. 2013; EDA 2007b), but the objectives were frequently missed. For instance, the funding targets for defence were first set in November 2007 and they were rather specific, such as the 20% of total defence spending in equipment procurement (including R&D/R&T), 35% of total equipment spending on European collaborative equipment procurement, 2% of total defence spending in Defence R&T and 20% of total defence R&T spending in European R&T collaborative projects (EDA 2007a). EDA data up until 2020 show that while defence spending including R&D and R&T exceeded its target in reaching a level of 23.5%, the other objectives were far from being attained. Total equipment spending for collaborative equipment procurement was 4.9%, European collaborative defence equipment was 2% of total defence expenditure (down from 3.2% in 2017), and that of European collaborative defence R&T was at 0.1% (EDA Data, authors’ own formulation). After these initiatives and others by the Commission, “up to 80% of procurement and 90% of research and technology [were still] administered on a national basis” in 2017 (Duke 2019, 126). The most recent analyses by the EDA and Commission confirm that the defence initiatives have still not engendered much change: while overall defence expenditure in the MS increased by 6% to EUR 214 billion in 2021, continuing the post-2015 growth trend, targets pertaining to collaboration between MS were not reached. In 2020, 11% of total equipment spending was devoted to collaborative defence equipment procurement, in 2022, this number was at 18% – well below the 35% target (EDA 2022a; EDA 2022b). Similarly, spending on collaborative R&T projects as a percentage of total defence R&T remains low at 7% (although up from 6% in 2020) (EDA Defence Data 2020–2021). In addition to a preference for national solutions, MS also increasingly tend to procure defence equipment from non-EU countries, leading to a risk of further fragmentation of the market (EDA 2022a, 4).The invasion of Crimea by Russian forces showed once again the lack of military capabilities at the disposal of European countries and this created political momentum for a new set of initiatives from the Commission aiming at supporting a consolidation process. The establishment of the EDF is certainly one of the most notable initiatives, alongside PESCO and CARD, established to create/strengthen the EDTIB (Haroche 2020). They together constituted the European Defence Action Plan (EDAP) adopted on 30 November 2016, which “aimed primarily at the defence-industrial base, capacity development and research” (Duke 2019, 125). PESCO was adopted in December 2017 and provided the platform for member states to combine resources to address security concerns (Biscop 2018). Cooperation under PESCO would be incentivised/supported by the financial resources available under the EDF, which aims to “make cooperation the norm and thereby develop and acquire key strategic defence capabilities” (European Commission 2017). CARD is an initiative that aims at presenting an overview of the state of the art regarding member states’ defence capabilities. In fact, this overview would also help to identify areas of possible cooperation in the EU. The first CARD report was published in 2020, and the second will refer to the years 2021 and 2022 (EDA 2020).

While PESCO, CARD, and the EDF are interrelated, the first two schemes differ from one another in that they either facilitate or recognise the activities undertaken by member states only, while the EDF creates economic incentives to reward intra-EU cooperation in the area of defence (James 2018; Sweeney and Winn 2020). The EDF is widely acknowledged as a relevant qualitative departure from the traditional role played by the EC on defence (Fiott and Bellais 2016; Haroche 2020; Ianakiev 2019). This assessment was echoed in the creation of a Directorate General for Defence Industry and Space (DG DEFIS) in 2019.

The overarching goal of the EDF is to increase defence cooperation in Europe and make its defence industry more competitive (Sabatino 2022). As the Commission points out in its Communication on the launch of the EDF, the defence-industry issues that must be remedied are the “insufficient levels and quality of investment in the development and procurement of future capabilities” as well as the “high degree of fragmentation” and “unnecessary duplication” of defence forces and systems (European Commission 2017). In practice, the Fund aims to do so by providing an economic incentive for defence companies to cooperate in R&D. The EDF comprises a research “window” and a capability one, the latter consisting of the development and acquisition phases. The projects under the research window will be financed entirely from the EU budget, while development efforts will be co-financed by the EU and the member states. This, in turn, is intended to lead to acquisition by the latter of equipment from fewer producers than today, i.e. decrease market fragmentation. With a funding allocation of EUR 1.5 billion per year after 2021, the EDF thus helps not only to address the decrease in EDA countries’ defence R&D spending (EDA 2019) but to “make cooperation the norm” on EU defence R&D.

However, we still lack an empirically grounded comprehensive overview of the European market for defence and its constituent actors. We know that there are several defence industries active in a number of countries, that there have been joint projects across EU members and that procurement is highly fragmented. However, we know less of how many companies could be active participants in a common market for defence at the European level. This article aims at providing an answer to this question as we have for the first-time information on how defence companies would respond to European-wide incentives. This will allow to detect the state of the art on the consolidation of the European market for defence and to provide a first discussion for the future assessment of European initiatives to consolidate the market for defence.

Conceptual considerations

The creation of the EDF and the precursor programmes is surprising in so far as defence industry policy “has [traditionally] been deeply rooted in national defence and security policy” (Britz 2010, 176). As an empirical puzzle, the emergence of the EU-level defence industrial policy could be investigated using the concept of Europeanisation. This concept has been used to describe both the process of national politics acquiring a European scope and of member states delegating new competences to the supranational level (Buller and Gamble 2002; Kevin and Radaelli 2003; Radaelli 2002). Embedded in the classical debate on European integration, defence has also been the subject of scholarly attention in this regard (Jacobs 2013; Muller 2013; Rieker 2006).

In this article, however, we forego the use of Europeanisation theory in favour of the concept of market consolidation. This is due to our interest not in the process of emergence of the precursors, but rather, as explained in the introduction, the information they can reveal about the composition of the European defence market.

Market consolidation refers to a process whereby a fragmented market, i.e. one in which many companies exist, gradually becomes populated by fewer and larger, companies and the final outcome of this process. Consolidation can occur in two ways. First, consolidation can occur by mergers and acquisitions between companies, which we can describe as “hard” consolidation. Second, by establishing joint ventures or simply expanding their market role – something we may call “soft” consolidation.

Reasons for consolidation can vary, but most studies identify economic incentives as the main drivers. One of the main reasons cited is that larger firms can benefit from economies of scale, i.e. produce more efficiently by distributing costs over more units of production. Increased efficiency at the firm level is assumed to increase inter-firm competition and thereby the efficiency of the market as a whole (Cummins and Rubio-Misas 2006). Other authors cite increased bargaining power for larger firms (Saeed, Vivian, and Erickson 2020) or the creation of shareholder value (Berger, Demsetz, and Strahan 1999) as motives for consolidation. In the defence context, similar efficiency-based motivations have been identified (e.g. Krishna-Hensel 2010). More specifically, others have pointed to the exponential increase in the costs for the development of new weapons systems which can be too high for small firms to bear (Meijer 2010, 65) as incentives for consolidation. In addition, it is argued that firms may also be responding to developments on the demand side such as cuts in government spending on defence (Guay and Callum 2002). Lastly, some authors suggest that technological advances and the need for integrated systems drive consolidation (King and Driessnack 2007; Peter and Ross 2008).

However, a consolidation process can also be hampered by a variety of institutional and political variables. As we have discussed above, the existing defence market in the EU is the result, on the one hand, of the alignment of national defence industry and the interests of the member states’ interests and, on the other, of the lack of incentives for consolidation at the supranational level. At the same time, incentives at a supranational level are also designed to pursue objectives other than consolidation, which may mitigate the achievement of full consolidation.

In general, supranational institutions may design incentives to enhance their legitimacy towards either the governments of the member states or towards subnational constituencies. First, the incentives could be designed to maintain the support of member states, therefore, the incentives could end up reproducing the intergovernmental divisions that shape the decision-making process. Given the current geographic distribution of European defence companies, market consolidation would have substantial distributive effects on EU member states, i.e. create winner and loser. However, unequal returns across the EU can undermine the legitimacy of initiatives of supranational institutions. If funds were to be too concentrated on a few actors, EU institutions could be criticised by those member states receiving less funding than others.

Second, a policy towards consolidation may fuel anti-EU feelings among companies that will not benefit from the incentives. A supranational policy to favour consolidation is likely to reward a few and larger companies, which could spark protests among smaller operators that would gain less from such policy and, consequently, SMEs would weaken their bond with the EU. Therefore, we label the “legitimacy problem” one that identifies the need of EU institutions to maintain the support of the member states and the European constituencies to be able to set up and run EU projects.

In the European context, we are interested in how processes of consolidation transcend national borders to result in a consolidated European market. The existence of such a market has already been demonstrated, for example, for sectors such as aviation, which has been populated by a few large operators (e.g. Ryanair, Air France – KLM, Lufthansa, International Airlines Group) at the European level, offering services to all Member States since the liberalisation of trade routes (Burghouwta and de Wit 2015). Other examples of European industries with high concentration rates of firms are communications, energy and finance (Koltay and Lorincz 2021). However, relatively little scholarly attention has been paid to actor configuration and degree of consolidation in the European defence market (Lavallée 2012). Indeed, most studies in the field of European defence (e.g. Calcara 2017; Fiott 2019) focus on the development of specific policy initiatives and the way in which they have been negotiated between Member States and European supranational actors.

This article seeks to rectify this knowledge gap and aims to investigate whether the European market revolves around a limited number of defence companies and to identify possible trends towards further consolidation over the 2016–2020 period.

Methodological considerations

This article has a twofold objective to map the actor configuration of the European defence market and to investigate whether there has been a change since the introduction of the first European financial incentives via the precursor programmes to the EDF. The three precursor programmes consisted of 65 projects and 430 participating companies. The three programmes mobilised EUR 887 million in four years with a total EU disbursement of EUR 578 million. This shows the European scope of the programmes. Even though the financial allocation is not very substantive, this is also the richest attempt at the European level, and therefore, it provides a unique opportunity to analyse the European market for defence.

We will assess market consolidation positively if we can identify a limited number of companies playing a central role in the defence market. Subsequently, we will verify whether the number of active and more engaged actors increases or decreases over time to detect positive or negative consolidation trends. In making these assessments, we are not seeking to derive causal connections between the precursor programmes and the consolidation of the European market for defence.

These two objectives are reached by looking at the ways in which funding the three precursor programmes of the EDF has been allocated. The database of the precursor programmes was constructed using official European Commission and EDA documents. For each of the 65 consortia projects which were carried out in the years 2016–2020, we collected year, duration, EU contribution, participant companies, participant companies’ countries of origin and, in so far as available, EU contribution for each participant.

The first step is to assess the configuration of the European market for defence. We collected descriptive statistics for the three precursors, including companies’ participation rate and participation rate by member state.

Second, using Gephi version 0.9, we performed network analyses on our data to uncover the state of consolidation. Specifically, focusing on statistics such as network centrality, we were interested in investigating whether the three precursor projects’ funding allocation shows that a few companies enjoy a more central position compared to others. We then looked at the aggregated rate of participation of defence operators in the three precursor programmes and evaluated whether this configuration of the European defence market changed overtime from 2016 to 2020. Finally, we explored with desk research potential sources of overlap among defence companies.

Third, we explore how the institutional incentives designed to foster institutional/policy legitimacy shaped the funding allocation of the three precursors of the EDF. As laid out above, the aim of the precursors is to create a common technological basis, which is likely to go in hand with substantial market consolidation. This third step will verify whether resources have been allocated to a small number of countries and companies also as a consequence of incentives designed specifically for them. Thus, we will explore whether the country distribution and number of countries represented in consortia evolve over time to detect whether some countries/companies benefited more than others.

The decision to focus on the funding allocation of the three EDF precursor programmes provides a unique perspective to study the configuration of the European market for defence today. The identification of defence companies has become an ever more complex matter, therefore the decision to focus on how the European Union understands defence actors is an innovative and empirically rich method to address this matter.

As mentioned previously, the results of these analyses were complemented by the findings of three focus groups with experts, representatives of defence industries, and national authorities held in the Netherlands, Italy, and Sweden in 2019 and a survey (see the questionnaire in Appendix II) completed by 19 defence experts from the Netherlands and Germany in February and March 2022. These two countries were selected because they represent both the member states where larger companies can be located and the member states that do not have large defence industries.

Analysing the data

The three precursors: the PP, the PADR and the EDIPD

The objective of the three projects was to prepare for the EDF launch in the multiannual budget 2021–2027 and to test the various aspects and vulnerabilities of the process implemented to fund defence-related projects.

First, the PP was designed to test for the first time European cooperation in defence. It was carried out under the initiative of the EP in 2015 (Gahler 2016) and was administered by the EC. The call was organised by the EDA in 2016 with a total budget of EUR 1.4 million. The PP was a grant-based system with a focus on R&T development along the lines of the PADR. The PP awarded funding to three projects involving 13 companies from nine EU member states.

Second, the PADR was activated to finance the “window” of research and innovation and to thus demonstrate the need for collaborative European collaborative defence research (EDA 2017). The programme had an allocation of EUR 90 million (EUR 25 million in 2017, EUR 40 million in 2018 and EUR 25 million in 2019). The aim of the PADR was to demonstrate the added value of EU-supported defence R&T. The three calls in 2017–2019 led to 18 projects with the participation of 138 companies from 20 EU countries, as well as the UK, Norway, and an international partner.

Third, the EDIDP was launched to finance joint capability development and further increase the competitiveness of the European defence industry. The programme had an allocation of EUR 500 million for 2019 and 2020. It targeted “capability development and co-financing the joint development of (new and upgrading of existing) defence products and technologies [in the EU].” One of the main differences with the PADR is that EDIPD projects required co-funding from the member states, so EU funding would serve as an incentive for nationally mobilised resources. Eventually, the EU allocated EUR 158 million in 2019 and EUR 200 million in 2020. The two rounds were structured into nine calls in 2019 and 12 calls in 2020. The two rounds facilitated the creation of 44 consortiums, with a total of 341 companies coming from 26 EU member states.

Step 1: Mapping the EU defence market

In total, the three precursors involved 430 companies from 29 states (EU and non-EU countries). The 430 companies participated, as noted, a cumulative 736 times throughout the duration of the five years of the three precursors (see Table 10). On average the consortia consisted of 11 companies, although this number is slightly misleading, seeing as there are some very small consortia (consisting of no more than the minimum three companies) and some very large ones of more than 20 companies. As for the number of countries represented in each consortium, this amounts to an overall average of six.

Although companies from all EU countries (except Malta) participated in at least one consortium, the snapshot of the European market for defence shows a high concentration of firms in a few countries. More specifically, companies from four countries – France (red), Italy (yellow), Spain (green) and Germany (light blue) – are most represented in the consortia. This is followed, with some distance, by Greece (dark blue). In total, French companies appear 149 times in all consortia, followed by Italy with 96. Spain, which has half the population size of Germany, is more represented – with 90 companies versus the 73 of the latter. In total, companies from these four countries make up 55% of all memberships in consortia. Malta was the only EU member with no companies involved in the three programmes. The finding that four countries’ companies are overrepresented is not necessarily surprising, given that these countries have historically counted amongst the countries with the highest defence expenditure, worldwide and in Europe (Meijer 2010), and have thus been able to build solid defence industrial bases over time. While this result thus conforms to our expectations, details such as the greater representation of Spain compared to Germany remain to be explained in future studies.

Step 2: Analysing consolidation

The network analysis shows that a few actors hold a central role in the market compared to others and, as such, this indicates the consolidated state of the defence market. We have identified several large firms that appear more frequently than others in all consortia formed under the EDF precursors. Across the three programmes, four operators stand out: the Italian Leonardo (with 23 participations); the Spanish Indra Sistemas (19 participations); GMV Aerospace and Defence S.A. (12 participations); and ONERA, the French Office National d’Etudes et de Recherches Aérospatiales (11 participations). A closer look at the degree centrality of the firms (i.e. the number of connections to other firms) confirms that the most prominent firms are Leonardo (215 connections) and Indra Sistemas (200 connections), followed by GMV, Safran Electronics, ONERA and TNO. Most companies are found in the range of 10–50 connections, with the average overall number of 24.4.

The centrality of these companies is clear not only in the number of participations in each precursor but also from the amount of EU funding they received.¹ The vast majority of companies (311) received less than one million EU funds and only 111 received between one and nine million. Of 430 companies, only eight received more than EUR 10 million in EU contributions, with the largest beneficiaries being Leonardo (around EUR 50 million), Airbus Defence and Space GmbH (around EUR 28 million) and Dassault Aviation and Indra Sistemas both with roughly EUR 24.5 million. Overall, funding accorded to the eight biggest recipients accounted for more than 35% of the total funding, underlining the weight given to these companies in relation to their smaller market competitors.

The finding that the European defence market is concentrated around a few large actors is not necessarily surprising. Indeed, significant market consolidation took place in the late 1990s and early 2000s. During this time, smaller, nationally oriented companies merged either into “hypernational champions” (as was the case with BAE Systems, made up of UK companies) or multinational entities like EADS, which resulted from mergers between French and German firms (Guay and Callum 2002). The consolidation resulted in the existence of three big players in the European market in the early 2000s. Thomson CSF (THALES), EADS (Airbus) and BAE Systems. This phase of consolidation was driven by a variety of factors, including the emergence of defence giants in the US industry, the steeply rising costs of weapons systems, as well as the reduction of defence budgets in several European countries (Meijer 2010).

The companies identified as central by our analysis also overlap with those identified as the biggest arms producing companies in Europe by other studies. For 2021, the Stockholm International Peace Research Institute (SIPRI), shows that the biggest European arms producers were Airbus, Thales, and the Dassault Aviation Group (SIPRI Top 100).

A cursory examination of the ownership structures of the big beneficiary companies also underlines the concentrated nature of the European defence market. Some of these companies maintain branches in other countries. An example of this is Thales, which appears in our database with 11 different names via companies that are headquartered in five different EU member states. Airbus, meanwhile, appears under nine different names in the database, with affiliations to three different EU member states. In addition, companies acquire shares in other brands, or enter into joint ventures and thus, de facto, participate in consortia with companies controlled by them. MDBA is a notable European joint venture, and Leonardo, for instance, owns shares in several other companies (see below), two of which (Hensoldt and Larimart) have participated in projects funded or co-funded by the three precursors. We do not intend to suggest that these patterns of cross-holding or joint ventures have resulted from the precursor programmes but rather point to an interesting finding which future studies could investigate further.

An analysis of the precursors over time indicates that consolidation may have occurred here during the time of their implementation. Indeed, there are only a few companies that have participated in consortia for multiple years in a row since 2016. Table 13 shows that the configuration of the most involved companies has changed over time. Certain companies participated in the first three rounds, but then stopped participating while others that did not participate in the first calls became dominant in later ones.

For instance, five out of the 13 companies who participated in the PP did not do so in the PADR and EDIDP (see Table 14).

An analysis of modularity (measuring the division of the network into smaller groups) and betweenness centrality (indicating a key position of a node) confirms this view. For 2016, the network shows three independent groups of companies corresponding to each of the three PP projects (TRAWA, EuroSWARM, SPIDER). There are no connections between the three communities, meaning no company is involved in more than one consortium. In 2018, modularity also indicates the existence of three different communities, but in contrast to 2016, they are connected via four main companies: MBDA France is at the centre of this network (highest betweenness centrality), connected to all other companies. It is followed in importance by Indra Sistemas, Leonardo, and Airbus.

The 2019 and 2020 again confirm the centrality of certain companies compared to others. The measure of degree centrality in 2019 indicates that three companies form the centre of the network: Leonardo (d = 69); Indra Sistemas (d = 58); Safran Electronics (d = 56). This is followed by eight companies in the midrange (d: 30–40), with the biggest ones being GMV, Diehl, and THALES SIX GTS France. The betweenness-centrality measure confirms the pivotal nature of these companies and highlights the importance of Leonardo, Safran Electronics, TNO and Naval Group in connecting different parts of the network. The 2020 network highlights the concentration around two main companies: Leonardo and Indra Sistemas (d = >100), closely followed by ONERA (d = 97) and GMV (d = 85).

Analysis of our expert surveys reveals a more ambivalent assessment of the degree of consolidation, which is somewhat consistent with the empirical overview presented above. Although five out of 19 respondents indicated that some larger companies are emerging, eight were not sure to have detected this trend, and three opposed this assessment.

There are many reasons for why consolidation occurs, and we cannot, and indeed, do not aim to conclude that this development is due to the three precursors. It is more likely a continuation of a long-term trend toward consolidation driven by a variety of factors.

Step 3: Analysing Legitimacy

As laid out above, structuring the precursor programmes in a way that maintained member state and companies’ support was an important goal for the EU institutions across the entire funding period. Thus, we now examine whether this goal was met. Indeed, the number of countries with companies participating in consortia funded by the three precursors grew over time, from nine in 2016 to 25 in 2020. This increase is partly explained by the larger budgets allocated for the PADR and EDIDP, but this seems to be a core characteristic of the three precursors, regardless.

However, each country had a different degree of participation. As indicated above, the network analysis indicates that certain countries enjoy more connections, and therefore are more central than others.

Companies based in the four dominant countries (e.g. France, Italy, Spain and Germany) increased in participation rates from 30% in 2016 to 55% in 2020, while there are four countries from which virtually no companies participated in the precursors (i.e. Ireland, Luxembourg, Norway and Malta).

The degree of company participation in the three precursors could be proportional to either the size of the economy or defence spending. This finding is more correlated with the size of the economy (correlation coefficient 0.7) than with the ratio between defence spending and gross domestic product (−0.04). If we look at the 2020 data, there is a positive correlation between GDP and number of companies involved (the higher the GDP, the more companies are involved) – but there are still interesting cases to look at. For instance, France has the highest number of companies even though it has only the second-largest GDP, while Belgium has twice as many companies as the Netherlands although with roughly half of the latter’s GDP. On the contrary, we do not see any correlation between the number of companies and the ratio of defence spending to GDP. We acknowledge that this finding can also be due to other factors, for instance, whether military equipment is imported or domestically produced, but it shows precisely that the number of companies is not linked to the size of the economy.

Although country participation thus increased slightly, there is also tension between large and small companies that need to be considered. As laid out above, supranational EU institutions have long been criticised for being too close to large multinational firms. Some see these entities as the only actors having access to the halls of power in Brussels and, as such, as undermining EU legitimacy (Some see these entities as the only actors having access to the halls of power in Brussels and, as such, undermining EU legitimacy. This was, for example, also the opinion expressed by some participants at workshops held in the Netherlands and Sweden, 2019). Considering EU institutions wanting to preserve their legitimacy, it is not surprising that the number of companies involved, as illustrated above, increased substantially from 13 in 2016 to 355 in 2020, which can be assumed to be mainly SMEs given the limited number of large defence companies operating in the EU. Indeed, supporting the participation of SMEs was made an explicit goal of the EDIDP (European Union 2021).

Although the statistics suggest that companies from most member states were a partner in a consortium that received funding, the perception of the surveyed experts is more sceptical here. On the question of whether the EDF precursors managed to involve companies from all member states, only two out of 19 respondents were moderately positive about this having happened. When we asked whether the EDF precursors were widely distributed across the EU, the answers were again mostly negative (10) versus only a single positive one. When asked about company participation over time, six out of 19 interviewees believed that the EDF precursors succeeded in involving more companies over time versus only four moderately pessimistic respondents here and nine undecided.

Broader implications of the findings

The empirical analysis of the consortia that were awarded funding under the EDF precursors allows for preliminary considerations on the European defence market as it appears through the lens of the precursor programmes. First, we will discuss the actor configuration of the European market. Second, we draw insights on the challenges that lie ahead in the construction of the common technological basis for a European defence market.

An emerging consolidated market for defence?

The creation of a common technological basis for defence aims to address the current fragmentation of related European systems. The establishment of European funding instruments such as the EDF and its precursors is an incentive to foster cooperation beyond national borders, but the outcomes for the common defence market can be diverse. The first natural comparison is with other markets that have been consolidated at the European level, seeing the emergence of fewer and larger actors operating across EU borders. This appears to be in fact taking place in the defence market itself. Well-known European defence actors such as Leonardo, Thales, and Airbus have already emerged as the central companies, as indicated by their dominant position in the network of actors involved in all EDF precursors.

However, we have also seen that there are at least two factors in the institutional design of EDF funding that are structurally hampering consolidation. First, the goal of sustaining the legitimacy of the European initiative is realised through applying eligibility criteria for consortia that are related more to the geographical dispersion of companies, i.e. that companies must be located in at least three different countries, rather than to factors like innovation or quality. This requirement, encouraging the participation of a wide range of companies, works against the goal of reducing market fragmentation. Second, innovation in the defence sector is also thought to originate from small and medium-sized enterprises, which have been neglected in the first calls. In the latest EDIPD calls, a dedicated funding scheme was added to ensure that SMEs would be required to participate in the European funding scheme – partly explaining the exponential increase in the number of companies involved in these consortia. This has certainly added to the bureaucratic hurdles regarding application, as emerged in our expert survey, but also limited the exclusive role of larger corporations on the European market.

There are two problems to note. The first is the relevant role of national markets compared to the common European one. According to the surveyed experts, national markets are still central to the decision-making of defence companies. The co-funding required by the EDIPD programmes suggests that it is increasing from the member states, but the absolute value is still too limited to say whether the latter are seriously investing in European-wide projects. The second is that there are indications that the larger companies could still benefit from their market position; therefore, both regulations and monitoring should be tailored to address this potential challenge.

Policy considerations

The second set of considerations that this analysis favours are more policy-oriented ones. While the EP and the EC have been praised for innovation in adding defence to their list of competences in 2014, recent events in Ukraine may require the EU institutions to take a substantially more assertive role in the future. In particular, it is legitimate to wonder whether the creation of a European defence market and a common technological basis for defence requires more ambitious goals in a shorter time frame. As seen above, the precursors took five rounds of funding to prepare for the EDF, which started, as noted, in 2021. Future projects moving at the same speed might be too slow-moving to fit with a rapidly evolving global security context.

Beyond timing, there is also an emerging magnitude too. The financial allocation for the EDF is around EUR 8 billion for the years 2021–2026. However, recent events in Ukraine have led several states to announce that more resources will be devoted to defence in the coming years. The decision by Germany to devote EUR 100 billion to defence in the coming years has drawn much attention (Chazan 2022), but others such as Belgium, Romania, Italy, Poland, Norway and Sweden have all pledged more resources for defence as well (Mackenzie 2022). In this context, the EDF allocation runs the risk of being a very small financial incentive for consolidation if compared with increasing funding allocations at the national level – where companies are less likely to run into competition from foreign counterparts.

A new Commission proposal from August 2022 only partly addresses these issues, proposing a short-term funding instrument of 500 million euros to incentivise governments to rely on common procurement of defence equipment (European Commission 2022).

Conclusion

The consolidation of the European market for defence has found a more prominent place on the agenda of EU institutions since 2014. The adoption of the EU Global Strategy in 2016 and the creation of the EDF marked a clear new step in the creation of a European defence, with institutions devoting significant financial resources to contribute to the creation of a shared technological basis. More recently, the war in Ukraine has further exposed the EU to its lack of military and defence capacities and the lack of success of past initiatives to reduce defence-market fragmentation. We have witnessed the creation of new initiatives to strengthen EU MS capabilities, such as the European defence industry reinforcement through common procurement act (EDIRPA) and the Act in Support of Ammunition Production (ASAP), which confirms that research like the one we presented here goes in the direction of providing necessary information for the success of rapidly evolving policies adopted by the EU in this area.

In this article, we have focused specifically on the EDF, which started its operations in 2021, but three precursor programmes – the PP, the PADR and the EDIPD – were administered to pave the way for the former’s sound design. However, the assessment of their success can take place in a few years, but the necessary condition is to have a clear view of what the starting point of the European market for defence was before the EDF will become fully operational. This article has explored the actor configuration of the common European market for defence and its evolution by looking at the project allocation under the three precursor programmes.

The analysis suggests some general considerations. First, the European defence market shows signs of consolidation. Four companies, Leonardo (Italy), Indra Sistemas, GMV (Spain), and ONERA (France), occupy a particularly central role when it comes to both the large amounts of funding received and the number of projects carried out in cooperation with other companies. They possess, thus, a large degree of centrality in the network of the European market that suggests a certain degree of market consolidation. While the market is overall populated by a rather large number of companies of various size and origins, there are indications that the market has features typical of a consolidated one.

Second, there seems to be a slight trend towards further market consolidation. Seen through the lens of the precursor programmes, there are a limited number of larger companies that appear to have played an increasingly central role in the market over time. Companies from the big four, i.e. Germany, Italy, France, and Spain, have been more successful than smaller ones in securing particularly large amounts of funding, and the largest ones have also participated in multiple consortia over time.

Third, we find confirmation that the pace of market consolidation could be slowed by the need to maintain internal legitimacy for EU institutions. Already, measures such as the compulsory inclusion of certain companies based on geographical dispersion or size has led to an increase in the overall number of participating companies, directly contradicting the EDF’s goal to decrease market fragmentation. In the future, the EC may incur legitimacy problems if, in trying to advance the consolidation process, it allocates resources only to a number of large European-wide operators in a short time frame. This could trigger a pushback from either the governments of EU member states, in case only a few countries received the majority of the funding, of from certain companies, in case funding allocation benefited only a certain category of companies. Efforts by the Commission to re-establish legitimacy and satisfy demands for inclusion would again work against the EDF goal of market consolidation.

With our study, we provide a first comprehensive overview on the state of the art of the defence market. As such, our research is an essential starting point for future academic research and policy decisions on European defence market consolidation initiatives. Future studies should expand the findings of our investigation and deepen the analysis on the nature of this market consolidation in three different directions.

First, this approach should be applied to the first EDF calls. The increased funding and the joint research/capability “window” allows for a more comprehensive overview on the status of such market consolidation, and this could also represent the benchmark for future comparisons here. Moreover, the ownership structure of defence companies should be further explored with the aim of detecting market consolidation even when, seemingly, this is not happening.

Second, the effectiveness of market consolidation should not only focus on whether or not a few larger companies are emerging. Attention should also be paid to the results of cooperation. In other words, future research should investigate whether the individual projects are de facto leading and contributing to a common technological basis at the European level by their activities.

Third and finally, both market consolidation and the effectiveness of trans-European cooperation should be further investigated. The aim here would be to identify and detect causes and effects regarding integration and disintegration processes. The emerging scholarship on differentiated integration could, for instance, provide a theoretically informed but policy-relevant angle to enhance our understanding of how a number of internal actors would cooperate within and outside the EU legal framework.

Acknowledgments

This research is part of JEDI – Joint Effort for the Defence Industry, funded under the EIBURS scheme of the European Investment Bank Institute. The authors thank the participants in the European Integration Colloquium at the University of Groningen for their comments on a draft version of the article and the valuable contributions from the anonymous reviewers, which have significantly improved the article. All errors remain our responsibility.

Disclosure statement

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

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/14702436.2023.2277440

Additional information

Funding

This work was supported by the European Investment Bank Institute [EIBURS].

Notes on contributors

Francesco Giumelli

Francesco Giumelli, Francesco Giumelli is Associate Professor and deputy head of Department at the Department of International Relations and International Organization (IRIO) of the University of Groningen. Francesco Giumelli is the Chair of the Cost Action Globalization, Illicit Trade, Sustainability and Security (GLITSS) and the coordinator of the Illicit Trade Group (ITG) at the University of Groningen. He is the author of The Success of Sanctions: Lessons Learned from the EU Experience (Routledge, 2013), Coercing, Constraining and Signalling: Explaining UN and EU Sanctions After the Cold War (ECPR Press, 2011) and various other studies on sanctions purposes, effectiveness and implementation. His areas of expertise are international sanctions and illicit trade. He is currently doing research on the evasion and circumvention of international sanctions. He can be reached at [email protected].

Marlene Marx

Marlene Marx, Associate Researcher at the University of Groningen. She can be reached at [email protected].

Notes

1. The EU contribution for the EDIDP and for four of the PADR projects are estimates obtained by dividing the total EU contribution by the number of participating companies.