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SERA 30REPORTS

SESSION EUROPÉENNEDES RESPONSABLES

D’ARMEMENT

"30 years of SERA: Europe first!?”How to strengthen

the European Armaments,Security and Defence Co-operation?

Qué sera?

This document compiles the reports drafted in 2018 by the 30th SERA auditors on the general theme "30 years of SERA: Eu-rope first!?” How to strengthen the European Armaments, Secu-rity and Defence Co-operation? Qué sera?" and its subthemes.

Views and recommendations expressed in this document are those of the com-mittee’s members. In any case, this content reflects neither national policies of any SERA nation, nor positions of any company.

Copying, reproductions, modifications, distribution of any of the contents of this document without prior written consent of IHEDN is strictly prohibited

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SERA 30SESSION EUROPÉENNE DES RESPONSABLES D'ARMEMENT

The Session européenne des responsables d’armement celebrated this year its 30th edition: 30 years of cooperation in the field of armaments and defence, 30 years of animation, enlargement and strengthening of the armaments

community. This anniversary testifies the actuality of the SERA, its extreme viva-city and relevance at a key moment for the construction of a Europe of Defence.

This document reflects the current debates. The theme, "30 years of SERA: Europe first!? – How to strengthen the European Armaments, Security and Defence Co-operation? Qué sera?" gave the opportunity both to look in the rear-view mirror and forward. The SERA30 auditors have examined what worked, what did not work and, naturally, have better understood the projects currently being developed at the European level as well as future prospects of a European defence in terms of research and industry.

Therefore, I would like to warmly thank the 68 auditors coming from 23 European countries and the OCCAR and their Councilors of Studies who supported them for the quality of their work, compiled in this report. From the beginning, SERA was conceived to favour the exchange of experiences between senior officials of the armament community in order to "develop a spirit of mutual esteem and real fellowship between personalities led to meet within European bodies". I’m convinced that, again this year, this aim is achieved.

Sincerely,

Major General (eng.) Jean-Christophe CardamoneChairman of SERA

Deputy-director of the Institute for Higher National Defence Studies (IHEDN)

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General SERA presentation

European initiative under the responsibility of the IHEDN, the French "Institut des hautes études de defense nationale", the "session européenne des respon-sables d’armement" aims to broaden the links between European nations which are planning to co-operate on military procurement programmes since 1989. The SERA provides senior managers involved in defence equipment matters and in European collaboration with an environment for training and reflection, meetings and uninhibited discussion with the aim of strengthening the European outlook in matters concerning defence and defence equipment and to improve mutual understanding between partners. This training is provided over 4 weeks, distributed over 5 months between February and June, in France and in two other European countries. It relies on an original and interactive method built around a group of activities linked to a central theme:

✓ Conferences intended to supply information to the auditors, followed by an exchange of opinions with the speaker.

✓ Visits which give an insight into certain aspects of the defence industry and the organization of the armed forces.

✓ Committee work where each committee (groups of 10 people from different nationalities) is in charge of studying a defined subject whose conclusions are presented at the end of the session in June.

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SUMMARY5 COMMITTEE #1

Europeanisation of the supply chain:Why and How

23 COMMITTEE #2

European defence technologicaland industrial Base (EDTIB) ?

59COMMITTEE #3

Innovations and their Impact on Future Warfare, Defence Industry, Defence R&T, Logistics and Combatants’ Skills

80COMMITTEE #4

How to strengthen the EuropeanArmaments, Security and Defence Co-operation?

119COMMITTEE #5

What is the role for the EU in defining the procurement strategies for European military R&D and other capability programs? What are the legal and institutional links in place between national and international programmes to ensure a coherent, collaborative picture (OCCAR, EDA etc.)?

145COMMITTEE #6

State of play and focus on the future trends of European Defence(Armament) Cooperation

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Committee 1Europeanisation of the supply chain:Why and How

Pilots: Dany VAN DE VEN , Wim TIJSTERMAN , Alexandre PENLEY ,

Members of the Committee Josefin GRENNERT JOHANSSON Franco DONFRANCESCO Andreas HESS Emilio LARRIBA Corinne LONCHAMPT (Chairwoman)Krzysztof ZIELSKI Tomas WINNEY (Secretary)John R MANRHO Jukka Olavi KORHONEN Uros KRAVOS Luc VANBOCKRYCK Rolf Axel BORG

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Executive summary

Our committee quickly came to the conclusion that if we assume that the desired end state is a common European Defence policy, the member nations must prepare to lose individually for Europe to win collectively. A common unders-tanding of the “supply chain” is what we need to support during service to ensure European capabilities.Why is the Europeanisation important? Europeanisation of the supply chain would increase collaboration among Member States (MS) aiming at enhancing competitiveness of European Defence products within the worldwide market and improve security of supply. Besides, it would facilitate a reduction in the current market and would lead to improve industry competitiveness. All these issues, in the European defence sector, would be applied by MS without compromising their national security interests.From an economical point of view, we recognize that we will pay a lower unit price by reducing the number of platforms and increasing the volume. Therefore we will spend more money on investment in capabilities, personnel and R&D, which can only benefit European Defence.Some initiatives as European Defence Action Plan (EDAP), European Defence Fund (EDF), Permanent Structured Cooperation (PESCO) and European Defence Industrial Development Programme (EDIDP), are presented as a chance for MS to increase the European sovereignty. For instance, in the missile domain, the MBDA industrial consolidation is presented as an example of success.Working closely, industry and government, to secure supplies under all condi-tions, defining a common core of capabilities which will have to be supported at the national level, establishing the redundant capabilities which could be optimized thanks to a certain level of specialisation between European countries and with the reinforcement of the export market to support more efficiently the sustainment of the technical and industrial capabilities in Europe.

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T he current state of the European supply chain is disjointed, sporadic and characterised by duplication of effort. Europe recognises the need for a more coherent approach to Defence to combat a number of enduring and

emerging threats. The most pressing Industry objective is how we move from a highly localised Defence Industry, to one that leverages the collective benefit of a pan-Europe approach; a defence industry that derives benefits from the various Europe expertise. In essence how do we get more bang for our buck?

Where are we regarding Europeanisation of the supply chain?

Although the European Union put in place regulations in civilian areas that interfere with member states' sovereignty, Defence remains a domain in which the European Nations keep their entire sovereignty. Since the earliest stage, the member states of the European Economic Community agreed that rules on competition and the free movement of goods within the European Union should not apply to military and security equipment when “essential security interests” were at stake. This agreement, enshrined in article 223 of the 1957 Treaty of Rome, later became Article 296 of the 1999 Treaty of Amsterdam and then Article 346 of the 2009 Treaty of Lisbon. With this Article in place most armaments and related services have been conducted outside of the EU’s trade, competition and procurement rules.

The member states make decisions regarding defence capabilities on their own, taking into account national requirements based on often specific concepts of operations (ConOps), available budget, desired delivery time and especially the economic impact on their national technological and industrial base. Member states rather award contract to their domestic manufacture as not only it faci-litates the management of the security of the Supply chain but it also provides wider economic benefits in the form of jobs, technological progress and spin-offs. Therefore, European defence industry is very much fragmented and the number of different platforms in Europe is very high compared to the US. Figure 1 below demonstrates the stark difference between the EU and the US in that perspective.

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Thanks to a consolidation work that was conducted in 1993, the US were able to restructure and reorganize the US Defence industry. Number of manufactures exit from markets and many mergers took place. This is not a common practice at the European level since defence industry consolidation is based on commercial necessity and restrained by national sovereignty.

The European defence technological and industrial base (EDTIB) is dominated mainly by some key large prime contractors, for instance BAE Systems, Airbus Group, Thales, Leonardo, Naval Group, Fincantieri, MBDA. Most of the indus-trial capabilities are maintained within the six Letter of Intent (LoI) countries: France, Germany, Italy, Spain, Sweden and the UK. This Tier 1 level constitutes numerically only a small part of the overall industrial companies, but earns the

Figure 1 – US vs Europe procurement contrastsSource: Reflection paper on the future of European defence (European Commission, 7 June 2017)

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dominant share of the defence expenditure revenues. The competitiveness of prime contractors is a key element to strengthening Europe’s defence industry. Strong and healthy prime contractors in Europe are also essential for small and middle size enterprise (SME) and sub-suppliers.

Below these prime contractors level, the EDTIB is often aligned on a national basis and shows no strong evidence of EU-wide integration. These tier 2 companies account for around 15% of the supply chain. One issue within tier 1 and 2 is that there is only a small portion of contracts which includes cross-border markets. Only 10% of the value of public procurement contracts awarded under Directive 2009/81/EC has been won directly by foreign companies as main contractors. There are also a number of challenges for SME to enter cross-border markets that are specific to defence procurement such as nationally classified information and data, security of supply requirements, standardisation and certification, and national export control regulations. According to European Defence Agency report industry stakeholders should be encouraged to open supply chains and increase collaboration beyond national borders with an aim to enhance competitiveness within Europe and supply chain security.

Through the 2016 publication of the Defence Package of directives and commu-nications, the EU is seeking to introduce coherent, consistent, transparent and competitive rules for trade and the procurement in the European defence sector that Member States can apply without compromising their national security interests.

The objectives of the Defence Package are to act as the cornerstone of an open European defence market, encouraging intra-Community trade with equal treatment and opportunities. Facilitating a reduction in this market’s current fragmentation and ultimately leading to improved industry competitiveness, value for money for European Union (EU) Member State (MS) Customers and export success.

The Defence Package was endorsed by the European Council in December 2016 consisting of:

✓ Implementation of EU Global Strategy in the areas of security and defence.✓ The European defence action plan.✓ Cooperation with North Atlantic Treaty Organization (NATO) and United

Nations (UN).

It must be underlined that smaller Nations, that do not own a solid national Defence technological and industrial base, may be keener in acquiring systems from the US than giving a European preference for products that may both fit their operational requirements. These Nations may even feel a stronger bond

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with their Big American Ally than with other European States to ensure their security. Therefore they prefer purchasing off the shelf (sometimes used) US products that may be more competitive and perfectly interoperable with NATO. Moreover, these nations may also request offset benefit which is prohibited by the EU regulations.

Why should Europe go for an Europeanisationof the Supply Chain?

Geopolitical context as well as sovereignty and economic considerations preach for Europeanisation of the defence Supply chain.

The benefits of NATO as the basis for European Security have been created over a number of years and the relative peace enjoyed across Europe can be attributed

Figure 2 – Defence expenditure among NATO countries as a percentage of GDP Source: https://geopoliticalfutures.com

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in part to the existence and growth in influence of NATO. This has come under recent scrutiny from the United States as they have pressured NATO Nations to assume their part of the burden and more specifically to raise their level of effort to reach the 2% GDP by 2025, as the NATO Nations committed at the NATO Newport Summit in September 2014.

As an answer to this firm request from the US, Minister Von der Leyen (German Minister of Defence) invited the European Nations to move forward and contri-bute to a stronger Europe of Defence. In her speech at the Munich Conference, she stated that “We want to remain transatlantic while also becoming more European” with an objective to “enable Europe to also carry our weight in terms of military power. So that Europe can become more interdependent and self-reliant ultimately also within NATO. A European task for the future”. This requires the consolidation of the European Defence technological and industrial base (EDTIB). Since the fall of the German wall the European Nations have quite severely decreased their level of effort regarding their Defence budget, so the 2% GDP is a most challenging goal.

Figure 3 – Overall European Military Expenditures 2000-2017 in M€Source: SIPRI

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All Member States together spend less than half of US defence expenditure and this money is spread to many accounts for the same or similar contents. According to European Defence Agency (EDA) estimates, roughly 80% of defence procurement expenditure is spent nationally, i.e. outside cooperative projects, and almost half of the EU Member States is spending more than 60% of their respective defence budgets on personnel. Due to the limited national allocated budget to Defence capabilities it is foreseeable that it will be no longer possible for the European Nations to develop and produce a major equipment and/or project (e.g. frigates, combat aircraft or armoured vehicles) on a purely national level.

Figure 4 – NATO members’ GDP, population and defence spending Source: https://geopoliticalfutures.com

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From a market point of view, Defence companies need a critical size in order to be able to finance innovation, be competitive and develop services. As their natio-nal market becomes too small, the Defence companies must identify and target a Defence market where they can be competitive with a sustainable business model. Increasing competition worldwide (example in the Naval domain: Russian, Chinese industry and newcomers, and more generally in any domain with the US companies) leads to a focus on consolidation of the European industry to be able to compete in the worldwide market. Their survivability is at stake. Unfortunately, the actual fragmentation of the Europe capabilities leads so far to duplications in European spending, and not to a critical mass needed to be competitive.

Figure 5 – Manufacturers in different domainsSource : McKinsey

Progressing towards a truly Europeanisation of the supply chain would contribute to reducing the number of military platforms and as a consequence would enhance interoperability within the Euro-pean Nations’ armed forces.

Particular mention should also be made to the severely limited national budget resources in the field of armaments in connection with a possible loss of specific national know-how that would result from a lack of investment in innovation and production. As a consequence, often only suboptimal national solutions could be achieved, which may be associated with considerable operational restrictions. In addition, each of these individual national procurement projects also have to ensure the one-off costs for securing the necessary production capacities, logistical supply shares and in service support and maintain them over the project term.

Ensuring security of the Military Supply chain also militates for an efficient

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and competitive defence industry that enables to master the whole chain from one end to another. Being constrained to purchase components or entire sys-tems from the US presents some issues due to the International Traffic in Arms Regulation (ITAR). The latter controls the manufacture, export, and temporary import of US articles that have been designated as having military significance. The use of systems may also be operationally constrained and limit freedom of action. Therefore, ITAR-free systems or services are required for the Nations to be able to operate totally independently. Europeanisation of the supply chain could contribute efficiently to this objective.

How shall we achieve Europeanisation of the Supply Chain?

With the ultimate objective to enhance the EU Defence and Security autonomy, the EU reflection paper (2017) identifies three different scenarios:

✓ Security and Defence Cooperation: the EU27 Member States would coo-perate on security and defence more frequently, on a largely voluntary basis, depending on ad hoc decisions when need arises, and rely on initial economies of scale.

✓ Shared Security and Defence: the EU27 Member States would move towards shared security and defence, showing greater financial and operational solidarity and would enhance their ability to project military power, fully engaging in external crisis management and building partners' security and defence capacities. Considerable economies of scale in the defence market at European scale would be in place, with favourable financing conditions across the defence supply chain. [Committee evaluation: this certainly should be the minimum aim of EDAP/EDF]

✓ Common Defence and Security: the EU27 Member States would deepen cooperation and integration towards a common defence and security. Solidarity and mutual assistance would become the norm, underpinned by a certain level of integration of Member States' defence forces. Member States would have more efficient defence spending through more economies of scale, specialisation, sharing of expensive military assets and technological innovation aimed at reducing defence costs, and would be better equipped to face international competition. [Committee evaluation: in the long run this could become the ultimate aim of EDAP/EDF]

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Based on the scenarios outlined above then Member States need to take three well-defined steps:

✓ The implementation of measures for guaranteeing an own European supply chain starts with the prerequisite for a strong and permanent political will. This political determination shall be embedded in official statements and declarations. Accordingly Heads of State and Government as well as all other policy-makers have to act sound and united. The impetus and momentum are currently present as testified by recent declarations (e.g. President Macron’s speech at la Sorbonne University on 26th September 2017).

✓ The capabilities to be developed, produced and supported have to be defined based on the common understanding of the missing capabilities. Of course agreeing on common requirements will not be an easy task but hopefully the recent EU operations on the field as well as the Intervention European Initiative (IEI) can contribute to progress towards common Concepts of Operation (CONOPS) to support requirements statement. In addition to these commonly agreed requirements, an agreed calendar, the appropriate budget, an agreed contractual framework and an agreed and relevant industrial orga-nization are also required to set up favourable conditions for cooperation. Harmonization of the export control policy would also be needed to enable the participating Nations to use and operate the developed capabilities in full autonomy.

✓ Cooperation, integration, establishment of competitiveness hubs, specializa-tion within a regulatory framework of fair balancing among Member States.

As an example, in the missile domain, the successive phases of the MBDA indus-trial consolidation illustrate that this three steps approach can be conducted successfully. Through the progressive merge of Matra, BAe Dynamics, Aerospatiale, Finmeccanica Missile Divisions and later on LFK in Germany, MBDA has accom-plished European integration within the Aerospace & Defence segment. It was created as a response to the challenges to be faced at the beginning of the 21st century (reduction of national European budgets, greater pressure from US competitors, need to federate the development efforts and rationalize European firms’ portfolio with the strategic goal to become the reference Missile Company in Europe).

Cooperation programs played an important role in the consolidation of the com-pany. The European Deep Strike missile program gathered the UK and French MoDs around a common requirement lifting off the Security/Sovereignty issues

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on the program. The definition of the 6 nations(1) Meteor industrial consortium contributed also to the MBDA consolidation since 3 of the Meteor nations (France, UK and Italy) were already MBDA partners from the beginning, later joined by Germany as per the LFK/MBDA-D integration and by Spain as per the MBDA-ES creation.

The 2010 Lancaster House treaty results from a strong political willingness as the United Kingdom Prime Minister and President of the French Republic agreed on a closer strategic approach among all of the Military and Industrial systems of France and the UK, along with a mutual dependency vision aimed at preserving the strategic role of the two nations.

This alignment has been possible thanks to similarity in the UK and French Defence policies regarding spending and operation requirements, acceptance of mutual dependencies and the establishment of a joint long term governance. As a consequence, the “One Complex weapons” initiative was launched supported by common development programs. Centres of Excellence have been established, thanks to the three following lines of action:

✓ The definition of a common core of capabilities which will have to be sup-ported at the national level

✓ The definition of the redundant capabilities which could be optimized thanks to a certain level of specialisation between European countries

✓ The reinforcement of the export market to support more efficiently the sustainment of the technical and industrial capabilities in Europe.

Such a specialization could be widen to other areas and in a more comprehensive way between European Nations that are ready to accept mutual interdependence and acknowledge the benefit of it. The objective is to organize this specialization rather than to be constrained to accept it.

If European specialization contributed to strengthening the EDTIB particularly in front of worldwide competition, at an extremely high grade one industry for one capability, it might also imply unsuitable side effects by reducing compe-tition within Europe and therefore be unproductive as far as economic savings and technological level of performance are concerned. So prudence is in order.

The recently defined European initiatives are a chance that European Nations must seize to support European sovereignty, a development of the European

(1) France, UK, Italy, Germany, Spain, Sweden

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Defence Technological and Industrial Base. They constitute a comprehensive approach based on three pillars:

✓ The Capability Development Plan (CDP) assesses the existing capabilities and identifies critical shortfalls,

✓ The Coordinated Annual Review on Defence (CARD) identifies the cooperation opportunities to tackle capability shortfalls and gives the political impetus.

Together they deal with the capability priorities

✓ The Permanent Structured Cooperation (PESCO) deals with the implemen-tation of these capability priorities by voluntary States in a binding political framework.

The commission budget supports the implementation of these capability priorities. The objective of CDP and CARD is to make the European capability development process more robust encompassing an improved governance, increased transpa-rency between national defence plans and content, and establishing interaction with the NATO capability development process.

The identified European capability gaps will serve as the main input for the EDF. The EDF is an incentive for cooperation between Member States and European companies, including a Research and a Capability Window. The Research Window shall co-finance (with industry), through grants, collaborative research projects with high European added value. It starts with a Preparatory Action till 2020 of 90 million €, up to 500 million € per year from 2021. The Capability Window shall contribute to the development costs of cooperative programs decided by the MS (new products and improvement of existing products), for prototyping, feasibility and definition studies, risk reduction phases, testing, qualification and certification activities. It starts with a European Defence Industrial Development Program (EDIDP) of 500 million € till 2020, up to 1 billion € per year from 2021.

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Figure 6 – European Defence Funds Source : European Commission, Defending Europe – The European Defence Fund, 2017

Governance and participation rules for EDIDP, including eligibility criteria for companies, call for proposal procedure and competitive selection principles are about to be defined in 2018. But it is clear that an ambitious European Defence Fund will promote cooperation and cost savings among Member States to produce state-of-the-art defence technology and equipment. It contributes to fostering investments in defence supply chains, strengthening the single market for defence and maximising civil/military synergies across EU policies.

Permanent Structured Cooperation (PESCO) might actually lead to a broader definition of strategic autonomy for the countries who will be part of it, assuming they will develop capabilities to enable them to conduct the high-end missions of the Common Security and Defence Policy (CSDP). The 20 ambitious and binding common commitments promoting European defence are dealing with :

✓ level of defence and investment expenditures ✓ identification of EU military needs ✓ availability, interoperability, flexibility and deployability of forces ✓ capability shortfalls ✓ major joint or European equipment programmes

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A first wave of 17 selected projects related to both operations and capabilities is launched under the impulsion of the lead nations.

According to the Art. 42(6) of the Treaty on European Union (TEU), PESCO is established by “those Member States whose military capabilities fulfil higher criteria and which have made more binding commitments to one another in this area with a view to the most demanding missions”. It promotes defence cooperation in smaller committed groups, below the threshold of 27 Member States within the EU framework. The Council of the European Union opted for an inclusive PESCO enabling any willing Nation to participate instead of creating a defence first class group. PESCO is also modular in order to ensure a certain degree of flexibility, so that participating states would not have to contribute to every single capability area nor to any project encompassed by PESCO.

In order to avoid duplication of efforts as well as to achieve a more effective defence spending, close coordination and cooperation between PESCO and NATO should be developed, in terms of capabilities developments and operations. Therefore a prime role has been identified for the EU-NATO Capability Group in order to ensure better coordination between the NATO Defence Planning Process and the EDA CDP.

First, PESCO projects assessment has been made by EDA and the European Union Military Staff (EUMS) to ensure they fit in CDP and cover several Operational and Logistics gaps. For the moment, not all the 17 first projects will imply develop-ment and procurement and therefore will not contribute to European industrial consolidation at this stage. They mainly focus on common requirements to ensure they are mature and appropriate for collaboration. However further planning and implementation remain possible through the EDIDP initiative as a preferred solution.

Recommendations made by industry should be taken into account:

✓ Do not complicate the management of programs in cooperation ✓ Promote industrial excellence as opposed to the traditional goal of cohesion

of European instruments ✓ Favour genuine European companies ✓ Consolidate existing European industrial champions

European collaboration needs common programme development and manage-ment. To that means, OCCAR(2) can be considered an important and experienced

(2) OCCAR : Organisation Conjointe de Coopération en matière d’Armement

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enabler. As expressed in the preamble, the 6 Member States (but open for other EU countries) aim to facilitate and manage cooperative European armament pro-grammes through their life cycle, as well as Technology Demonstrator Programmes, in order to improve the competitiveness of the European defence technological and industrial base, to take advantage of their industrial poles of excellence, to promote links between companies, and for competition to be organised in accor-dance with uniform rules. The “Global Balance” replacing the “Juste Retour” for each programme and each participating country is a recommendable objective, even though it is also a challenge.

Besides the programme management and at least equally important is the close cooperation between Major/Large Companies, SME’s and Research Organisations. Working on collaborative projects, each partner has its strengths. Major Companies have the knowledge of the customers’ needs and have the financial capacity for the long-lasting “going to the market”, SME’s have niches high-level technical abilities and agile know-how, and Research Organisations have the scientific knowledge and innovative ideas.

To reach optimum performance an interesting approach is to create Competitiveness Hubs by concentrating companies, training and research centres in a given geo-graphic area, engaged in a partnership which is designed to produce synergy in shared projects of an innovative nature. This clustering goes hand in hand with specialization in order to avoid duplication and to create a sufficient market share. In order to respect national industrial interests of mainly the smaller countries, we also look forward to a Commission Recommendation on cross-border market access for SME’s which is expected in 2018.

The Government to Government sales (G2G) are another tool of cooperation that could be implemented in the European sphere. This method allows governments to procure defence equipment and services from other governments. The purcha-sing government does not deal directly with any defence contractor; instead, the sale is made by the other government. This tool cannot only be used by the selling Member State to dispose of surplus equipment, and by the buying Member States to purchase defence capabilities within relatively short delays and at affordable prices, but also for development and procurement by a lead nation. In all cases, it is a viable means to ensure interoperability of Member States’ Armed Forces.

As the United Kingdom voted for BREXIT, the Nation will leave the EU by 29th March 2019. As the negotiations are ongoing about the future of the relations between the EU and the United Kingdom, it is not the purpose of this paper to interfere or formulate any specific recommendations in this domain. However, even if leaving the EU, the United Kingdom remains in Europe. The United

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Kingdom is one of the only European nations with a global level of ambition when it comes to Defence. It has nuclear deterrence, a performing national industrial and technological base and a full spectrum of armed forces. It is one of the European Nations that invest the most in innovation. As such, it remains a considerable asset for the European superiority and its EDTIB. Therefore the future relationship with the UK should contribute to the European objectives.

More specifically, the association of companies such as MBDA, already built on a strong European model, to the development projects that may be encouraged by the European initiatives must be considered wisely not to prevent Europe from its already rationalized and competitive industrial assets.

Finally, a common base for requirements setting, qualification and certification should be strived for. Currently European military development programs often struggle with different national views on requirements, qualification and certifi-cation which contribute to adding cost. Although multinational programs often have special agreements between nations to align on these aspects, in reality there is still much to gain. A European authority like EASA (European Aviation Safety Agency) but then for the defence industry as a desired end state may be a bridge too far, but building further on the current European Military Aviation Requirements (EMAR) to achieve that desired end state is a necessity.

Conclusion and final recommendations

Nowadays European Nations keep their entire sovereignty in the matters of Defence. Although MS agreed in the free movement of goods within the European Union, this doesn’t apply to military and security equipment.

European countries, compared with the US, operate many different platforms and defence industry is very fragmented. The national requirements have an important weight in the decision regarding the management of the security of the supply chain.

EDA promotes to open supply chains and to increase collaboration beyond natio-nal borders with an aim to enhance competitiveness within Europe and supply chain security. Key factors are the nationally deemed sensitive information and data, security of supply requirements, standardization and certification, and national export control regulations.

It’s known that several Member States have limited defence budget and spent most of it on personnel. A lack of investments by the European Nations put a high risk on the survivability of the European Defence industry as well as on the

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related knowledge base of the technologies involved. The Europeanisation of the supply chain would contribute to a stronger European Defence industry, the reduction of the number of military platforms and the enhancement of intero-perability within the European Nations’ armed forces. It would also contribute to strengthen Europe’s political autonomy regarding freedom of action.

To achieve the Europeanisation of the supply chain, the suggested recommen-dations below could be followed:

✓ Prerequisite for a strong and permanent political will is necessary;✓ Nations must accept compromises and be ready to “loose” something indi-

vidually for Europe to gain;✓ The capabilities to be developed, produced and supported have to be defined

based on the common understanding of the missing capabilities;✓ The capabilities must be developed on a modular architecture with an as

large as possible part of commonalities;✓ Cooperation, creation of competitiveness hubs and specialization of industry

through merging should be encouraged within a regulatory framework of fair balancing among Member States. In this perspective, the new European initiatives could be a trigger for realization.

The need for the Europeanisation of the Defence supply chain is clear and understood, political will and dynamism are emerging and an EU framework is established; now all stakeholders - policymakers as well as industrials – have to keep the pace!

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Committee 2European defence technologicaland industrial Base (EDTIB)

Pilots: Jean-François COUTRIS , Daniel JOHANSSON

Members of the Committee Luc VAN DE WINCKEL (Chairman)Magdalena GREGEROVA Julie Sophie HÜBERTZ Yann DOLO Brig. Eric ESTEVE Col. Henrik SCHOLZ Lt. Col. Rune JENSEN Maj. Jose Daniel MUNIZ BASCUAS Joakim WALLIN Markus NIEVERGELT Oliver SHEARN (Secretary)

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List of abbreviations

BREXIT Withdrawal of UK from EUCSDP Common Security and Defence PolicyDTIB Defence Technological and Industrial BaseEC European CommissionEDA European Defence AgencyEDAP European Defence Action PlanEDF European Defence FundEDTIB European Defence Technological and Industrial BaseEEA European Economic AreaEU European UnionFCAS Future Combat Air SystemFMS Foreign Military SalesGDP Gross Domestic ProductLoI Letter of IntentMS Member StateNASA National Aeronautics and Space AdministrationNATO North Atlantic Treaty OrganizationOCCAR Organisation for Joint Armament CooperationPESCO Permanent Structured CooperationR&D Research and DevelopmentR&T Research and TechnologySME Small and Medium-Sized EnterprisesSoS Security of SupplyUK United KingdomUS United States (of America)USA United States of AmericaWEF World Economic Forum

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Executive Summary

18 years after signature of the Letter of Intent (LoI) between France, Germany, Italy, Spain, Sweden and the United Kingdom (UK), Europe now needs a reinvigo-rated direction towards a European Defence Technological and Industrial Base (EDTIB) through the development of a new EDTIB Strategy.

By the SERA30 Councillors, Committee 2 was asked to analyse: how a new and more effective EDTIB might be developed in conjunction with more effective col-laboration, alongside the major factors, which influence this, including national sovereignty, advanced technological capabilities and industrial competitiveness, as illustrated by the equation below.

EDTIB =(Defence Industry Competitiveness+Advanced Technological Capabilities)

(National Sovereignty)

The current state of affairs is dominated by national defence industrial planning (with national sovereignty a key consideration), with varying focus on national industry, competition, international collaboration and/or purchases. At the same time, complete national sovereignty is considered an illusion in today’s era, with all European nations reliant on international alliances and global acquisition and support, with only a small number of capabilities to be considered truly sovereign. By following a "nation first" strategy Europe has demonstrated that political objectives and national industrial priorities prevail. Europe is missing opportunities to achieve benefits for all nations and the European collective resulting from increased collaboration.

European Industry is competing with other western industries across the globe, namely the United States of America (US) and Russia, but other nations, such as China, Israel and Turkey, also possess strong defence industrial companies, which are able to compete on a global scale. European nations are often pre-sented with choices about whether to procure from the US or seek a European solution. The key for European Industry is to be able to provide credible and competitive options, rather than nations concluding they have no other choice but to buy American to access technologies, or benefit from economies of scale. Development of a renewed EDTIB Strategy is therefore key.

Committee 2 has analysed the issues associated with the above-mentioned suggested topic equation and has concluded that a different equation is more relevant to inform the strategic way forward, namely the one listed below.

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EDTIB Strategy X ∑ (DIC+ATC) = European Sovereignty

DIC = Defence Industry Competitiveness ; ATC = Advanced Technological Capabilities

This new equation surmises firstly and critically that a new EDTIB Strategy should be developed, which aims at coordination, collaboration and where possible consolidation of defence Research and Development (R&D) and procurement. The effectiveness of this strategy is supported by efforts to improve industrial competitiveness and advanced technological capabilities by coordinating natio-nal contributions. The sum of the equation would in theory be greater European Sovereignty - a more realistic concept in the modern era.

National, bilateral and multilateral leadership is critical, particularly by nations with the largest spend, which would be able to lead the way with major commit-ments to collaborative projects. Nations with smaller spend would then likely provide critical sub-systems and/or specialist technologies and procure the delivered products.

There must also be a sufficient number of programmes considered in order to get a fair balance for nations and industry over the long term. National govern-ments must also be politically ready for a shift in perspective, both in accepting that their industries may change in size and shape, in addition to making more balanced decisions on sovereignty that take into consideration the value that can be achieved through collaboration. The key is to align military capability needs and trade-off national specific requirements against a more common coordinated approach in order to increase European sovereignty as illustrated by Scenario No. 3 in Figure 1 below. Committee 2 firmly believes that if European nations, in unison, follow the recommendations provided below Scenario No. 3 is attainable resulting in an increased European sovereignty when it comes to defence.

k= Country A

Country Z

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Implementation of these recommendations will be challenging, but the potential benefits are significant. Respecting national interests and increasing European collaboration are not mutually exclusive. Now is the time for Europe to step up to the challenge and move into a new era of collaborative defence armaments acquisition, underpinned by an effective, efficient and coherent EDTIB Strategy.

Figure 1 – From national to european priority in defence procurementNote: Situation “Today” is an illustrative example of the current strategy of single European nations with regard to defence spending. Differences exist between nations, i.e. smaller nations are by default “forced” to procure more defence related equipment from other nations, European and International, given limited national DTIB.

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Introduction and background

Over the last two decades, the European defence environment and underpinning industry have evolved; however, both national and European defence investments have reduced over time, affecting the sustainability of nationally focused Defence Technological and Industrial Bases (DTIB) and driving a need for a more effective and efficient approach to armaments procurement, collaboration and decisions on national sovereignty.

“The DTIB organises the infrastructure, institutions, and ideas that ensure the Security of Supply (SoS) of armed forces with defence material and services.”

Directorate General of External Policies of the Union (2013)

In 2016, national governments stepped up their response to pressing security threats and the concerns of their citizens. Defence budgets were increased accordingly. However, the United States already invests more than twice as much as all European Union (EU) Member States (MS) combined on defence and will increase its budget by almost 10% in 2018, as shown in Figure 2 below. China has increased its budget by 150 % over the past decade, with a further rise of 7% expected in 2017, while Russia invested 5.4% of its gross domestic product (GDP) on defence last year (European Commission, 2017b).

Figure 2 – European defence spending in a comparative perspectiveSource: Stockholm International Peace Research Institute (2016 data, in billion euro), Jane’s, European Political Strategy Centre. Extracted from ”Reflection Paper on the Future of European Defence” (European Commission, 2017b)

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On 27 July 2000, a LoI Framework Agreement Treaty was signed by the Ministers of Defence of France, Germany, Italy, Spain, Sweden and the UK. It aimed to create the political and legal framework necessary to facilitate industrial restructuring in order to promote a more competitive and robust European DTIB (EDTIB) in the European defence market. This was followed in May 2007 by Ministers of Defence of the European Defence Agency (EDA) Nations signing the EDTIB Strategy, agreeing on a common view to achieve the DTIB on a European Level to underpin European Security and Defence Policy, calling for a EDTIB that could provide world-leading technology to guarantee that European nations could operate with appropriate independence. The intent was to align and combine various European needs in shared equipment requirements and to meet them from an increasingly integrated EDTIB.

The EDTIB was not envisaged as a ‘fortress Europe’, excluding imports from, or cooperation with, overseas defence industries, but as a necessity for European nations to ensure the future of their own DTIB and overall defence interests. Ministers of Defence aspired to the following, which remains equally valid today:

✓ Clarify priorities, including prioritising capability needs;✓ Identify key technologies;✓ Identify key industrial capacities;✓ Consolidating demand by aligning and combining future materiel needs

of European forces;✓ Increase investments, especially in Research and Technology (R&T), reco-

gnising the imbalance to investment by the United States of America (USA);✓ Ensure SoS, and;✓ Increase competition and cooperation.

An effective EDTIB contributes to overall European security, supported by a multinational Defence and Security Policy. In December 2013, the European Council stated that “an effective Common Security and Defence Policy (CSDP) helps to enhance European security and contributes to peace and stability in the broader world, in a challenging geopolitical and security environment. A CSDP aims to be complementary with the North Atlantic Treaty Organization (NATO) and provides a supporting framework for sufficient investment. A CSDP supports deepening of defence cooperation by improving the capacity to conduct missions and operations and achieving synergies, supported by a more integrated, sus-tainable, innovative and competitive EDTIB. Furthermore, a coherent European approach will also bring benefits in terms of growth, jobs and innovation to the broader European industrial sector” (Directorate General of External Policies of the Union, 2013).

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“The European Council has identified a number of priority actions built around three axes: increasing the effectiveness, visibility and impact of CSDP; enhancing the development of capabilities; and strengthening Europe's defence industry.”

European Council (2013)

Despite the Agreements of the LoI and the EDTIB Strategy, European nations are still protecting and prioritising their national DTIBs, whereas in the “real world”, i.e. international scene, the DTIB has developed into an international endeavour, characterised by:

✓ A hierarchical structure of industrial organisations with some universal producers and many smaller companies which supply them;

✓ Decreasing European defence budgets;✓ Increasing dependence of the defence industry on foreign purchases and

sales;✓ A globalised defence industrial production chain; and✓ The rise of a complex patchwork of civilian and military industries and

technologies.

By 2016, the European context had become more unstable, with macro threats, such as those stemming from a resurgent Russia, nuclear threats from North Korea and Iran, hybrid and cyber warfare, and political-economic changes, such as BREXIT, the rise of fundamentalism and instability in the Mediterranean and sub-Saharan area, and increased tensions for the control of natural resources in different parts of the world. At the same time, US President, Donald Trump’s ‘America First’ strategy underpins an increased burden sharing in defence from European NATO members.

“A more credible European defence is essential also for the sake of a healthy tran-satlantic partnership with the United States.”

European Union (2016)

Those challenges have called for and allowed the EU to agree on a shared vision and common action. This was detailed in the November 2016 EU Global Strategy by the European Commission (EC) with the European Defence Action Plan (EDAP), which outlined that” a stronger industrial base should be achieved”. The ambi-tious European Defence Fund (EDF), launched in June 2017, aims to promote cooperation and cost savings among MS to produce state-of-the-art defence technology and equipment. With the EDF, the EU creates incentives for MS to cooperate on joint development of defence equipment and technology through co-financing from the EU budget.

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“An EDTIB is important for an effective EU CSDP. This policy is designed to provide the EU with the capacity for autonomous action when responding to international crises, without prejudice to actions by NATO”

European Commission (2018)

Whilst these EU-led initiatives are important and in some circles considered ‘game changing’, non-EU structures are equally critical to current and future European armaments collaboration, both to EU MS and non-EU European nations. The current environment is supported by a patchwork of bilateral and multilateral agreements, in addition to key cooperative organisations, such as NATO agencies and the Organisation for Joint Armament Co-operation (OCCAR), which play a key role in delivering armaments collaboration. However, this col-laboration is largely ad hoc, uncoordinated and constrained significantly by an ongoing national focus.

Over the last two decades EU MS, EU Institutions, and individuals have been agreeing on the need to ensure SoS of their armed forces by increasing invest-ments into a EDTIB to safeguard the EU from industrial risks; however, with limited outcome. It was external challenges that made the EU MS to decide on an EDAP, to establish the EDF, and to agree on establishing a permanent structured cooperation to reinforce cooperation in the development of required capabilities.

“While NATO exists to defend its members — most of which are European — from external attack, Europeans must be better equipped, trained and organized to contribute decisively to such collective efforts, as well as to act autonomously if and when necessary”

Directorate General of External Policies of the Union (2013)

Europe first?!

This report analyses how a more effective EDTIB might be developed in conjunction with more effective collaboration, alongside the major factors which influence this, including national sovereignty, advanced technological capabilities and industrial competitiveness. This is analysed within the equation proposed by SERA30 Councillors, as listed below.

EDTIB = Defence Industry Competitiveness+Advanced Technological Capabilities)(National Sovereignty)

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Definition of Europe

To analyse ways to develop an effective EDTIB, the concept of “Europe” needs to be defined. Europe means different things to different people, nations and organi-sations. The defence context is unique in its concept of Europe, as influenced by several multinational military, political and collaborative organisations, including the EU, NATO, and OCCAR, in addition to a myriad of bilateral and multilateral agreements between European nations.

The EU may define Europe as its MS, or perhaps the wider European Economic Area (EEA); however, this would not include all European nations, which are members of NATO, which remains a cornerstone of European security. The impact of BREXIT raises an interesting challenge to the definition of Europe - even the most die-hard members of the European Community would be hard pressed to suggest that the UK is ‘not in Europe’, both geographically, militarily or industrially - particularly with its level of defence spending. Similarly, other non-EU European nations, such as Norway, would object to not being conside-red a part of Europe, and Switzerland would object to a NATO-only definition of Europe. This illustrates the point that for the purposes of defence, the defence industry and the EDTIB, Europe is a concept that goes beyond the boundaries of these organisations.

Identification of shared interests is a fundamental factor and commonality of defence and security threats is a key consideration when discussing the unity of Europe. However, this is not a simple concept when related to Defence Armaments. By way of illustration, a resurgent Russia is considered as a threat by many European nations; however, this threat is considered through a national lens and is influenced by a myriad of factors, including wider foreign policy (e.g. Switzerland’s status as a neutral nation), geography (the British and Norwegian view of maritime threats when compared to land locked nations), current and possible future areas of operations, and so on.

In summary and for this report, Europe is considered to consist of the nations within the European continent’s geographical boundary, which have shared interests within the realm of defence.

The Committee 2 topic equation, detailed above, suggests that industrial competi-tiveness and advanced technological capabilities both have a positive influence on the EDTIB and that a quest for national sovereignty has a negative influence on the EDTIB. The accuracy of this suggested equation will be critically analysed throughout the report and evaluated within the overall SERA30 Theme: ‘Europe First?!’ How to Strengthen the European Armaments, Security and Defence Cooperation? Que sera?

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Current Context

The current state of affairs is largely dominated by national defence industrial planning, with sovereignty a key consideration for all nations, with varying degrees of focus on national industry, competition, international collaboration and/or purchases. This is illustrated by the majority of individual defence industrial strategies, listed in Table 1 below, from which the following extracts are taken from the nations represented in Committee 2:

Table 1 – Examples of national defence industrial strategies

Belgium Czech Republic (2017)

In Belgium, an overarching concept, named the Triple Helix, has been accepted politically as part of the 2030 Strate-gic Vision for the defence. The idea behind this Triple Helix concept is that all parties involved, i.e. military, industry and research centres, have their own objectives, which they can pursue more effectively by cooperating with each other.

“The Ministry looks for ways of attaining…equipment from Czech defence industrial base... The more the country relies on importing weapon systems, the less certainty it has that it is fully prepared to defend its country….

“The Ministry defines four tiers of security of supply …. which is based on the principle of guaranteeing the ability and enforceability of supplies…with the view of maintai-ning the capabilities of the Armed Forces….

“The Ministry encourages the technological development of the Czech defence industry by supporting international cooperation, mainly with partners from NATO and EU MS, with special emphasis on trans-border partnerships, the participation of Czech Small and Medium Sized Enterprises (SMEs) in supplier chains (as part of international projects) and the transfer of technologies"

Denmark (2014) France (2017)

“As a small country, Denmark is dependent on the procu-rement of competitive defence equipment on the European and North American markets. However, it is necessary for Denmark to have…certain competitive industrial compe-tencies…which are strategically important for the protec-tion of Denmark’s essential security interests”.

“In relation to invitations to tenders concerning strategi-cally important defence equipment and defence services, the Danish Armed Forces include relevant requirements for security of supply and security of information….If it is not possible to ensure the maintenance and development of the necessary industrial competencies…obligations for industrial co-operation with companies in Denmark can be imposed on foreign suppliers. Co-operation between foreign suppliers and Danish enterprises on defence equipment is important with a view to maintaining and developing com-petencies and capabilities that can be necessary for the protection of Denmark’s essential security interests.”

With respect to the individual acquisition, it is of no conse-quence whether the supplier is Danish or foreign. The de-cisive criteria are quality, technology, security of supply, international military standards as well as price”

“Maintaining the vitality of [DTIB] is a matter of national so-vereignty. Ensuring reliable procurement and support for our armed forces is a prerequisite for France’s freedom of ac-tion, making this activity a pillar of its strategic autonomy”

“The support for DTIB is provided via long-term policies in areas such as research and investment, cooperation, sup-port to exports, acquisitions, and protection with regard to foreign investment”.

“Four possible approaches with regard to the goals in terms of sovereignty, operational autonomy, budget constraints, and confidentiality…1) Sovereign; 2) Cooperation with na-tionally preserved skills; 3) Cooperation with mutual depen-dency; and 4) The “market” solution.

In the last three cases, European solutions are preferred, although trusted non-European partners are not ruled out. Lastly, whichever approach is adopted, sovereign control over intellectual property rights and the freedom to sell on the export market must be preserved”

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Germany (2018) Norway (2015)

“The coalition agreement between Germany's government parties emphasises the importance of greater European and transatlantic armaments cooperation. The coalition agree-ment highlights national interest in the security and defence industry in terms of economics, and of technological and security policy. Key defence industry technologies and jobs are to be retained while other technologies and capabilities are further developed.

“The German Government focuses on enhanced European and Euro-Atlantic armaments cooperation with a view to joint implementation of equipment and procurement pro-jects... Europe's capability to take action will be further en-hanced by jointly planning, developing, procuring and provi-ding military capabilities and by increasing interoperability between armed forces in Europe”

“In the context of increasing Europeanisation of the defence industry, the German Government is committed to the pre-servation of national key defence technologies”

“The Government will contribute to the establishment of a common European defence and security market within the framework provided by the EU directives for defence and security acquisitions.

“The Government's main objective…is to safeguard natio-nal security interests by maintaining and further developing an internationally competitive Norwegian defence industry.”

“The Government considers a competitive defence industry as very important for Norway because of factors like topo-graphy, climate, and geographic location. Eight technologi-cal areas of competence are defined: (1) C4IS, (2) system integration, (3) autonomous systems, (4) missile technology, (5) underwater technology, (6) ammunition, sights, remote weapon stations and explosives, (7) material technology distinctly developed or processed for military purposes, and (8) life cycle support for military land, sea and air systems”.

“The strategy takes into account the European Union De-fence and Security Procurement Directive 2009/81/EC which also applies to Norway as a member of the European Economic Area”

Spain Sweden (2018)

“The Defence Industrial Strategy in Spain proposes goals and objectives to defence industry, proposing a series of ac-tions under the responsibility of the Ministry of Defence, as well as a set of useful reflections to all the industrial sector linked to the defence policy”

“The implementation of new programs, which promote a more realistic and consistent industrial policy, should take into account these key elements:

Existing strategic industrial capacities,

Innovation and technological training and improvement of quality, competitiveness and sustainability that may repre-sent the need to carry out,

An intelligent management of industrial knowledge

Promoting, around them, a closer and more committed ins-titutional collaboration and

Coordinated international support in foreign markets,

Applying better financing instruments compatible with bud-get stability”

Sweden does not have a defence industrial strategy as such. What Sweden does have is a procurement strategy that focus on open competition and ‘off-the-shelf’ equip-ment. In this strategy, some essential national security inte-rests are defined, where exceptions can be made, such as underwater technology, fighter technology and parts of C4I (s EW, crypto and sensors).

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Switzerland (2010) United Kingdom (2017)

“Self-sufficiency in the field of armament…has become un-thinkable, both in normal and extraordinary situations. Even in areas, in which Switzerland already possesses developed production capacities, the attempt to manage, in case of an emergency, without cooperation with other governments or foreign companies, would be impossible, both from a tech-nological and economic point of view. …Switzerland must therefore follow a strategy of more intensive international armament cooperation…only “cooperation” can meet the demands of the armament policy and the requirements of the armed forces.

“On the other hand the Swiss Industry Base … should provide significant services for the armed forces in selec-ted technological fields. In addition to the maintenance of systems with a maximum degree of autonomy this also in-cludes quality maintenance and upgrading as well as the subsequent procurement of systems, which have not been introduced comprehensively, in case of a crisis.

… The foreign supplier is usually expected to compensate Switzerland 100 percent of the purchase price in major pro-jects.

Industrial participations ensure access to advanced techno-logies, permit the acquisition of additional know-how, gene-rate further export volumes, open doors to foreign markets and strengthen the position of Swiss industry in internatio-nal markets”

“We will strengthen industrial collaboration with our key allies and partners, including in the context of NATO, the US National Technology and Industrial Base and the Euro-pean Technology and Industrial Base…We are committed to strong co-operation with European partners. This is ge-nerally underpinned by arrangements within a broader Eu-ropean defence industrial and technological base”.

“UK will advocate an interconnected, efficient international defence market with fair and reciprocal access; prioritise industrial co-operation with the US, France and Germany; do this in a way which enhances NATO interoperability and growing industrial and technology co-operation with other NATO allies….and develop key non-NATO defence indus-trial partnerships…”

“Protecting our freedom of action and operational advan-tage seldom involves binary choices, and is still subject to overall value-for-money considerations. We will make a balanced judgement on the basis of risk, opportunity and affordability”

These extracts and strategies, which represent Europe east and west, north and south, big and small, illustrate both challenges and opportunities. It is unde-niable that the diversity of national politics, economics, sovereignty, autonomy, individualised capability planning, different force structures, varying budgets, wider societal priorities and many other subjects remain fundamental factors when evaluating the notion of ‘Europe First’ and the development of a EDTIB.

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Challenges and opportunities

In the context of the overall theme of SERA30, this report aims to analyse how the EDTIB can be strengthened. By following a ‘nation first’ strategy Europe has demonstrated that political objectives and national priorities prevail. From a national perspective, other European nations’ defence industries are typically seen as the competition. At the same time, Europe is missing opportunities to invest in an effective EDTIB and achieve benefits for nations and the European collective, which result from collaboration. The result is a suboptimal duplication of industrial capabilities, as shown below in Table 2:

EU US

Defence Expenditure

Total Amount EUR 227 Billion EUR 545 Billion

% of GDP 1.34% 3.3%

Investment per Soldier EUR 27,639 EUR 108,322

Duplication of Systems in Use

Number of Types of Weapon Sys-tems

178 30

Main Battle Tanks 17 1

Destroyers/Frigates 29 4

Fighter Planes 20 6 Table – Comparison of eu and us defence spending

Source: NATO (2017)

“We are protecting our market because we are observing that other nations are protecting their markets.”

Government Official Briefing during SERA30 Seminar, 2018

This holds true to the structure of the European Defence industry, which is influenced by the actions of governments and their resulting programmes. From the perspective of European industry, due to national budget constraints and high development costs for new military systems, exports and cooperation with US companies to gain access to both new technology and a substantial defence market are often critical for European defence Small and Medium-Sized Enterprises’ (SMEs) survival.

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Militaries have contributed to the system by a lack of willingness to accept the need to agree on operational requirements of multiple armed forces in a col-laborative environment. The overall effects are not in the overall financial and capability interests of nations and Europe. National and European taxpayers ultimately carry the burden.

Some commentators have argued that the European defence market should be rationalised with countries withdrawing from sectors in which another has a competitive advantage. Some have suggested that France, for example, could hand over the production of its military land systems, such as armoured vehicles to Germany, known for ground force systems produced by manufacturer Rheinmetall. In return, France could become the main supplier of ships to the Germans. However, this would also mean each country losing part of its DTIB and relying heavily on another nation to supply its armed forces (POLITICO, 2018). The latter issue is why others consider such a suggestion nonsense.

Under the justification of claiming to protect national sovereignty, Europe has built a system that prioritises national industry and resulting jobs. At the same time, complete national sovereignty is considered to be an illusion in today’s era, with all European nations reliant on international alliances and global acqui-sition and support, with only a small number of capabilities to be considered truly sovereign. Arguably, if a nation’s military cannot defend the nation alone, the defence industry does not have to be sovereign. Some progress was made in the 1990s with the formation of giant transnational companies, such as Airbus Defence & Space and MBDA; however, no new major step has been made since this period.

Although, despite this complex context there are success stories, which show that collaboration can work (e.g. UK-France Complex Weapons, and Germany-Norway DoI on Submarine Cooperation), including numerous OCCAR-led programmes and bilateral collaboration on sensitive technologies, such as the European MALE RPAS.

“Where some 15 to 20 years ago words like “international”, “joint” or “combined” were the exception rather than the rule, nowadays, these are no longer buzzwords but the clear and evident future. Threats are that complex and multifocal that no nation is able to tackle them alone anymore; international cooperation is the only way out.”

OCCAR (2017)

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How to strengthen the edtib?

“To get value for money and armed forces that truly increase their security, governments will have to overcome a reluctance to buy from foreign suppliers and collaborate on multinational projects — even when that means fewer jobs for their own industries.”

“In a study published in February…, McKinsey argued that Europe could save almost a third of what it spends on military equipment if governments club together to coordinate investment and use fewer arms suppliers.”

POLITICO (2018)

The reversing trend came over the last three years; in 2015 France, Germany, and Italy started a multinational European MALE RPAS Definition Study; Spain joined the Programme later the same year. The Franco-German Bilateral Cabinet Decision of 13 July 2017 decided on a larger effort to promote the Berlin-Paris relationship in a militarily stronger Europe. Plans for a joint “système de combat aérien du futur” (Future Combat Air System (FCAS)) kicked off in earnest at the Berlin Air Show in April 2018. Furthermore, in 2018 the UK re-joined the OCCAR-delivered BOXER programme.

From an industrial perspective, Nexter (France) is cooperating with Krauss_Maffei Wegman (Germany), Kongsberg (Norway) with ThyssenKrupp Marine System (Germany), Airbus (EU) with Leonardo (Italy) and Dassault Aviation (France). National DTIBs are integrating mainly at a bilateral level, sometimes multilaterally by cooperation between a handful of nations. These examples of cooperation decrease the number of systems and components on the European market and improve the market situation of the companies signing cooperation agreements supported by governments. European companies become more effective and can better compete on the global market. The EDTIB still has the potential to become a more significant element of a global DTIB.

Mechanisms, such as the OCCAR Global Balance Concept, favour cooperation on a large scale between participating nations. OCCAR participating nations have renounced to the analytical calculation of industrial “juste retour” (national industrial work share equals fully the national governmental cost share) on a pro-gramme-by-programme basis and have replaced it by the pursuit of an overall and flexible multi-programme/multi-year balance of work share against cost share.

It is imperative that the benefits of increasing collaboration are understood and communicated at a political and organisational level within nations and broader institutions. Broadly, these are as follows:

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✓ Governments/Taxpayers: Better use of financial resources through cost sharing;

✓ Military: Wider access to technology to provide capability advantage and greater interoperability; and

✓ Industry: Greater certainty of pan-European planning for major programmes. The essential ‘need’ for export is reduced, which has a positive effect on the overall competitiveness, resilience and sustainability of the European defence industry.

“Member States remain sovereign in their defence decisions: nevertheless, to acquire and maintain many of these capabilities, defence cooperation must become the norm. The EU will systematically encourage defence cooperation and strive to create a solid European defence industry, which is critical for Europe’s autonomy of decision and action”.

European Union, 2016

European institutions have currently failed to be a “game changer” in the realm of collaboration; however, some may argue that they have not been allowed to be active actors in this regard. The active drivers behind existing collaborative endeavours are the European nations themselves and the actions of the nations with the largest spend continues to be the key factor.

Bilateral and pockets of multilateral cooperation, representing a stepped approach, seem to be successful to strengthen national DTIBs and at the same time the EDTIB. These endeavours need to be increased, particularly on forthcoming major programmes, such as FCAS, which will not be cost-effective unless delivered through multilateral cooperation. The sovereign decision of European nations to set in place the EDF, further fostering cooperation between few European nations, is promising. Whether the Permanent Structured Cooperation on Security and Defence(1) (PESCO), now an initiative of almost all EU MS, will be successful in promoting further cooperation, is yet to be proven. Furthermore, the actions of non-EU MS, such as Norway and in time the UK, will ultimately have an influence.

(1) PESCO is a Treaty-based framework and process to deepen defence cooperation amongst EU Member States who are capable and willing to do so. The aim is to jointly develop defence capabilities and make them available for EU military operations. This will thus enhance the EU’s capacity as an international security partner, contribute to the protection of EU citizens and maximise the effectiveness of defence spending. The difference between PESCO and other forms of cooperation is the binding nature of the commitments undertaken by participating Member States., ref. https://eeas.europa.eu/headquarters/headquarters-Homepage/34226/permanent-structured-cooperation-pesco-factsheet_en

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18 years after signature of the LoI between France, Germany, Italy, Spain, Sweden and the UK, Europe now needs a reinvigorated direction towards a EDTIB through development of a new EDTIB Strategy. The current status quo and possible future direction with regard to the EDTIB Strategy and underpinning national industrial policies is summarised simply within the diagram shown in Figure 3 below. The left hand circle applies to all European nations at present to varying degrees. The key challenge is how Europe collectively moves towards Scenario No. 3 depicted in the right hand lowest circle, increasing the level of cooperation and shrinking the autonomous, nationally focused inner.

“Europe must wean itself from U.S. high-tech weaponry, proposing that arms deals with Washington could decrease in an effort to achieve greater “strategic auto-nomy” for the continent. The trend of European nations purchasing advanced US capabilities should stop if the continent wants to stand on its own feet militarily.”

Head of the European Defense Agency, DefenseNews (2018)

Figure 3 – From national to european priority in defence procurement

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A precondition to a true ‘Europe First’ from a defence industrial perspective would be a paradigm change in a critical mass of European nations – a focus change from national sovereignty to European sovereignty. This may not be considered optimal when viewed through a national lens and substantial political and indus-trial will would be required to shift to a ‘Europe First’ philosophy – this shift is likely an illusion without an extreme external shock!

However, there remains substantial scope for change and the status quo does not mean that improvements to the current state of European Defence armaments collaboration and development of a more effective EDTIB cannot be achieved, with the aim of increasing European sovereignty without decreasing national sove-reignty. They key here is coordination between nations in defence procurement.

“Even the strongest soft powers cannot make do in the long run without at least some integrated defence capacities; integrated defence capacities, more syner-gies in defence procurement and permanent structured cooperation is the way forward.”

Juncker (2014)

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National sovereignty

Sovereignty is defined as “the full right and power of a governing body (i.e. a nation) over itself, without any interference from outside sources or bodies” (WIKIPEDIA, 2018). National sovereignty is closely linked to the issue of natio-nal defence. For many nations, it is a very sensitive issue to be able to defend oneself against outside threats and to rely on one’s own forces in a time of crisis. As national sovereignty is defined to be the full right and power of a nation over itself, without any interference from outside sources or bodies, it is obvious that in today’s world no European nation is truly sovereign. Accepting this fact will allow nations to enter into a more informed and realistic discussion on the degree of sovereignty that nations strive for.

It is considered that the concept of national autonomy (i.e. maximising freedom of action) and limitation of binary national sovereignty to a few critical technological areas is a more feasible concept than holistic national sovereignty. Furthermore, wider definitions of industrial sovereignty are now increasingly relevant - such as within Europe or NATO.

Issues

A great number of factors influence a country´s view and emphasis on national sovereignty and most European countries (and indeed Europe as a whole) have to rely upon close cooperation of militaries to maintain their security. However, most European countries consider their national defence industry as an asset and an enabler for their own defence capability, and their national industrial strategies seem to have a clear reference and preference for their own national defence industry. Exclusive use of national industry is often related to national sensitivity and what is considered as key capabilities. This could be related to for instance intelligence gathering, C4i, and maintaining a nuclear capability, where applicable.

National sovereignty has multiple facets, which may well be interdependent. Hence, national sovereignty is a highly complex issue, as illustrated in Figure 4 below.

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Figure 4 – National sovereignty and the five forces

Potential Solutions and Way Forward

A strong EDTIB is an essential element in maintaining a credible and relevant European defence capability and by implication strategic autonomy of nations. European political leaders need to convince themselves and the citizens of their nations that the (arguably flawed) concept of complete national sovereignty (aside from a limited number of fields) is less important than choosing collaborative procurement approaches that provide tangible benefits. Furthermore, political leaders need to accept that the European and/or NATO collective can achieve a higher degree of sovereignty than any individual nation on its own. The key issue is one of trust and where the line is drawn on sensitive technologies and national eyes only material.

The process of a transition from national sovereignty to European sovereignty will require a holistic assessment of military, political and economic factors. It will most probably take a long time and in an incremental manner. This will need to be based on a steadily growing level of trust between partner nations based on the results of the previous steps. However, the effectiveness and reliability of defence capabilities can only be ultimately tested under real circumstances; hence, a certain level of ‘leaps of faith’ are probably unavoidable. Furthermore, it

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will need to be accepted that individual nations will always want to keep a certain degree of national sovereignty in certain fields.

A targeted industrial strategy is key to supporting collaborative endeavours in the realm of sensitive technologies, where the benefits of reduced duplication and cost-sharing can be realised whilst maintaining national industrial capabilities. A prime example is the UK-France Complex Weapons endeavour involving MBDA as a strategic industrial partner. Other solutions are likely to be programme specific collaborations or as FCAS, which has commenced between France and Germany followed by industrial announcements by Dassault Aviation and Airbus Defence & Space.

Governments must play a leading role in fostering increased industrial col-laboration. They are the only institutions that can form binding agreements between countries and to minimise the constraints of national sovereignty taking balanced decisions in this sphere. The trend seems to be that larger European countries form a framework for cooperation where smaller countries can take part. In the absence of a strong European supranational arrangement that can act autonomously on behalf of its MS, Europe has to rely upon the leadership of countries with common interests and needs to form new cooperation models. At the same time, European companies need to be willing to cooperate, identifying the benefits of collaboration versus black and white competition.

If Europe is to maintain its role as a credible and relevant international actor, the combined level of defence capabilities and the ability to develop new capa-bilities have to be further enhanced. It seems challenging to reach such a level of ambition without having a clear and strong sense of European sovereignty and a coherent EDTIB Strategy. Whilst nations tend to make arrangements that benefit themselves and their citizens (this will ultimately continue) the key is to align national and wider European interests. Extended collaboration between leading European industrial companies sponsored by their respective govern-ments may be the start Europe needs in order to redefine national sovereignty to allow more extensive collaboration. National interests have to be protected by a Global Balance Mechanism, i.e. multi-year, multi-programme schemes.

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Industry competitiveness

According to the World Economic Forum (WEF), national competitiveness is the “set of institutions, policies and factors that determine the level of productivity of a country”. Industry or company-level competitiveness refers to “an industry or a single company’s capacity to compete, grow and be profitable” (European Commission, 2017a).

From 2001 to 2010, EU defence spending declined from EUR 251 billion to EUR 194 billion. These budget cuts had a serious impact on the industries that deve-lop equipment for Europe’s armed forces with cutbacks in existing and planned programmes. Between 2005 and 2010 there was a 14% decrease in European R&D budgets down to EUR 9 billion; today, the US alone spends seven times more on defence R&D than all 27 EU Member States together (European Commission, 2013).

The problem of shrinking defence budgets is aggravated by the persisting frag-mentation of European markets, which leads to unnecessary duplication of capabilities, organisations and expenditures. Cooperation and EU-wide compe-tition still remains the exception, with more than 80% of investment in defence equipment being spent nationally (European Commission, 2013).

What Factors Influence Competitiveness?

Another way of looking at competitiveness is the delivery of armaments, which provide unique capabilities – i.e. a military edge. A capability-focused competitive defence industry must be able to utilise the latest technology in order to deliver battlefield advantages to its military customers. This may be fostered by:

✓ Investment in education;✓ New market entrants and thus new (creative) ideas;✓ Innovation and R&D spending;✓ High level/output-based customer requirements, allowing industry/supplier

creativity;✓ Selected single-source procurements to develop a unique solution; ✓ Mutual understanding on export policy, due to sovereignty and mainte-

nance of national and/or Allied advantage, whilst providing export/sales opportunities where viable; and

✓ Government’s willingness to invest in the national defence industry.

The factors that support or hinder industrial competitiveness are often influenced by the point of view and the specific context. No one size fits all. Government agencies will view competitiveness in a different manner to industry, with different

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nations having different interpretations regarding what is in their best interests with regard to industrial competitiveness. Furthermore, companies within an industry will also have different views, particularly with regard to market access, level of consolidation and the balance of single source procurements vs. competition.

The general factors, which may hinder industrial competitiveness, are as follows, some of which demonstrate the dichotomy detailed above. The answers will differ based on the national perspective, company perspective and the specific market segment.

✓ Too many or not enough companies in a market segment;✓ Too much or not enough competition in a market segment;✓ Insufficient market volume;✓ Economies of scale;✓ 2009/81/EC Defence Procurement Directive✓ Overuse of single source procurements;✓ Not enough single source in key areas to promote certainty of revenue;✓ Government ownership/control – may help or hinder; ✓ Divergence in export policy between European nations (noting that there

will always be appropriate restrictions);✓ Divergence in industrial policies within Europe; and✓ Uncertainty of capability planning and project roadmaps.

Who are European Defence Industrial Companies Competing with?

A key question for Europe to consider is with whom the European defence industry is competing with? At a basic level, companies within a segment are competing with one another (unless the market is fully protected to the benefit of one or very few companies/suppliers). They may be competing within national bounda-ries, or across Europe with other market players (e.g. for Combat Aircraft - BAE Systems, Dassault Aviation, SAAB). Conversely, collaboration between compe-titors often occurs on larger programmes to the benefit of all, demonstrating a degree of interdependence.

At a macro level, the European defence industry is competing with other natio-nal industries across the globe, namely the US, and for certain products, Israel, South Korea, China and Russia. Competing with US industry remains a challenge due to the differences in defence spending and current fragmented approach in Europe; however, it remains true that nations are often presented with choices about whether to procure from the US (either directly from US Industry or via the Foreign Military Sales (FMS) system), or seek a European solution. Whilst

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the focus of considering US options varies per nation, most European nations procure numerous capabilities from the US. The key for European industry is to be able to provide credible and competitive options, which provide choices, rather than nations concluding that they have no other choice, but to buy American to access leading technologies, or benefit from economies of scale. Development of an EDTIB is key to this.

“If we do not get Europe to collaborate more, nations will buy cheaper and better products from outside of Europe”.

Company CEO, SERA30 Seminar, 2018

Influence of Procurement Directives

A key influence on competitiveness is the 2009/81/EC Defence Procurement Directive, which provides a legal system for Defence and Security Procurements, aimed at strengthening competition across the European market, whilst provi-ding the means for nations to exempt specific procurements from competition for reasons of national secrecy and/or sovereignty, in order to address essential security interests. Exemptions also exist for utilisation of international organi-sations, such as OCCAR and NATO. Furthermore, single-source procurements can be utilised under the Directive in certain circumstances (such as exclusive Intellectual Property Rights). Companies may view the Directive as a significant help to access the market, or a hindrance if their market position is strong and they want certainty of business.

The utilisation of the Directive varies across national boundaries, demonstrating again the national differences in armaments procurement decision-making and industrial strategy. This illustrates the need for a more common approach across Europe that balances the benefits of open competition, whilst allowing freedom for nations and the European collective to make flexible decisions in defined circumstances.

Consolidation vs Competition

Consolidation has occurred in various defence industry sectors during the last few decades. This has supported the establishment of organisations with unique capabilities, which are often co-dependent with their government customers. For example, the emergence of MBDA as the leading European player in Missile Systems has been the result of industry consolidation, shaped by a conscious defence industrial strategy and bilateral cooperative strategy between France and the UK.

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However, as discussed above, consolidation is not necessarily the ideal approach for all market sectors, where competition within national boundaries and across Europe may be preferable in certain areas. The degree of consolidation required to support industrial competitiveness is influenced by:

✓ National/European defence budgets and whether this can sustain competition; ✓ Size of the export market and/or civil exploitation, which may sustain more

companies;✓ Sovereignty for a particular capability area;✓ Industrial decisions regarding mergers and acquisitions; and✓ Political influence regarding mergers and acquisitions.

Again, this illustrates the need for an effective EDTIB, which could consider where consolidation might be beneficial to Europe as a whole and where allowing competitive market forces is preferable. The role of national governments and European institutions in shaping consolidation is open to debate, as consoli-dation may simply naturally occur through more effective European defence planning and identification of more collaborative opportunities. As European collaboration is seen a positive in general terms, mechanisms, such as the EDF, are likely to have a positive effect through supporting agreements to a general set of rules that support financial incentives for collaboration. Consolidation does not mean that nations have to give up their industries. Consolidation can be the next step from cooperation, where companies, that started working together within collaboration, start working together in one company located in more than one European nation.

Export Policy

Divergence in export policies across European nations is considered to be a bar-rier to optimum industrial competitiveness, as industry does not have a single European view as to where export sales are permitted or restricted. This presents a challenge to international collaboration as agreements on exports need to be made across national boundaries, which may prevent industry from making sustainable revenues and maintaining competitiveness. It is also a challenge for the nation states themselves, for which defence export is a factor of influence on the international scene. It is recognised that national foreign policy remains a key factor; however, an effective EDTIB will have to consider opportunities for convergence of export policies to create a common European defence export policy. This will allow Europe to become more equivalent to the US in its approach.

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Suggested Improvements

Enhancing European industrial competitiveness is a complex, long-term goal for which there is no single answer. However, there are several actions, which could be taken to set Europe on the right path:

✓ Spend more European money in Europe by developing credible European product choices, which can compete with US solutions;

✓ Enhance/increase common R&T to achieve economies of scale to warrant increased spending on R&T;

✓ Work towards a common European defence export policy;✓ Align planning on defence spending across Europe to provide greater cer-

tainty to industry;✓ At a European level, identify which capabilities should be subject to

co-operation; ✓ Provide incentives to develop cutting edge technologies, including those

with civil and dual-use applications;✓ Provide support to SMEs in a more coherent and targeted manner; ✓ Identify opportunities for collaboration through more joined up planning; and✓ Consolidate where possible.

The above will need to be actioned under the right umbrella that supports a com-mon EDTIB. Industrial competitiveness would be enhanced through a common European Defence Industrial Strategy. Clearly, the EU has a key role to play, with the Coordinated Annual Review of Defence (CARD) supporting more joined up capability planning and EDF supporting targeted R&D. However, this falls short of addressing all of the above, and excludes non-EU European nations, which have a key role to play in the European defence industry. Therefore, further work is required to ensure that a true European approach is developed.

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Advanced technological capabilities

History teaches us to maintain a technological watch to avoid ‘big surprises’. For example, the launch of the first Sputnik artificial satellite in 1957 took the US by surprise and created a reaction of massive investment in the National Aeronautics and Space Administration (NASA). Governments therefore need to keep a continual watch on ‘the art of the possible’ in terms of technological advancements military solutions, incentivising development of these technologies for itself and for its Allies.

Due to the uneven spending and dispersed efforts on defence by European nations, it is possible that the industrial competitive edge, and by implication defence capability advantage over adversaries, may be degraded or lost when compared to large nations, which may be spending more in a coherent manner, such as China and Russia, as shown in Figure 2 above.

The combined weight of European R&D spending can put Europe in a similar league to these nations provided that it is spent in a smart manner and on the right technologies. This will also improve European contributions to NATO, which is important in today’s climate of the US not seeing Europe as an equal partner, due to suboptimal and insufficient spending on defence.

Objectives relating to advanced technological capabilities will very depending on the perspective, as follows:

✓ Government Perspective: Advanced technological capabilities provide several benefits to governments, most notably a superior military capability, which in turn is a diplomatic tool that enables countries to establish credibility to partners, deterrence for potential adversaries and execution of foreign policy objectives. Furthermore, creation and maintenance of advanced technological capabilities provides economic benefits, such as high tech jobs and a national DTIB, in addition to providing long-term access to skills in support of sovereignty in key areas; or

✓ Industry Perspective: Advanced technological capabilities provide a com-petitive industrial edge, which enables export and therefore increased revenues, which in turn allows for increased private venture funding for R&D. A new challenge for the defence industry is the ever-decreasing “time to market” issue, which can only be bridged by massive investments or use of advanced civilian technology “spin-in”(2).

(2) “Spin-in” aims at integrating civil technologies into the military solutions to reduce costs and development time for military applications and benefit of the latest technologies

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A common interest is that advanced technological capabilities allow the defence Industry to survive in peacetime through exploitation abroad or in civil markets, whilst enabling access to advanced capabilities to the government in times of crisis.

Way Forward

Europe needs to collectively agree on a joint vision for the advanced military capa-bility objectives. Without this harmonisation, R&D will not align effectively with these aims. Whilst national interest will vary, common goals, common capabilities and collaborative programmes are preconditions for driving synergies and will act as catalysts to ensure that Europe remains at the cutting edge of technology.

The capacity for Europe to maintain advanced technological capabilities relies on the links within the industrial, military and research triangle – the Triple Helix model employed by e.g. Belgium. This implies the need for a transparent and collaborative relationship between the relevant actors, underpinning an effective EDTIB in the years to come.

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Conclusion and recommendations

A New Equation

Committee 2 was provided with the following equation as the subject of this report, which outlines that industry competitiveness and advanced technologi-cal capabilities were key positive factors in the development of a EDTIB, whilst national sovereignty was a factor that diminished the development of a EDTIB.

EDTIB = Defence Industry Competitiveness+Advanced Technological Capabilities)(National Sovereignty)

Whilst this equation is broadly accurate, Committee 2 has analysed the issues associated with it and has concluded that a slightly different equation is more relevant for the purposes of informing the strategic way forward and the subse-quent recommendations of this report, namely:

EDTIB Strategy X ∑ (DIC+ATC) = European Sovereignty

DIC = Defence Industry Competitiveness ; ATC = Advanced Technological Capabilities

Recommendations

This new equation surmises firstly and critically that a new EDTIB Strategy should be developed, which aims at coordination, collaboration and where pos-sible consolidation of defence R&D and procurement. The effectiveness of this EDTIB Strategy is supported by efforts to improve industrial competitiveness and advanced technological capabilities. The sum of the equation would in theory be greater European Sovereignty, a more realistic concept in the modern era. Whilst this Strategy would of course not preclude a national choice to procure from the US and other sources, the key is that development of an effective EDTIB would likely provide for credible European options, which is a key driver in increasing collaboration.

k= Country A

Country Z

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RECOMMENDATION # 1Develop a new EDTIB Strategy that enables development of an EDTIB over time, supported by more coherent R&D, capability planning and informed decisions on sovereignty. Each nation shall provide its priorities in terms of sovereign technologies, i.e. what shall be kept at national level; what shall be developed in cooperation at European level; and what can be acquired on the open and international market.

Closer integration among the national DTIBs shifts the SoS equation to the European level, serving the political objectives of European defence, as illustrated in Figure 5 below. At the same time, an effective EDTIB would allow European companies to become more competitive globally and to access other markets. The diplomatic, economic and technological strength of Europe should be harnessed more effectively in the realm of a defence industrial strategy.

A more homogeneous landscape in defence industrial policies is a key enabler. Greater coordination between individual nations would contribute to a clearer articulation of the future military and industrial requirements. As such, this will enhance the structure and quality of the EDTIB due to the improved efficiency and effectiveness of industry. A more harmonised or even common European approach to procurement and articulation of future demands could align indi-vidual MS’ requirements and stimulate the efficiency of the EDTIB.

Whilst Brussels institutions have a role to play, individual nations still call the shots with regard to adopting collaborative programmes and would be essential

Figure 5 – Ilustrative example of individual vs. Collaborative approaches to defence industrial capability

Note: Chart shows the defence industrial capability of different countries within different and broad defence industry sectors on a scale from 1 to 5, where 5 is the highest. But coordinating, collaborating and consolidating, European nations can achieve a higher defence industrial capability as illustrated by the grey marker, labelled “Europe First!”.

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in the development of an effective EDTIB Strategy. Therefore national, bilateral and multilateral leadership is critical, particularly those with the largest spend, which would be able to lead the way with major commitments to collaborative projects. Nations with smaller spend would then likely provide critical sub-sys-tems and/or specialist technologies and procure the delivered products.

RECOMMENDATION # 2Re-invigorate work under the LoI Framework Agreement Treaty between France, Germany, Italy, Spain, Sweden and the UK, establishing renewed leadership between the major spending nations.

An overall, renewed direction for the LoI group will need to be established with renewed objectives set either within the scope of the existing LoI Framework Agreement Treaty, or through amendments where beneficial.

During the last two decades, there has been a relative lack of major defence collaborative projects, with the exception of the Airbus A400M Atlas military transport aircraft, creating fragmentation and inefficiency. This has driven dupli-cation of costs, overcapacity in defence industries and overly high prices. There is, however, a potentially reversing trend in motion, which should be capitalised on, as an example the Franco-German initiative on FCAS may see aircraft take to the skies by 2040, replacing the fleets of Rafale and Eurofighter Typhoon jets. This project is seen as a key indicator for how – and if – Europeans can manage a truly large-scale project, especially given industry rivalries that lie beneath the diplomatic intent.

The fact that at present there are only a few collaborative projects in Europe is not only due to lacking political will and leadership, but also due to the will of government procurement organisations and militaries to accept the necessary compromises and undertake the necessary efforts to collaborate. Changes within these organisations with regard to policy, training and understanding of benefits are required to give greater consideration to collaborative options, with support from National Armaments Directors and political leaders.

There must be a sufficient number of programmes in order to get a fair balance for nations and industry over the long term. Secondly, all national governments must be politically ready for a shift in perspective, both in accepting that that their national industries may change in size and shape, in addition to making more balanced decisions on sovereignty that take into consideration overall value that can be achieved through collaboration.

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RECOMMENDATION # 3AEnabled by an EDTIB Strategy and re-invigorated LoI, identify new, long-term opportunities for collaborative projects and commit firmly to those projects, in addition to exploring the expansion of the nations involved in existing projects.

In order to make those programmes successful, a strong and experienced orga-nisation has to be empowered. Such a tool exists in Europe, i.e. OCCAR. Its advantages are:

✓ Proven experience in complex programme management;✓ Existing institution;✓ Global balance principle versus geo-return;✓ Core of nations able to "quickly" agree on new programmes; and✓ Open for other nations to participate in OCCAR's programme.

RECOMMENDATION # 3BIncrease the number of projects managed by OCCAR as a key delivery agency for complex programmes, based on the new opportunities identified through Recommendation 3A.

Implementation of these recommendations will be challenging, but the potential benefits are significant. Respecting national interests and increasing European collaboration are not mutually exclusive. Now is the time for Europe to step up to the challenge and move into a new era of collaborative defence armaments acquisition, underpinned by an effective, efficient and coherent EDTIB Strategy.

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SERA 31 suggested topics for discussions

Throughout group discussions, Committee 2 has identified a number of related key issues that, whilst outside the scope of this report, would warrant conside-ration in their own right as part of SERA31:

✓ Review of the Defence and Security Procurement Directive;✓ Definition of the Future Role of OCCAR; and✓ Review and Discussions on Collaboration and Coordination on the EDTIB

between EU MS and Non-EU European Nations.

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References

Czech Republic (2017), “2025 Armaments and Defence Industry Development Support Strategy”, Ministry of Defence of the Czech Republic, 2017DefenseNews (2018), “European Defense Agency chief questions ‘unhealthy’ defense trade with the US”, by Sebastian Sprenger, 12 June 2018Denmark (2014), “National Defence Industrial Strategy”, Note by the Ministry of Defence of Denmark, July 2014Directorate General of External Policies of the Union (2013), “The Development of a European Defence Technological and Industrial Base”, Brussels, Belgium, June 2013European Commission (2018), “European Defence Industries”, Accessed June 2018, http://ec.europa.eu/growth/sectors/defence/European Commission (2017a), “The EU Regional Competitiveness Index 2016”, Brussels, Belgium, February 2017European Commission (2017b), “Reflection Paper on the Future of European Defence”, Brussels, Belgium, June 2017European Commission (2013), “Towards a more competitive and efficient defence and security sector”, communication from the commission to the european parliament, the council, the european economic and socialcommittee and the committee of the regions, Brussels, Belgium, 24 July 2013European Council (2013), “Conclusion of Meeting on 19/20 December 2013”, Brussels, Belgium, 20 December 2013European Union (2016), “A Global Strategy for the European Union’s Foreign and Security Policy”, Brussels, Belgium, June 2016France (2017), “Defence and National Security Strategic Review 2017”, Republic of France, October 2017Germany (2018), “German Government Strategy Paper on Strengthening the German Defence Industry”, 2018Juncker, P. J.-C. (2014), “Political Guidelines” presented to the European ParliamentNATO (2017), “Munich Security Report 2017”, International Institute for Strategic Studies, SiPRINorway (2015), “National Defence Industrial Strategy 2015-2016 (Nasjonal forsvar-sindustriell strategi 2015-2016)”, The Royal Department of Defence of Norway, 30 October 2015Occar (2017), “Occar Business Plan 2018”, Bonn, Germany, December 2017

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Politico (2018), “Europe faces defense spending challenge”, by Janosch Delcker, Updated 20 April 2018Switzerland (2010), “Principles of the Swiss Federal Council for the Armament Policy of the DDPS”, Swiss Federal Council, June 2010United Kingdom (2017), “Industry for Defence and a Prosperous Britain: Refreshing Defence Industrial Policy”, Ministry of Defence of the United Kingdom, 2017Wikipedia (2018), “Definition of Sovereignty”, Accessed June 2018, https://en.wikipedia.org/wiki/Sovereignty

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Committee 3Innovations and their Impact on Future Warfare, Defence Industry, Defence R&T, Logistics and Combatants’ Skills

Pilots: Alfred VOGEL , Co-Pilots : Bernard CLERMONT , Jolanta SWIESCIAK

Members of the Committee Katja FRINTROP Anders PEDERSEN Floris VAN DEN BROECK Fabrice GAIME Kristian TORNIVAARA Lonnie MYKLEBUST (Chairwoman)Marek MARZEC Athanasios GEORGIADIS Mario TOSCANO Maarten VAN MEURS (Secretary)Andreas HEDSKOG (Chairman)

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Abstract

At the greatest pace in history, technology developed in the civilian sector is affecting the defence sector. Civilian technological development is fast, forcing European armed forces to adapt quickly. This happens against the background of multiple emerging threats. It is of great importance that new technology be innovated and implemented in the defence sector as quickly as possible to suc-cessfully counter foreseeable threats.

The novel funding arrangements announced by the European Commission (EC) will provide a stimulus for the development of military and dual use technology. However, the availability of funds is not the only issue. There are still structural barriers hampering the development and implementation of technology in the defence sector. This paper identifies some of these barriers and suggests a path forward to overcome them:

The EC should consider establishing a support framework especially for small and medium-sized enterprises (SMEs) with dual civilian-military technologies. Individual European countries and the EC should consider having private equity agencies that can provide SMEs with the necessary funds to develop military technology, but which can also hold onto the SMEs in order to retain the tech-nology for as long as is needed.

EU member states should support the EC in its efforts to improve Intellectual Property Rights (IPR) in order to protect European innovation efforts.

The EC should consider applying the innovation partnership procedure under the Defence and Security Directive. At present, a comparable procedure exists only under the Public Procurement Directive. A procedure under the Defence and Security Directive may lead to long-term innovation partnerships between public and private parties, which may be beneficial for technology development in the defence sector.

When updating the Defence and Security Directive, the EC should consider allowing authorities that engage in joint procurement to appoint a lead nation that will be the only competent appeal body for handling appeals. By doing so, there will be no conflicting divergent appeal decisions of the partners.

The EC should provide better guidance on the use of Articles 13c and 13j Directive 2009/81/EC on the award of contracts in the fields of defence and security and on the rules concerning state aid. The present uncertainty on these articles hampers the willingness of EU member states to use the exemptions the articles provide for.

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To improve cooperation between NATO and the EU it will likely not be enough to have more ‘practical agreements’ between the two institutions. NATO and the EU should therefore try to achieve a common understanding of the threat environment and a shared vision for how technology and innovation can address security challenges. As well, the EU should give direction on a political level in order to have a common voice and coordinated efforts with NATO, and thereby avoid duplication and waste of resources.

European countries should engage in harmonizing their Research and Development (R&D) efforts in a multi-staged approach. They could start by defining common strategic objectives in this area and establishing an integrated R&D policy. This could be followed by making EU funds available and pooling (parts of ) national budgets for European projects. In the next stage, funding from national budgets could be transferred to European projects.

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Introduction

‘Europe First’

The Organization for Economic Co-Operation and Development (OECD) defines innovation as “production or adoption, assimilation, and exploitation of a value-added novelty in economic and social spheres; renewal and enlargement of products, services, and markets; development of new methods of production; and establishment of new management systems. It is both a process and an outcome.”

Innovation can be either tangible or intangible: a new appliance such as a satellite, or the innovative use of existing equipment coming from the civilian sector, all of which can give value added to the armed forces.

Traditionally, high-end and robust technology products characterize the defence domain, and are the result of years of exhaustive research on specific techno-logies as well as development and prototyping. Today, civilian technological developments provide a wide range of applications and products. As a result, armed forces are confronted with new challenges based on relatively inexpensive civilian technologies in the hands of other armed forces and/or non-state actors. For example, the widespread use of mobile phones with a relatively low level of security makes all modern wireless communications utilized by the general public viable targets for opposing military forces or criminals.

The current innovative source evolution has an impact on how new systems and products for the defence domain should be developed and how to stimulate innovation, since armed forces will continue to require specialized equipment that the civilian sector cannot provide independent from the defence sector. To strengthen European armaments, security and defence cooperation, Europe must be able to keep up with the rhythm of technology development and be able to counter new threats. It is evident that innovation resources within the civilian sector and the defence sector can and should be used efficiently and with synergy.

This paper will identify selected issues hampering the practical development and use of innovation in the European defence sector, and their impact on future warfare, defence industry, defence R&T and logistics. Finally, this paper will make policy recommendations dealing with these issues.

Europe Defined

Relative to the European defence sector, the definition of Europe is widely dis-cussed. This paper connotes that Europe is the geographic Europe and respective

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overseas territories, in spite of socio-political discussions, and that ‘Europe’ - in this paper - means the European Union (EU) plus the four European states within the European Free Trade Association (EFTA: Iceland, Liechtenstein, Norway and Switzerland), as well as the five smallest microstates in the geographic Europe, Andorra, Liechtenstein, Monaco, San Marino, and the Vatican City.

Background

Recent Past

In the not too distant past, the main driver of innovations in the defence sector was the competition between a small number of actors for power and influence. In terms of innovation, the military sector was ahead of the civilian sector. Currently, the situation has changed. Although defence budgets are rising again, after years of cuts these budgets are still at lower levels than in the previous decades. In parallel, multiple new threats have emerged. With the depletion of natural resources, the implementation of new technologies and the ‘digital trans-formation’ of civilian society, the defence sector is dominated by new drivers for innovation. This will remain a permanent state of affairs.

In past years, the development of technologies was relatively slow, threats were well defined and the military drove innovations. Today, by entering the digital world, the speed of technological development is increasingly accelerating, threats are ambiguous, hybrid and changeable, and the civilian sector drives innovation more than the defence sector.

Current State

Technologies in the civilian domain and their numerous applications are the basis for the development of innovative defence solutions. The innovative use of new technologies contributes to a considerable reduction of the development time while keeping costs at more affordable levels. As a result, products are developed based on requirements of the armed forces, but often limited by the existing technologies developed within the civilian market.

The traditional development of new defence systems is focused more on speci-fic projects that demand fundamental research and result-driven technological innovation. The investments are considerably high, in terms of the necessary long-term financial resources, the necessary infrastructure and personnel; however, these investments can create a legacy that will secure a leading position in the newly developed innovative technologies.

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As shown in the graph below, defence innovation stems from the need to confront emerging threats when available solutions are insufficient and strategic capability gaps are laid bare. Moreover, the lower costs and shorter application time nee-ded to innovatively use new civilian technologies for military purposes provides opportunities for adversaries with fewer resources to sustain their capability to wage asymmetric warfare. Consequently, defence organizations and industries must be able to quickly and effectively counter hostile innovative applications. Long-term innovative scenarios that identify future emerging threats and possible solutions must be recognized. These innovative scenarios and their subsequent technologies need to be earmarked because of their potential to either disrupt the status quo, and/or address emerging challenges.

In the defence domain both technological innovation and innovative use of existing technologies and capabilities are required in order to fulfill the short to long-term defence needs of European countries.

The innovative use of the existing technologies and capabilities can satisfy the short-term requirements while preparing the way to provide solutions in the mid-term. The development cycle is significantly decreased allowing for short delivery times of new products. In addition, end users can gain experience by applying ad hoc solutions based on dual use technologies. Development costs are significantly reduced by economies of scale, allowing the redirection of resources to the development of new technologies. The use of current technologies allows the end users to adapt faster to new systems, minimizing training time for users. Investing in fundamental research is critical for the success of long-term deve-lopment plans and the benefits of such investments can be significant: military supremacy and strategic advantage.

Currently, the European Defence Agency (EDA) considers various disruptive technologies in the defence domain. A vast variety of sensors and the network

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connectivity that already exist in the civilian market could provide a significant amount of information. Numerous algorithms are available for the performance of big data analytics of the collected information contributing to near real-time systems. Applications of Artificial Intelligence (AI) as well as robotics and auto-nomous systems (RAS), which are used extensively in many civilian domains, are promising; this includes genetic engineering, nanotechnology and wearable technologies, all of which are pushing the boundaries beyond traditional biolo-gical limits. One possible outcome could be a more militarized ex-Earth Space with the possible establishment of military bases outside Earth’s atmosphere (despite not in line with present space related international treaties in force). The European Ecosystem for Defence R&T-Innovation Today

Background

As recent efforts to increase the EU’s security and defence footprint are welco-med across Europe, there seems to be little doubt among European countries that Europe needs to do more for its own security and defence while recognizing that each European country has unique characteristics and has adopted different domestic defence policies to mitigate threats.

Some countries are members of the EU and NATO, others are members of the EU and not NATO, yet others are members of NATO but not the EU, and a few are members of neither. In addition, some countries have substantial bilateral cooperation agreements and others have elected to stay out of parts of the EU and NATO frameworks respectively. Although there is little doubt that NATO remains the bedrock of the European defence architecture, selecting the most suitable defence institution as the vehicle for strengthening European defence capabilities is not an easy task.

Across Europe, perceptions of current threats also vary extensively, due to histori-cal, geopolitical and domestic reasons. Existing differences of views over security and defence priorities will not be easy to overcome. As far as innovation and defence industry policy is concerned, although most countries see the potential benefits of dual use innovation from outside the traditional defence industries, as soon as defence applicability appears, export control restrictions come into play, which vary from country to country.

Hence, European defence considerations are permeated by significant ambiva-lence over the ultimate aim of any collective effort in security and defence. Clarity and singularity of the EU’s strategic objectives in that regard will be difficult to achieve. But, although there is no great appetite for a revolutionary European

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institutional change in defence policies, the support for enhanced coordination and cooperation along the lines of what has been agreed upon already, individually and collectively, by the EU and NATO is promising.

European Union

National defence and security arrangements have traditionally been seen as core domestic competences. The defence research and development programs are no exception to this. For this reason, virtually all defence related innovation funding has been national and in many European countries it has even been kept inside governmental organizations without any industrial participation.

However, the international competition and the demanding technological requi-rements for defence systems have changed this. There is an existing discussion in Europe, by industrial partners and the defence sector, to combine know-how and research capacity, and to join development programs together with partner nations. Even the larger EU member states are too small to maintain the com-petition with the largest global players. It has been realized that it is crucial for European autonomy, including for reasons of security of supply, that Europe must combine its resources in the area of defence innovation.

Even though the fundamental political drive behind the need for tighter European co-operation has been to ensure peace in Europe, for which the credible and autonomous defence capabilities are the key enablers, until recently the EU and other European institutions have been extremely reluctant to support defence innovation and research and development activities. Common European support for defence development and funding of defence innovation activities has been lacking almost entirely. There is some existing cross-border co-operation and multinational research and development projects that have been set up in Europe, but these are arrangements based on multilateral governmental or industrial partnerships, and they were not based on initiatives by a European institution.

The EU is now aiming to enhance its competitiveness on the global market and considers Research and Technology (R&T) funding as a central part of how this goal is achieved. However, until recently none of its funding, including the latest EU innovation funding methods, have been directed to defence innovation. For example, in the EU's 7th Framework Program defence projects funding was excluded completely. Some steps towards defence innovation funding are taken in the EU-‘Horizon 2020’ program, where dual use solutions were included to acquire funding, but still in this current EU R&T funding framework all directly defence related research is left out.

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Apart from the EU Preparatory Action for Defence Research (PADR), which began in 2017, the defence sector remains today the last area not to receive any common European innovation and research funding, which has been historically driven by defence being firmly excluded as an arena of common policy within the Treaty of the European Union.

NATO

The member states govern NATO through their membership of the North Atlantic Council (NAC), which is the alliance’s main decision-making body. NATO does have some agencies, which deal with specific issues, and some have the mandate to help NATO to adapt on technology issues.

NATO has the civilian Science and Technology Organization (STO) to lead on science and technology issues, which is composed of three main entities:

✓ The Office of the Chief Scientist; ✓ The Collaboration Support Office in Paris, which links 5000 scientists

and engineers with one another and helps shape commercial strategies to ensure technologies meet NATO standards and are available to NATO; and

✓ The Center for Maritime Research and Experimentation, which conducts research and technology development for the maritime domain.

NATO’s Defense Investment Division in Brussels advises the allies on issues related to defense procurement, interoperability, standards, and industry. The division oversees the Conference of National Armaments Directors (CNAD), which works on armaments cooperation. CNAD is supported by the NATO Industrial Advisory Group (NIAG), which convenes industry representatives to inform the CNAD on industry trends and emerging technologies.

In recent years, the CNAD has hosted a growing number of discussions about defense innovation, and those allies with innovation strategies (e.g., the United States, UK, Canada, and the Netherlands) are briefing their peers and sharing best practices. The CNAD is limited in what it can accomplish because some allies lack the will, the authority, the industrial capacity, or the relevant startup communities to contribute.

New EU Funding Tools

Described as a ‘game changer’, the European Defence Fund (EDF) was introduced by the EC in 2017 with two purposes; research and development, and capability development and acquisition. The dual mandate is expected to energize the defence

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innovation ecosystem in Europe and challenge the traditional infrastructure for funding innovation. The EDF’s ambitious focus on helping member states to both develop and acquire strategic defence capabilities is indeed a game changer with both direct funding grants and incentive financing.

Based on the EU Treaty of Lisbon, the EDF along with the Coordinated Annual Review on Defence (CARD) and the Permanent Structured Cooperation (PESCO) offer the EU member states a comprehensive defence package. EC president Juncker has called PESCO the “sleeping beauty” due to the envisaged harmonized ability of member states for providing capabilities for national and multinational forces. While similar to other EU enhanced cooperation, PESCO participation is not man-datory for member states. CARD, which monitors the member states’ individual defence planning, became operational in 2017, on a test basis under the European Defence Agency (EDA). In 2019, the first integrated report will be published.

The funding through EDF until 2020 amounts to € 590 million. Starting in 2020, the EC has proposed allocation of a minimum of € 1.5 billion per year. The fund’s mandate is to enable and accelerate development and acquisition. PESCO pro-jects for joint development and acquisition of capabilities are among the tools to make the funds operative.

Issues and the Path Forward

This chapter will identify some issues hampering defence innovation in Europe, as well as sketch a path forward to address these issues.

EU funding structure may hamper SMEs

A substantial part of the innovation in the commercial domain rests with SMEs. However, SME startups in the defence area are uncommon. The majority of SME innovation applicable to defence will be dual-purpose with both civilian and defence applications and often, these SMEs are not aware that their technology has defence applications.

EU funding for defence projects requires cross-border cooperation, which may lead to unintended consequences. Firstly, as clustering is viewed as a positive driver for innovation, the cross-border condition may lead to sub-par collabora-tive projects winning over the best or most innovative collaborations. Secondly, most SMEs do not have national support elements assisting them in finding and developing collaborations and proposals for EDF projects. This means that those SMEs situated in countries with substantial support elements have a great comparative advantage regardless of their level of innovation. Thirdly, the

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combination of the above may lead to a situation where the current front-runner in terms of innovative dual use technologies is locked out of the market through signaling effects simply because of grants being awarded to consortia with better proposal building support on a national level. When the substantial funding for a particular EU defence program is announced, a SME active in the same tech-nology area, or preparing for this, will find it very difficult to attract investment.

SMEs depend on the financial industry for their capital. Investment companies tend to let these SMEs grow for some years and, when successful, sell them off to other investors or to a large company. Developing European defence technology may be hampered by the fact that every few years these SMEs are sold and bought by another party. If this party is non-European, the company and its technology may be removed from Europe.

The EU should consider establishing a support framework especially for SMEs with dual technologies to mitigate the risk of unfair competition based on national support elements for SMEs in these technologies.

Furthermore, in the US, the Department of Defense and the CIA have each esta-blished their own private equity entities to invest in, and if proven successful, retain essential SME technology for defence purposes. These agencies make substantial investments in technology areas and shorten the time to market for SMEs. Such agencies can afford to maintain their investments until they are no longer needed, instead of selling them off after some years for financial reasons as private investors usually do. European countries and the EC should consider having similar private equity agencies.

Intellectual Property Rights (IPR)

European-based R&T in the defence sector, both private and public, has long been confronted with two major challenges. These challenges have threatened the IPR of the developed technology, and thereby form an obstacle to funding and hamper the speed of innovation. These challenges are:

✓ The United States (US) Government’s Federal Acquisition Regulations (FAR) and the additional Defence Federal Acquisition Regulations Supplement (DFARS), and

✓ The inadequate protections afforded to R&T in the individual states in Europe concerning IPR, such as patents, copyrights, and trademarks. The standards of individual countries and the EU are sometimes not only inconsistent, but even contrary.

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The FAR and the DFARS provisions attached to US Government funding for R&T in Europe have provided the US Government control and even ownership over R&T performed in Europe. This is the case not only for private industry, but also for R&T performed in col-laboration with European (wholly or partially) state-owned research institutes, including those conducting EU research.

This coopting of Europe-based research has resulted in European industry and states losing control over IRP ownership, in diminished marketplace competitiveness and in a hampering of follow-on innovation, design and developments derived from the original R&T.

In 2017, the European Commission announced a Single Market Strategy with one of the nine goals being ‘Create more transparent, efficient and accountable public procurement’. This included working with the World Intellectual Property Organization (WIPO) to harmonize how protections are recognized, licensed or registered in Europe including for patents, copyrights and trademarks. The Commission has also promoted enforcement of IPR both in EU and non-EU states in order to protect the European innovation efforts, and to harmonize the European input on innovation in the World Trade Organization (WTO).

These issues are best addressed at the European level. EU member states should support the EC in their efforts to improve the protection of IPRs.

Tender legislation and innovation

Contracting authorities have several different opportunities for collaborating with the industry to develop and contribute to new and innovative solutions. Both the Public Procurement Directive and the Defence and Security Directive contain such opportunities. However, there are a number of issues related to such cooperation with the industry. The legal framework, limitations and possibilities are briefly outlined below.

Innovation partnerships

An innovation partnership under EU rules is a complex process which often requires a lot of resources from both the contracting authority and the tenderer, and which takes a long time. Under European rules, when a need for a product or service cannot be met by solutions already available on the market, contracting authorities have access to a specific logistical procedure for procurements within the scope of the Public Procurement Directive. This Directive allows contracting authorities to establish a long-term innovation partnership for the development

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and subsequent purchase of a new, innovative product, service or works, provided that it can be delivered to agreed performance levels and costs, without the need for a separate procurement procedure for the purchase.

Europe has limited experience with innovation partnerships. The few expe-riences show that innovative products or solutions can be developed through partnerships, but these development projects can take a long time. In addition, as there is no possibility of using innovation partnerships under the Defence and Security Directive, it naturally sets certain restrictions for research and development in the field of defence.

When updating the Defence and Security Directive, the EC should consider intro-ducing the innovation partnership procedure under this Directive. The scope of this procedure might be greater under the Defence and Security Directive than the Public Procurement Directive and the contracting authorities will be able to gain experience with innovation partnerships and apply this experience under the Defence and Security Directive.

Joint logistics and procurement

Joint procurement can take many different forms. For example, a number of contracting authorities could coordinate procurement by formulating com-mon technical specifications for goods or services, but each authority would conduct its own separate procurement procedure. On the other end of the scale, contracting authorities could jointly conduct one procurement procedure either together, or by entrusting one contracting authority with the management of the procurement procedure on behalf of all contracting authorities. When two or more contracting authorities jointly conduct one procurement procedure, the increased potential volume of purchase can spur the industry to spend additional resources on developing innovative solutions.

Obstacles for joint logistics and procurement are differences in needs and diffe-rences in timing for fulfilling those needs. In addition, under present EU rules there is no possibility for a unitary complaint procedure. One practical challenge of joint procurement is that different contracting authorities (in different coun-tries) must have the same technical needs and specifications for the acquisition, as well as a need at roughly the same time. Another practical challenge in regard to the Defence and Security Directive is that it cannot be decided that a single country’s complaints board is the sole jurisdiction, with the result that the same procurement program can be involved in different complaint procedures with different outcomes.

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All participating contracting authorities should be aware of the disadvantages regarding the eventuality of complaints lodged at each country’s appeal body. If the participating contracting authorities wish to limit the risk of conflicting (divergent) appeal decisions/judgments, a coordinated tender can be used. Although this procedure does not exclude parallel appeals, the procedure consists of separate tenders in each country and therefore divergent appeals will be less problematic.

When updating the Defence and Security Directive, the EC should consider allowing the participating contracting authorities to appoint a lead nation. The lead nation appeal body will be the only competent appeal body which will han-dle all the appeals. In this way there will be no conflicting or divergent appeal decisions. The EC should therefore consider to introducing the relevant articles from the Public Procurement Directive, dating from 2014, in this area to the Defence and Security Directive.

Articles 13c and 13j Directive 2009/81/EC on the award of contractsin the fields of defense and security

The EU rules for promoting R&D in the defence area are not well understood and are not used to their full potential.

According to Article 13c of the Defence and Security Directive, contracting autho-rities may participate in R&D with industry. When doing so, the contracting authorities contribute financially to the industries participating in the develop-ment of new defence equipment. The contracting authority may not bear all the expenses alone, but the industry (the company) must also contribute financially. In addition, it must be agreed how the outcome of the cooperation should be shared between the parties (e.g. IPR).

Article 13c only covers the development of new technology, and it does not include the making and qualification of pre-production prototypes, tools and industrial engineering, industrial design or manufacture. Such production shall be subject to the rules for public procurements. In addition, the contracting authorities must pay particular attention to avoid giving state aid.

For the use of article 13c, it is crucial that the parties’ goals are described and balanced from the start. In addition, it should be clarified, whether the parti-cipating company should be able to submit a tender in the later process of the procurement covering the production. If so, it should be contractually agreed that the participating company is bound to participate loyally in order to arrange a compliant procurement – for example by providing technical information and other relevant material.

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For EU countries, it will be ‘safest’ to complete research and development pro-jects with development stages (Project Technology Readiness Level (TRL)) of 1-6, as they would typically be subject to the exemption. Likewise the contracting authorities should ensure that their share of the costs does not become too high, in order to reduce the likelihood of giving illegal state aid.

A good opportunity for obtaining innovative solutions and developing new defence equipment is using Article 13j, which is the Defence and Security Directive’s spe-cial exemption for cooperative programmes on research and development. Such programmes are particularly important because they assist in the development of new technologies, and support the high research and development costs of complex weapon systems.

Contracts for this type of development are exempt from the Defence and Security Directive. This exception acknowledges the particular importance of coopera-tive programmes for the strengthening of Europe’s military capabilities and the establishment of a truly European EDTIB (European Defence Technological and Industrial Base), since such programmes help to develop new technologies and bear the high research and development costs of complex weapon systems. However, there is a lack of understanding of how to use article 13j. In case of unmanageable uncertainty, both the contracting authorities and the participating companies may refrain from participating in R&D projects.

For the exceptions provided by articles 13c and 13j, better guidance from the EC is required on the use of these articles. Both the contracting authorities and the participating companies will not use these exceptions if the present uncertainty on their application continues. The EC should also consider more guidance on state aid as this area is particularly complex and the rules in this area do not always seem to be consistent with the procurement rules.

NATO and EU cooperation

In 2016, the EU launched a Global Strategy that reignited ambitions for European strategic autonomy. As a result, European NATO-allies now face important ques-tions about the strategic relationship between EU and NATO. In 2016, the EU and NATO Councils signed a Joint Declaration that lays out 42 actions in seven areas of cooperation ranging from countering hybrid threats and cybersecurity to defence capabilities, industry and research, as well as exercises and capacity building. The parties concerned are now working towards implementation, but questions remain as to how NATO and the EU will relate to one another in strategic terms.

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The Joint Declaration makes clear that both NATO and the EU have an interest in building a “stronger defence industry and greater defence research and indus-trial cooperation within Europe and across the Atlantic”. The two institutions, however, have different strategic priorities and different sets of tools to foster cooperation. While NATO works through the Defence Investment Division and other stakeholders to encourage transatlantic cooperation, the EU has the EDA and a set of new, unique legal and financial tools like the EDF to promote defence-industrial cooperation and spur innovation in the EU. Although it will represent only 1% of the EU budget, the fund will provide a financial incentive in Europe for multinational cooperation on capabilities development for the first time. The EU also launched the PESCO and CARD initiatives, described elsewhere in this article. These initiatives on the part of the EU have sparked debate in Brussels about prioritization, governance, and the role of third countries (such as the UK after BREXIT) and companies owned in part by third-party countries in EU projects.

While the EU has taken several initiatives, NATO has struggled with innovation and R&T. NATO lacks legal and financial mechanisms to steer the allies in a par-ticular direction, or the ability to effect a step change across the alliance. NATO relies on its efforts to build and share knowledge among the allies, set agendas, establish priorities, and promote multinational cooperation. NATO’s innovation challenges relate to:

✓ Securing resources for innovation and engaging commercial industry;✓ Balancing short-term priorities with preparations for the future;✓ Preserving interoperability and transatlantic burden sharing;✓ Harmonizing defence-planning processes, including with the EU;✓ Using allies’ diversity to foster innovation that is more effective.

There is an obvious tension between NATO’s way of working with innovation and the new EU initiatives. It will be up to NATO and the EU to work out how their initiatives relate to one another, and it will be up to the European allies to work out whether one institution or the other offers a better platform for cooperation on science and technology issues, capabilities development, and innovation. The EU countries could face dilemmas between buying more technology from the US or invest in their own R&T, both of which would have consequences for European and transatlantic industry and for European autonomy vis-a-vis the US.

EU and NATO member states each have their own historical experiences and security priorities, and they will likely only invest in capabilities that they see as addressing their security needs. For the US, the primary drivers for defence inno-vation are Chinese and Russian military modernization and a sense of strategic

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competition for technology and innovation. While many European allies broadly accept US assessments of the global security environment, including the rise of China, their assessments of the implications of China’s rise differ from those of the US. France and Germany, for example, are focused on managing Chinese investments in Europe, and the European nation states are more concerned by challenges from Europe’s unstable perimeter: Russia in the East, terrorism in the Middle East, and migration on Europe’s southern and eastern borders.

To improve cooperation between NATO and EU, it will probably not be enough to have more ‘practical agreements’ between these two institutions. NATO and EU should therefore try to achieve a common understanding of the threat envi-ronment and a shared vision for how technology and innovation can address security challenges. Besides this, the EU should give direction on a political level in order to have a common voice in NATO, which are coordinated with the efforts within EU, and thereby avoid duplication and waste of resources.

Fragmentation of innovation efforts

The defence planning of most European countries is primarily focused on buying equipment based on available technologies. A number of countries are perfor-ming research of new technologies for the purpose of introducing these in their armed forces in the long term. These countries are funding dedicated research programs for defence equipment that involve both their research institutions as well as their industry. In this way, they also endeavour to foster a national indus-trial and technological ecosystem in support of their R&T and capability needs.

Apart from differences in the national institutional frameworks, the expenditures on defence-related research vary greatly between countries. For example, in 2016, both France and the UK spent more than $ 4 billion on R&T, compared to $ 900 million spent by Germany. Three large defence companies (BAe Systems, Boeing and Lockheed Martin) each spent more on Defence R&T than Germany.

This divergence in national policies is an important obstacle for an efficient European R&T policy underpinning European defence efforts. Moreover, due to fragmentation of strategy and efforts, current EU funding for R&T seems to be lacking the scale needed to effectively compete on a technological level with the large players in defence R&T like the US and China.

Many European countries aim for similar, but not identical equipment in their multiyear acquisition planning. This duplication results in inefficiencies and in resources spent on non-fully harmonized items. For example, European countries produce 178 weapon systems, where the US produces only 30. Europe

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produces 17 different armoured vehicles against one in the US, and 20 different combat aircraft against six in the US.

European policy makers have identified the need for better cooperation in order to reduce these ‘inefficiencies’. Examples of cooperation are the programs executed by OCCAR or direct bi- or multilateral programs. The Organisation Conjointe de Coopération en matière d'Armement (OCCAR) is an international organization of six countries with the mission of managing joint defence equipment programs. To this end, OCCAR places and manages both operational and administrative contracts. Another example is the establishment of PESCO. In addition, the EC has decided to (co-)fund the research and development of common European capabilities.

In order to reduce fragmentation and inefficiencies in the European defence industry, European countries should harmonize their R&T efforts. A multi-staged approach could make this possible:

✓ Definition of common strategic objectives of R&T policy;✓ Establishing a more integrated common R&T policy and providing sufficient

funding by making available EU funds, but also by pooling (parts of) national budgets for European projects;

✓ Transfer of (parts of ) national R&T budgets to European projects.

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Conclusion

At the greatest pace in history, technology developed in the civilian sector is affecting the defence sector. Civilian technological development is fast, forcing European armed forces to adapt quickly. This happens against the background of multiple emerging threats. It is of great importance that new technology be innovated and implemented in the defence sector as quickly as possible.

The new funding arrangements announced by the EC will provide a stimulus for the development of military technology. However, the availability of funds is not the only issue. There are still structural barriers hampering the development and implementation of technology in the defence sector. This paper identifies some of these barriers and suggests ‘the’ path forward to overcome them:

✓ The EC should consider establishing a support framework especially for SMEs with dual civilian-military technologies. Individual European countries and the EC should consider having private equity agencies that can provide SMEs with the necessary funds to develop military technology, but which can also hold onto the SMEs in order to retain the technology for as long as is needed.

✓ EU member states should support the EC in its efforts to improve IPR in order to protect European innovation efforts.

✓ The EC should consider applying the innovation partnership procedure under the Defence and Security Directive. At present, a comparable procedure exists only under the Public Procurement Directive. A procedure under the Defence and Security Directive may lead to long-term innovation partnerships between public and private parties, which may be beneficial for technology development in the defence sector.

✓ When updating the Defence and Security Directive, the EC should consider allowing authorities that engage in joint procurement to appoint a lead nation that will be the only competent appeal body for handling appeals. By doing so, there will be no conflicting divergent appeal decisions of the partners.

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✓ The EC should provide better guidance on the use of Articles 13c and 13j Directive 2009/81/EC on the award of contracts in the fields of defence and security and on the rules concering state aid. The present uncertainty on these articles hampers the willingness of EU member states to use the exemptions the articles provide for.

✓ To improve cooperation between NATO and the EU it will likely not be enough to have more ‘practical agreements’ between the two institutions. NATO and the EU should therefore try to achieve a common understanding of the threat environment and a shared vision for how technology and innovation can address security challenges. As well, the EU should give direction on a political level in order to have a common voice and coordinated efforts with NATO, and thereby avoid duplication and waste of resources.

✓ European countries should engage in harmonizing their R&D efforts in a mul-ti-staged approach. They could start by defining common strategic objectives in this area and establishing an integrated R&D policy. This could be followed by making EU funds available and pooling (parts of ) national budgets for Europan projects. In the next stage, funding from national budgets could be transferred to European projects.

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References

International Institute for Strategic Studies: The Military Balance, 2018Lisa A. Aronsson: Transatlantic Perspectives on Defense Innovation: Issues for Congress; Congressional Research Service, April 2018 https://fas.org/sgp/crs/row/R45177.pdfh tt p s : / / w w w . e d a . e u r o p a . e u / w e b z i n e / i s s u e 1 4 / c o v e r - s t o r y /disruptive-defence-innovations-aheadhttps://www.eda.europa.eu/webzine/issue14/cover-story/a-constant-eye-on-the-future-identifying-europe-s-capability-requirements-for-2035https://ec.europa.eu/epsc/publications/strategic-notes/defence-europe_enhttp://europa.eu/rapid/press-release_IP-17-1508_en.htmhttps://ec.europa.eu/info/law/better-regulation/initiatives/com-2017-294_enhttps://www.acq.osd.mil/dpap/dars/dfars/html/current/227_71.htm

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Committee 4How to strengthen the EuropeanArmaments, Security and Defence Co-operation?Pilots: Jan ENGMANN , Karanko TUIJA , Nicolas TALLAT

Members of the Committee

Vincent MARION Nicolas MUELLER (Secretary)Adelina NIKOLOVA Jonas WIKMAN Jari MIELONEN (Chairman)Jurij GVOZDAS Reinoud SIEZEN Cristina FERRUZ GARCIA Mark FARGE-BENNET Hannes HECHER Nils KUHNERT

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Executive Summary

Reducing European defence technological and industrial dependence on non-Euro-pean sources has gained increasing prominence in recent years; at both national and pan-European level. Defence and security companies face increasingly competitive environments filled with new actors from emerging markets and adjacent industries, many applying disruptive business models to increasingly constructive effect. The entry of a variety of emerging market companies that maintain the flexibility to offer ‘good enough’ solutions, technology transfer, and favourable financing terms has been a feature of export markets for several years. Europe must strengthen its collective defence by pushing, pooling and sharing defence cooperation and integration to new levels.

The defence sector market and its supply chain distinguishes itself from the usual business market for several reasons: goods are often unique, defence activities are sensitive and subject to specific national rules for handling classified infor-mation and export control, security of information is essential and procurement is mainly carried out by tendering to Member States’ Ministries of Defence as the single national clients in defence procurement.

Small and Medium Enterprise (SMEs) have gradually further increased their involvement in the European Defence Technological and Industrial Base (EDTIB), and nowadays play a central role in the complex defence supply chains in Europe. SME’s ability to respond promptly to changing military needs, as well as their ability to conduct significant research, technology and innovation activities is recognised by both Member States and Prime Contractors.

Cooperation in the field of armaments, whether at the level of R&T or of armament programmes, is a way to accelerate technological innovation and to lower costs of armament programmes. We are searching for improved trust and cooperation between civil and defence industry facilitated by EU (Commission and EDA) and Member States. The need for harmonised defence architecture, military doctrine, equipment and procurement leads to lower fragmentation and duplication in EU defence industry. This in turn leads to a higher competitiveness of the EU civil and defence Industry on a global level, less dependence on non-EU sources of critical technologies and a decreasing cost of defence equipment and R&D. The result should be more «Bang for the Bucks» for Member States.

The key issues in strengthening collaboration between Member States and coo-peration between civilian and military in a viable ecosystem are:

✓ Facilitating easier export control and regulation;

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✓ A clear statement on IPR and how to create trust between the parties involved;Utilization of critical competences and expanding the customer base by ope-ning markets between civilian and defence industry;

✓ Giving access to knowledge by sharing data and development roadmaps faster and more effectively to develop products and services cheaper;

✓ Creating working models for SME involvement in lifecycle management.

This paper explores these issues and proposes recommendations that would result in a more readily accessible ecosystem for civilian and defence industry collaboration. The key recommendations are:

✓ Already established ways to support Industry and SME are, for example, foreign military sales, government-to-government sales. These vehicles give government the opportunity to support specific companies and products and could be enforced in the EU.

✓ EU and partner nations should consider issuing a blacklist of States that are not eligible for export, going beyond the nations that are under embargo, setting common approach to all EU member and partner states. Categories of institutions eligible for Export should be mentioned for each listed nation (e.g. coast guard, rescue services). Currently different EU MS act differently and some do export to certain nations, whereas others are more restrictive. The regulation should be enforceable at EU level, which will require infor-mation sharing about respective exports.

✓ In cooperative programmes, different products generally come from diffe-rent industries based in different Member States. The process would be easier if the export license could be coordinated, even when production is done in several countries.

✓ Create a marketplace and rating system for SMEs interested in defence and defences OEMs through government and industry jointly developing a web based database of SMEs (EU should push the existing "Yellow Pages" database).

✓ Establish European IP support services for SMEs through awareness initia-tives, provision of IPR consulting services and providing support to SMEs for effective contracting with big industry.

✓ Harmonise European regulatory framework for IPR through driving through a unitary patent system that spans the EU.

✓ In opening markets, there needs to be a systematic exploration of the potential of combining civilian and military capabilities, as there is much overlap in sectors such as border control, maritime safety and security, cyber security, energy security and environmental protection looking for dual use synergies.

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✓ In sharing roadmaps, COTS could potentially drive innovation: for example, in navigation, positioning and communication. The proposed action requires domain specific demo projects, in particular regarding how to solve military specific security requirements based on a COTS platform. We propose an initiative to pilot and establish a joint monitoring framework though crea-ting the right behaviours and incentivizing trust and information sharing. The EU-US market intelligence working group initiative would establish a joint working group designed to exchange good practice, share information on supply and demand of raw materials and standard components, and improve forecasting capabilities. The proposed action would create stronger collaboration in terms of exchange of models, exchange of data and joint experimentation for validation and data generation.

Encourage SMEs to team together, to develop partnerships covering all the product life cycle. The idea is to set up a network gathering a set of SMEs, each of them covering part of the life cycle, with some focused on innovation, some on development, and some on In-Service Support. This would help SMEs to get access to some defence projects offering an end-to-end solution, relying on a multi-SME partnership. This network could be organised, maintained and sponsored by EDA. Even more innovatively, it is recommended to identify at the earliest stage of the project, the “Older Brother Company” to produce & support the equipment during all the life cycle.

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Today’s security environment calls for a stronger and more responsive Europe. Reducing European defence technological and industrial dependence on non-European sources has gained increasing prominence in recent years,

both at national and pan-European level, especially with the issue of the EU Global Strategy. The 40 EU based companies listed in SIPRI’s Top 100 List comprise of system integrators and first-tier suppliers but also of smaller companies. However, not even the big producer countries possess the full spectrum of defence indus-trial capabilities. Hence, they depend on foreign companies; not only on the level of second or third tier companies but also at the prime contractor level. There is a long-term trend towards service industries and SMEs becoming a significant part of the defence industrial business/base. This trend will gain momentum because many EU Member States opt for outsourcing many of the services, which traditionally provided by the armed forces themselves. Currently 20 of SIPRI’s top 100 defence companies earn their money predominantly or entirely in the military service sector. These services include maintenance, repair, operation (MRO), after-sales service, software, intelligence training, armed security and logistics. Some companies have services as part of their wider portfolio. While services make up a growing share of the defence business, the actual benefits of the outsourcing approach are mixed.

Managing the transition towards a knowledge-based economy is the key challenge for the EU today. Success will ensure a competitive and dynamic economy with more and better jobs and a higher level of social cohesion.Dynamic entrepreneurs are particularly well placed to reap opportunities from globalisation and from the acceleration of technological change. EU capacity to build on the growth and innovation potential of small and medium-sized enter-prises (SMEs) is therefore decisive for the future prosperity of the EU. Vibrant SMEs will make Europe more robust to stand against the uncertainty thrown up in the globalized world of today.

Research Problem and Methodology

Cooperation in the field of armaments, whether at the level of R&T or of arma-ment programmes, is seen as a way to accelerate technological innovation and to lower costs of armament programmes. Admittedly, cooperation is uneasy. For sovereignty and security related reasons, states are hesitant on sharing defence technologies that have been developed with national resources. Cooperation in armament programmes can face divergent corporate industrial interests, if it does not lead to industrial mergers. Meanwhile, companies are reluctant to consolidate in a transnational framework if armament markets are not open, as synergies can then be limited. EU member states and the European Institutions have worked

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for twenty years to build a framework supporting industrial consolidation. They have indeed attempted to create a harmonised legal framework in which defence companies would evolve, and to create a European Defence Equipment Market. They are now funding research in the field of defence, and will likely soon fund cooperative armament programmes. (Belin, 2017). What needs to change in order for Europe to be successful in its endeavour? The SERA 30 main topic is: “Europe first!?” – “How to strengthen the European Armaments, Security and Defence Co-operation? Qué sera?” In this context, committee 4 is looking at the following research question: “How to build an eco-system bridging defence industry and civilian innovative industries more easily?”

To maximise efficiency and to reduce the number of interfaces, the structure of the paper was defined in Module 1 and five subtopics to the research question (issues) were identified. These subtopics were each subsequently investigated by two SERA 30 participants and the results presented in chapter 5: Key Issues. The other chapters were developed in parallel or are based on the results and recommendations of the five issues.

Visionary Outlook

The vision for a strong European defence and networked partnership with SMEs and Start-ups is the following:

✓ Improved Trust and Cooperation / Collaboration between Civil and Defence Industry facilitated by EU (Commission and EDA) and Member States MoD / Mo Economy, especially in R&D.

✓ Harmonised Defence Architecture, military Doctrine, Equipment and Procurement leads to lower Fragmentation and Duplication in EU Defence Industry.

✓ This leads to a higher Competitiveness of the EU Civil and Defence Industry on a Global Level and less Dependence from non-EU Sources of critical Technologies / Capabilities, also due to decreasing Cost of Defence Equipment and R&D.

✓ This leads to more “Bang for the Bucks” for Member States.

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Future Challenges to Europe and a shift to Non-Military War Operations

Future Trends in Warfare

After the end of the Cold War, military research focused on a multitude of topics, each heralding a new outlook on the wars of the future (Revolution in Military Affairs, Network Enabled Operations, Military Operations other than War, Counter-Insurgency Warfare, 4th Generation Warfare…). However, the trend where Western Countries are the least prepared evolved largely unnoticed: A paradigm shift from:

✓ physical to virtual lines of operations;✓ platforms to networks;✓ military to civilian actors.

The invasion of Crimea 2014 and the subsequent War in eastern Ukraine was a wake-up call for Western Countries. The massive use of propaganda, strategic deception, irregular and voluntary war fighters, and cyber-attacks was unprece-dented. The 2007 theory of “Hybrid Warfare” of Frank Hoffmann could successfully be applied to this new kind of warfare. In Russia, the new "Gerasimov Doctrine" is said to be based on the Russian equivalent of hybrid warfare.

An even more radical shift to non-conventional lines of operations is described in the 1999 Chinese concept of “Unrestricted Warfare”: the fusion of technologies make the inclusion of the political, economic, diplomatic, cultural, religious domains in warfare possible and render obsolete the idea to confine war to the military.

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Unrestricted Warfare employs simultaneously up to 27 lines of operations, most of which are in the non-military domain. Most would be prepared over years and executed in a synchronised way over a very short time period (minutes – days), while being difficult to detect and attribute and would fur-thermore often be deniable.

Need for Cooperation between Civilian and Defence Actors and Industries

These new concepts of warfare show that future conflicts, crises and disasters will only be successfully managed, if all actors – armed forces, police, civil protec-tion, public health, critical infrastructure operators, etc. - work closely together (planning, exercising, coordination, decision taking, intelligence sharing…).

An example of a possible process is shown below with the US Federal Emergency Management Agency (FEMA) planning process:

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In conclusion, there will likely be a convergence of threats and solutions for pro-tection for civilian as well as military actors in the future (e.g. protection against cyber, terrorist, drone, disinformation attacks, etc.), as civilian targets (critical infrastructures) will be legitimate targets in a future war and will therefore need protection from similar threats as the military.

This shows the need for a closer cooperation between civilian and defence indus-try companies and lends weight to the importance of creating and eco-system in which defence and civilian industry operates seamlessly and efficiently. Possible approaches for this cooperation are the focus of the present paper.

Key Issues in Enabling Ecosystemswith Defence and Civilian Actors

Export Control and Regulations in Europe – Framework for Interaction

It is widely recognised that export is a key element to underpin a healthy European Defence Industrial Base.

There is a common EU regulation in place with regards to export control that sets the EU baseline. However, this shall not affect the right of Member States to operate more restrictive national policies; thus, sovereignty is not affected. In fact, there are substantial differences in the approach the different EU Member

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States take in support of the export of the items produced by their national industries, directly related with the Governments policy and their willingness to support national industry.

These policies that may change over the years are in many cases not known to the SMEs, so their efforts to export may not pay off in the long term. Prime contractors though have more opportunities/access to lobby, so their exports efforts are better rewarded/focused.

The current EU Regulation for exports is enforceable at national level, but not at EU level. There is also a Common Position of the EU MS that govern the exports of military technology and equipment, which is more of a code of conduct, and thus not enforceable at all.

During our study we have reviewed the process of export licencing as well as the stakeholders involved in some of the MS. Situation varies in Member States. Given our findings, we have come to the following conclusions.

Recommendations

The following actions are recommended:

✓ The Export Control Authority in the Member States should strengthen their support to SMEs. The relationship of Industry with Ministries within the application process is up to a certain degree bound by the government political will, sometimes with unpredictable outcomes. This can have a direct impact on the costs for SME that may have gone through the whole sales circle to not be allowed to deliver to the end costumer.

✓ Already established ways to support Industry and SME are for example Foreign Military Sales and Government-to-Government Sales. These vehicles give government the opportunity to support specific companies and products and could be considered also in the EU.

✓ EU should consider issuing a list of non EU Member States that are eligible for export, going beyond the nations that are under embargo, setting com-mon approach to its entire MS. Currently different EU MS act differently and some do export to certain nations, whereas others are more restrictive.

✓ In cooperative programmes, different products generally come from diffe-rent industries based in different Member States. The process would be easier if the export license could be coordinated, even when production is performed in several countries.

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IPR & Trust – Can We Operate Together for a Stronger Europe?

Current situation: Concerns about Intellectual Property actas an obstacle for SMEs access to the Defence Market

Innovative SMEs, in general, must keep up with the relentless pace of innovation in a globalised market. To remain competitive, SMEs not only need to develop original innovation but also protect it while bringing it to the market as fast as possible.

IP management is an essential element of SMEs innovation strategies. Small enterprises have an increasing need to exploit the full range of formal and infor-mal IP tools, to help to build and defend their competitiveness.

To analyse the particular challenges these strategies face in the defence market, we must better understand the challenges faced by SMEs in particular, when dealing with the unique defence (industry) environment.

MoDs rely, to a significant degree, on large defence Original Equipment Manufacturers (OEMs) to supply them with sophisticated military equipment, in particular when complex defence systems are involved. MoDs generally prefer dealing with a large prime contractor rather than manage component procure-ment and integration for complex systems themselves. The OEMs on the other hand will strive for sufficient IPRs to allow them to market the final product to acquisition officials in the defence market place available to them.

This means that civilian and defence focused SMEs, able to add important know-how and novel technological solutions, will often have to work with much larger OEMs in order to bring their products into military solutions. Often only in sharing information about their inventions with a much larger corporation are they able to market their product and to identify together with defence OEMs the feasibility of an integration of their products into a military system.

Cooperative research requires sharing prior knowledge, therefore protecting IP is a key aspect of the contracts ruling these projects. The particular defence market environment enhances the challenges and risks for SMEs as it forces them to share information with corporations that are likely in a position to assign far larger resources to their IPR management and that may put SMEs at a disadvantage in a potential dispute.

This situation likely enhances existing difficulties SMEs face in the civil world when protecting their IPR with formal IP tools such as patents, e.g. costs of patent

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application, the need to disclose critical information and the risks involved in enforcing their rights through the legal system. For those reasons, SMEs will often choose not to rely on formal legal system and forego patent protection and will instead rely on informal means of protection such as NDAs or other contractual tools when dealing with defence contractors.

Summarised, this framework disincentives the release of information by SMEs for the following of reasons:

✓ Fear of losing advantage edge over competitors if proprietary information is leaked

✓ Known deficiencies in the available tools for formal IPR protection✓ Insufficient familiarity and resources available to SMEs to acquire legal

protection of IPRs Mistrust larger OEMs may not respect SMEs IPR and have superior resources to counter any legal recourse SMEs may have.

Thus, despite civil SMEs that are agile, reactive, able to demonstrate brand new innovative technologies or solutions, a concern about IP and a lack of trust will often prevent MoD and prime contractors from involving SMEs in defence programmes. Consequently, readily available innovative opportunities remain underused in military systems.

Challenges: What are the concerns for SMEs with regard to their IPR?

IPR are classified in two main groups, formal (rights granted by the legal system, such as copyrights, patents etc.) and informal (where protection exists in practice but does not depend on a legal procedure), which may be used in alternative or complementary ways.

SMEs / Start-ups reluctance in dealing with prime contractors is to a large degree connected with their economic situation and the risk to their business model involved in dealing with large defence corporations and MODs.

SME’s feel at risk of losing considerable investment and competitive edge

SMEs and Start-Ups often invest multi-million € in technology development (Technology Readiness Level (TRL) 1 through 3) and product development (TRL 4 through 6) to innovate and put new products on the market. Some Start-ups may be dedicated to a single innovative concept with their entire resources dedicated to achieving a certain innovation with no fall back options. In these cases, the technologies and products are completely developed by the SME and thus the IPRs are fully owned by them. Non-manufacturing companies will be particularly

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exposed to high risks, because of the need to keep investing in R&D and remain one step ahead of the competition in technological innovation. Protection of their IP therefore becomes paramount.

Defence OEMs rely on searching the market for innovation and therefore may be interested in accessing information on a multitude of new products or innovative concepts. In developing complex offerings for their military customers, they are likely to strive for complete transparency in order to ensure certification and for complete control over their final product in order to be able to market their products widely with little dependence on supplier’s interests.

MoDs are often interested in acquiring substantial IPR on products purchased in order to avoid or reduce decades of dependence on a single contractor and to allow for more competition during the life cycle of a defence product.

That is why many SMEs fear, not without cause, that OEMs and MoDs as poten-tial customers may be incentivised to reduce the SME’s legal foothold on the inventions used for the defence products. While conflicting business interests are normal in the marketplace, the situation is made worse for small start-ups or mid-sizes defence suppliers by the known deficiencies of the legal system governing the protection of IPR.

Deficiencies in the tools available for formal IP protection

✓ The perceived constraints of the legal environment are:✓ The costs of IP protection, associated with the complexity of the application

process and the bureaucratic burden;✓ The difficulties in enforcing already obtained rights, often attributed to

additional translations and implementation costs;✓ The time to make IP protection work;✓ The lack of harmonization of the European Patent System and the fragmen-

tation of the national legal frameworks across the EU.

Insufficient familiarity and resources availableto protect their IPRs in the marketplace

SMEs face greater barriers than large enterprises in IPR adoption, because of their minor resources and lack of specific expertise. This leads to a reduced awareness on the side of SMEs about IPR protection and a (perceived and/or real) bias of patent examiners towards patent applications of large firms.

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Trust and use of informal tools of IP protection

SMEs are concerned that prime contractors may want to copy or unrightfully use their IPR. In the perceived absence of an accessible and effective legal envi-ronment, cooperation then requires a significant level of trust between parties.Trust for a fruitful corporation can be established over time based on a posi-tive track record but will initially be lacking due to the inequality of the parties involved. It could rely on information on the reputation of the corporate partner acquired from other market participants; however, the availability of such assess-ments will depend on their networking capabilities and their immersion in the marketplace of the SMEs.

As the superior resources give one party leverage over the other, SMEs have few options outside hoping an OEM will not turn on them. Not wanting to turn to formal means of protection SMEs and OEMs are likely to use contracting / NDAs as a mean of establishing a negotiated framework for their cooperation.

Recommendations

Since:

✓ There are perceived and real risks for an innovative SME, in releasing their innovate solutions to large defence OEMs;

✓ There is a need for big defence groups, to have access to innovation to create marketable products;

✓ There is an urgent need for governments to have access to high tech weapon systems.

It is necessary:✓ To create a more efficient marketplace for the exchange of ideas (create

opportunity) and to bridge cultural divides and reduce mistrust (build trust). • To create opportunities and build trust government and industry

should develop a public web-based solution in order to create more transparency and access between European SMEs with technologies relevant for defence applications and the large OEMs.

• Such solutions could include the possibility to rate business partners positively or to flag negative experiences in order to establish means of evaluating trustworthiness between parties with no prior business relationship, but confidentiality issues need to be addressed.

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✓ To improve the quality of IPR adoption and management by SMEs by providing adequate tools and support instruments as well (ease access to existing legal protection).

• There is a need for streamlining and reinforcing the broad range of IPR support services for SMEs, already existing in Europe. They should be encouraged to progress beyond an excessive focus on patents to promote wider IP protection strategies, taking into account the full range of formal and informal IPR, and to provide industry-specific services, particularly to SMEs valuable for the defence sector. To address the particular needs of SMEs with technology relevant for the national defence, nations/EU should consider better promotion of practical knowledge of the IPR system and existing alternatives to achieve and protect competitive advantages. Such awareness initiatives should include periodical monitoring and comparative assessments of the suitability of the different IPR tools (or alterna-tive protection methods), from the point of view of SMEs business strategies.

• Furthermore, instruments such as specialized, value-added IPR consulting, enforcement and implementation services dedicated to specific defence market needs should be considered. These ser-vices should allow SMEs to find help to compete and cooperate in business chains with larger enterprises with greater means.

• Provide SMEs with support for effective contracting, helping them to clearly define the background IP that the SME brings to the table at the start of the contract, to define the ownership rights of the results of the contracts and agree on licensing/access rights if applicable.

✓ To further improve and harmonise the legal framework within Europe (improve legal tools and protection).

• Ultimately, EU nations should strive for greater harmonisation of the IPR regulatory framework between the European and national level, particularly for patents. Much could already be achieved by streamli-ning and harmonisation of bureaucratic processes; the adoption of a Community Patent granted by one central authority and subject to the same rules throughout the EC seems an obvious solution to reduce the present inefficiencies of the European Patent system. However, it presents several problems and should be encouraged only if the costs of such Community patents would be affordable to all patent holders including SMEs. In order to respond to SMEs needs, the overall efficiency and timeliness of the European patent system should be improved, and the burden of excessive translation costs

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should be reduced. Additional funding could be considered to fill the gap in time when SMEs must anticipate costs for patents, before new revenues start to come in. The unitary Patent and the Unified Patent Court already developed and awaiting final ratification could be important building blocks, which could supplement and stren-gthen the existing centralized European. Unitary Patents could make it possible to get patent protection in up to 26 EU Member States by submitting a single request to the EPO, making the procedure simpler and more cost effective for applicants.

Open Markets – Leveraging from the Capabilities

The impact of having an ecosystem bridging civilian and defence industry more easily in terms of opening up markets, either civilian into defence or vice versa is here considered. Traditionally defence markets have been closed and difficult to access for civilian industry unless via a prime contractor.

Opening markets is of particular importance in the context of building an eco-system between the military and the civil industry, because today more than ever Europe needs credible and modern armed forces to deal with the instable world situation.

The problem of opening markets is not so much an economic problem but mostly political and governmental problem: as long as the majority of defence acquisition remains nationally planned, nationally ordered and delivered, opening up the markets is relatively difficult.

Many everyday technology ideas started in defence (e.g. GPS, microwave, airbags, internet), however, this trend is reversing for sensors and mapping tools and thus there is a benefit of creating an eco-system that allows civilian and defence industries to collaborate and share technological evolution.

Challenge / Drivers

Comparing military and civilian projects, there are many different drivers for each of them:

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Military projects

✓ Performance of weapons systems is usually a higher driver than the cost as the capabilities needed are normally extremely demanding;

✓ Large ratio of technical to non-technical personnel;✓ Most products custom-designed which can lead to a tendency toward

overdesign;✓ Relatively few customers, the governments and their military services,

which designate how a product is designed;✓ As a consequence of high performance needs, projects tend to be enginee-

ring lead rather than marketing and sales led;✓ Large, long-term contracts;✓ Much time spent on proposals and in developing documentation (operating

and maintenance manuals);✓ During design and manufacture, a need to define a variety of missions;

harsh, uncertain operating environment;✓ The customer, supplies the threat and mission requirements, while the

contractor furnishes the technology; parties work together to define final work statement;

✓ Government regulatory environment mostly covers all aspects of operation (e.g. export control);

✓ Products have to be supported for a long time.

Civilian projects

✓ Highly cost-sensitive in order to compete on the market;✓ Fewer technical personnel; less development cycles and redesign;✓ Standardized, mass-produced products;✓ More emphasis on use of off-the-shelf items to keep costs low;✓ Different customers with differing needs. Products sold few at a time, ven-

dors compete for every sale;✓ Concerns of marketing and sales personnel often override those of technical

staff;✓ Many customers, many orders;✓ Emphasis on specification sheets, instruction manuals, and warranties;

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✓ Predictable product life is important;✓ Manufacturer of equipment supplies product specifications, does not design

to a requirement;✓ Administrative and accounting done to standard commercial practice;✓ Regulations cover only specific aspects of operations;✓ Environment to design for is much less harsh than for the military (e.g.

temperature of military hardware has to operate from -46°C to +71°C);✓ Product support timescales are not long term.

Threats

The key threats foreseen from implementing such an ecosystem are:

✓ Armed forces requirements may exclude the use of civilian solutions, for-ming a barrier to effective sharing of technology.

✓ Civilian and defence companies / military do not plan protection against common threats together. The threats are common but the root cause is being treated by separate organisations, which is inefficient.

Opportunities

Technology scouting to identify useful new technologies developed by start-ups and SMEs would enable a wider breadth of knowledge of what technologies might be beneficial to the defence industry. Cooperation could be improved with further sponsoring of Start-Ups by the defence industry.

Civilian critical infrastructures could also consider defence industry solutions for their needs, as beneficial technology already exists.

The following key benefits have been identified:

✓ The defence industry provides a steady customer and status to civilian industries whereas the commercial sector provides the higher volume and pace (1-3 years vs 5-10 for defence).

✓ EU funding opportunities exist for SMEs to migrate technology from civi-lian to defence sector, providing an incentive mechanism for converting to dual-use.

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✓ SMEs may not have the time or resources to enter foreign markets and this presents a problem for SMEs that have technology which there is a market for. Large defence companies will already have an international market, which can be accessed by the SME through working with the defence company.

✓ There is considerable value at low TRL stages of development for both defence and SME as products can be matured quickly by the SME and the defence industry can see if the technology is viable quickly.

Recommendations

Both the governments and the EU Commission have a big part to play as regula-tors, and their involvement in opening the defence and civilian markets is very important and should be strengthened. The barriers to market entry should be minimised. The governments should encourage openness and competition and avoid initiatives that create formal or informal barriers to security and defence market access. Harmonisation of the transport and border security procedures and standards, and promoting international cooperation to ensure new techno-logies and methodologies can be internationally recognised and used.

Industrial reform and restructuring is needed: cross-border industrial coope-ration, coordination and even integration, as well as increase of research and innovation on every level are needed. Investments should be increased and not be spent at purely national level.

We should investigate more systematically the potential of combining civilian and military capabilities. The new threats and challenges to Europe’s security lie mainly in spill over effects from instability outside Europe. Civilian security actors dealing with border control, maritime safety and security, cyber security, energy security and environmental protection – all of them use capacities which at least partially overlap with those owned and operated by the military.

Dual-use capacities are growing and increasingly they will be arranged beyond the national level.

Dual-use synergies should not be limited to R&T/D but extended to procuring, operating and maintaining dual-use assets. Regional or bilateral civil-military capability clusters should be realised quicker and more easily than at the overall European level.

Additionally, it would be beneficial to improve civilian and defence industry cooperation in the fields of compatible / interoperable solutions and products (e.g. intelligence / C4 systems, cyber defence, site protection).

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The key recommendations from exploring opening markets are:

✓ There needs to be a systematic exploration of the potential of combining civilian and military capabilities, as there is much overlap in sectors such as border control, maritime safety and security, cyber security, energy security and environmental protection looking for dual use synergies.

✓ Ensuring that money is put to best use and not be spent at purely a single nation level. E.g. through collaborative programmes across nations and ensuring that capabilities needs are fulfilled through most efficient use of European nations defence funding.

✓ Improving civilian and defence industry co-operation in the fields of compa-tible / interoperable solutions and products (e.g. intelligence / C4 systems, cyber defence, site protection). Through sharing of solutions to the common threats and looking to dual purpose such solutions.

Sharing Roadmaps - Better, Faster, Cheaper

European nations should aim for holistic solutions across European coun-ter parties that integrate ICT across all architectural layers of defence forces (i.e., infrastructure, applications, military systems, and ICT enablers). Such an overarching integration includes a joint strategic roadmap to clear roles and responsibilities and strong joint technology governance across the defence organisation and helps effective skills build-up. This approach can dramatically improve the effectiveness of military operations.

In 2007, the EU member states agreed to enhance the development of a “European Defence Technological and Industrial Base” (EDTIB) with the help of an EDTIB Strategy. Since then, the EDTIB has become a point of reference not only for the member states, but also for the European Parliament (EP) and the European Commission.

Drivers for the Development

The main drivers of the current and potentially the future integration of inno-vative technologies are:

Increased Globalisation: Dependencies have increased in two ways: The civilian basis for defence industry is growing and defence establishments become more dependent on civilian supply chains. Moreover, as the civilian part of the business generates the majority of the turnover and income, it will get increasingly difficult and costly for the military to establish highly reliable supply lines.

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The inefficiencies of national control are becoming increasingly visible in several domains:

✓ Economics: constantly increasing per-unit costs, loss of economies of scale and learning, absence of competition among companies;

✓ Defence: lower levels of technological sophistication, poor availability of cutting edge capabilities;

✓ Technology: slower rates of innovation, growing gap to leading companies outside the EU;

✓ Industry: loss of production capacities and changing markets;✓ Security: increasing dependency on foreign suppliers.

At the same time there are many disruptive drivers facing defence and security companies.

New actors: Defence and security companies face increasingly competitive envi-ronments filled with new actors from emerging markets and adjacent industries, many applying disruptive business models to increasingly constructive effect. The entry of a variety of emerging market companies that maintain the flexibility to offer ‘good enough’ solutions, technology transfer, and favourable financing terms has been a feature of export markets for several years.

New technologies: Development, proliferation, and clever use of a range of emerging technologies have the potential to rapidly transform end-user capa-bility requirements and shatter assumptions about the types of models that will enable success for corporate activities.

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New frameworks: The intersection of industry drivers with broad ‘megatrends’ related to economics, geopolitics, demography, immigration, challenges to Westphalian concepts of state sovereignty, and climate change will have far-rea-ching implications for global defence communities and the industry that supports them.

New rules: Managing supply chains and business resilience amid increasing regulations focused on counterfeiting, cyber security, corruption, climate change, and conflict materials will bring new risks and constraints on partner identi-fication and could even further constrain the nature of the markets to which companies can sell.

New budget and funding realities: The current environment of constrained pro-curement budgets will be matched by enduring spending crunches in Research, Development, Testing, and Evaluation (RDT&E) budgets across several regions later in this decade.

Recommended Actions

COTS-driven innovation: this action addresses areas where COTS could potentially drive innovation: for example in navigation, positioning and communication. The proposed action requires domain specific demo projects, in particular regarding how to solve military specific security requirements based on a COTS platform.

Smart use of COTS focuses on the use of COTS components in supporting what is at the core military-specific innovation. This typically requires design, verification, packaging and assembly of COTS components to enable military qualification; consequently, the proposed action is geared to strengthening these capabilities.

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Identify and exploit dual use potential component technologies. For some technologies, military applications are natural first adopters, but civilian appli-cations may follow, hence motivating civilian R&T investments (e.g. from H2020) and enabling lower cost supply for military use in the future. Specifically the proposed action focuses on identifying civilian stakeholder and building joint communities.

Create or secure defence specific suppliers: There are many candidate areas for this tool, including major military-specific R&T efforts on specific topics. Our proposal, however, is for a relatively small and industrially oriented pilot to explore and address the policy, legal etc. issues associated with a multinational setting. Technology foresight: early identification of emerging and key enabling defence technologies. The purpose of this business case is to coordinate and enhance existing European efforts to identify and early stage technologies with potential for defence. This would be delivered though establishing a capacity to synthesise existing foresight analysis and priorities coordinated investment. Establish a monitoring framework for the defence supply chain. Although many European defence suppliers have structured risk management systems in place for technology dependences, there are very few examples of sharing knowledge and sharing good practice between defence suppliers. Hence, we propose an initiative to pilot and establish a joint monitoring framework though creating the right behaviours and incentivizing trust and information sharing.

Establish EU-US market intelligence working group. The EU and the US face a number of shared challenges but work independently to address them. This initiative would establish a joint working group designed to exchange good prac-tice, share information on supply and demand of raw materials and standard components, and improve forecasting capabilities.

Manage commodity supply explicitly addresses the issue of bottlenecks, and is specifically dedicated to an operational time-scale dependence. The proposed action concerns the establishment of a supply chain mapping capacity and conduct of a stress-testing exercise with respect to commodity supply.

Exploit and enhance operational modelling concerns the technological support required to use advanced equipment in operational settings – an operational dependence of a clearly strategic nature. The area also has a link to systems development since the same or similar models are useful for qualification of systems. The proposed action would create stronger collaboration in terms of exchange of models, exchange of data and joint experimentation for validation and data generation. (Europe, 2012)

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SME Service Capabilities in Total Lifecycle Management

Despite the fact that civil SMEs are agile, reactive, and able to demonstrate brand new innovative technologies or solutions, the armament long lifecycle discourages MoD and prime contractors from involving SMEs in defence programmes, and so prevents from delivering the best level of performance for our Forces and the best distribution of public money in the whole industry.

Let us understand more deeply the reasons of this situation. Why are Defence timescales not compatible with SMEs? What are the main challenges? Moreover, what are our two major recommendations to overcome it?

Current situation: Defence timescales prevent European armiesfrom benefiting from SMEs innovative capability

The main goal of MODs is to keep the Armed Forces at the level that could meet future military challenges as well as threats posed by possible adversaries. There is a need to have capabilities for the Armed Forces that can give certain opera-tional advantages against the enemy’s forces. How is it possible to have these advantages?

It seems that all procured weapons system and main military equipment has to be modernised to the level that could satisfy the operational needs (operational and technical requirements). To acquire and keep systems updated requires the fostering of good communication between the defence industry (companies: prime contrac-tors, SMEs) and end-users (MOD). In order to have and maintain the operational advantages, it is required to use new technologies. SMEs obviously have a potential to react comparably quickly to all challenges and MODs should not miss that.

At the same time, the end user expects that the procured equipment will be in use up to 30 years or longer, which is a challenge for the industry especially for the SMEs. It means that the end-users expect long lasting lifecycle support of its defence equipment. Could the innovative SMEs give such kind of support?

Today, most of the SMEs refuse to offer support longer than 3-5 years after deli-very. This leads to:

✓ Big defence industries and some specialised SMEs developing third party maintenance capabilities, to compensate for SMEs unwillingness to commit for such long terms, to permit prolong support of the complete armament system. However, most of the time this transfer of maintenance is more a late reaction to SME default than a well-prepared and mastered long term plan.

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✓ Increasing mistrust from big defence groups and MoDs with regards to working with SMEs, and as a matter of consequence a relative small SMEs contribution to the defence industry.

Challenges: Why are Defence timescales not compatible with SMEs?

The five main challenges are set below.

SMEs are focused on a dedicated phase of the product life cycle

Defence Equipment has a very long life cycle. After having been delivered at slow rate, Armed Forces use the same equipment for up to 40 years, and do not want it to change. The typical duration of the different phases of a Defence programme are:

✓ Operational needs specification and decision to launch: 4 years✓ Design phase : 3-5 years✓ Development and integration within current Defence systems : 3-5 years✓ Deployment, training, set into operation : 2-3 years✓ In Service phase : up to 30 years

These durations are to be compared to SMEs timeframe. To stay competitive, innovative SMEs need to offer up-to-date technology that changes every 6 mon-ths/1 year. This makes it difficult for them to get involved long term with defence projects with an innovative and immutable solution. That is why most of the SMEs involved in Defence are focused on a specific activity: either R&T or Hardware/Software development or Services.

We will illustrate this choice with an absurd example: what would happen to a SME that decided to cover the full product lifecycle. Let us assume that at year 1, it is one of the most innovative SME dedicating 100% if its resources on R&T.

At year 2, this SME decides to extend its activity to the development of a solution based on its R&T results. At year 3, it decides to extend also its activity to the support of the developed and delivered solutions. As a matter of consequence, at year 12, this SME dedicates only 1/3rd of its resources / capability to R&T…and is very likely not the most competitive and innovative SME anymore.

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Start-ups and SMEs have thus to focus on R&T to stay highly innovative. In other words, when they meet success and start to grow bigger and bigger, there comes a time where they have to decide:

✓ Either to become an industrial group encompassing all the life cycle of its products, which requires a critical size;

✓ Or to give up some part of its activity and focus on only one phase of the life cycle to stay innovative and/or competitive.

Defence projects duration vs SME innovation race & ROI

High tech innovative SMEs need to stay ahead of the competition, to shorten the time to market and consider short Return-On-Investment (ROI). This innova-tion race is vital for these companies. They cannot offer a brand new solution / technology on the market and wait several years before getting the first income while still investing to stay among the front-runners.

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However, as already stated, the time to launch defence projects may be very long. For this reason, some SMEs might find the civilian market more attractive and adapted to their innovative profile.

If EU wants to benefit from their innovations, they have to be involved at a rela-tive late stage of the process, to stay attractive with a short expected ROI. This implies that all the upstream (Operational needs specification, Design phase) and downstream (Deployment, training, set into operation, in Service phase) stages are undertaken by another company / big industrial group.

Defence projects shifts to the right, a high risk for SMEs

On one hand, SMEs may consider that taking part in a defence project is a key opportunity to double their size or significantly grow.

On the other hand, most defence programmes face delays during the development phase, and also some shifts during the Initialisation/orientation phase leading to the Launch decision. SMEs are more sensitive to the shift of a project that represents 50% of their portfolio than big industrial groups that have a larger portfolio of projects, all of them regularly facing delays that, on average, ensure a regular workload. The expected opportunity could turn into an inextricable situation or even into the demise of the company.

This risk is clearly identified by some SMEs that would prefer a steady approach and have a limited contribution to a defence programme rather than a “double or quits” move. They focus on their core added value (R&T, research consultancy, innovative software, etc.) and they need to team with other, sometimes bigger, partners to address the full scope of the defence project.

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Big Defence groups are committed in the long run. Why not SMEs?

Big defence groups are and must be committed in the long run. In fact, it is not a choice.

First, it is a demand of one of their main customers, which is also often one of their shareholders: the State. No state would accept that a local big defence prime contractor say “Your Tiger helicopters won’t be supported going forward. Do not use it anymore. Sorry”. The same applies for fighters, submarines, frigates, main battle tank, etc.

Similar to the aeronautic domain where you are engaged to support your equipment as long as equipped aircrafts fly, some military customers request a commitment of supportability for more than 30 years (Singapore, Middle East).

Moreover, being a worldwide group, with a long-to-build and quick-to-discredit image, induces that a small default, e.g. on long term support, may very quickly ruin their image with dramatic consequences and huge, financial and human stake. These big industrial groups could not afford a “Fire and forget” commer-cial strategy.

This long-term commitment leads to specific measures deployed in these indus-trial groups:

✓ A retention of the industrial process ensuring repeatability independently of the individual performance;

✓ Detailed (and heavy) configuration management;✓ Competence maintained on hardware and software technologies 40 years

long.

The key point is that these necessary measures taken by big defence groups to be committed in the long run are hardly compatible with keeping an agile highly innovative SME structure.

How long could SMEs be committed? When should they give up or hand over?

Let us consider the Bathtub curve. This classical curve illustrates the evolution of the failure rate of a product, which is comparable to the effort to support it. It starts with the Break-in phase, a first phase where infancy defects are encoun-tered, then the Midlife with almost constant failure rate due to the decrease of the manufacturing defects and the progressive increase of wear-out failures, and

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eventually the Wear-out phase, where the support becomes exponentially more difficult, facing obsolescence, relaunch of spares production, etc. The timescale depends on the technology, but the global shape is almost always the same.

The Break-in phase is intimately linked to the development phase and the SME which has delivered the product needs to stay involved.

At the beginning of the Midlife phase, some SMEs prefer to stop their contribution for the reasons presented earlier. Some others prefer to make some income with a relatively low effort. However, they very quickly enter the dread zone where the comfort becomes a burden, worsened by the rapid evolution of the technology and the increasing number failures appearing then in the wear-out phase.

Recommended Actions

Since it is difficult:

✓ For an innovative SME, to commit them self to deliver and support the same equipment for 40 years;

✓ For a big defence group, to integrate a solution without having secured all the commitment ensuring the customer satisfaction all along the 40 year life cycle.

Eventually, how could we overcome this inherent time constraint to really take benefits from the innovative civil SMEs?

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Foster a “Life cycle” Network of SMEs

A first approach is to encourage SMEs to team together to develop partnerships covering all of the life cycle.

In that perspective, the idea is to set up a network gathering SMEs, not only focused on R&T in a given technology field (there are already many networks of this kind), but a set of SMEs each of them covering part of the life cycle; some focused on innovation, others development, and others on In-Service Support. This would help SMEs to get on board some defence projects offering an end-to-end solution, relying on a multi-SME partnership.

This network might be organised, maintained and sponsored by EDA.

Identify at the earliest stage of the programme, the older brother

Even more innovatively, we recommend identifying, at the earliest stage of the project, the Older Brother Company to produce & support the equipment during all the life cycle.

On 20 April 2018, the European Commission issued a recommendation (EU) 2018/624 on the cross-border market access for sub-suppliers and SMEs in the defence industry. This document proposes measures to improve the position of SMEs in the defence supply chains. This recommendation underlines the importance of SMEs in the defence industry. The recommendation should apply to both government and defence industries (big companies and SMEs). The most important measure underlined in this document is establishing a system between government institutions and defence industry – to introduce defence industry (prime contractors and SMEs from different EU states) with long-term plans and priorities in capability development.

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This measure, at the early stages of a project, could be very useful especially if proper SMEs for the prime contractors as well as for MODs are identified early enough in the process. If this measure could be successfully implemented it would be an opportunity for SMEs as well as a good chance for the prime contractors and MODs to establish good working relations as well as developing a better understanding between them in order to more successfully complete projects with greater productivity, which would be a win-win for all stakeholders.

More precisely:✓ This Older Brother Company can be either a big defence group or another

SME, specialized in long term support;✓ During the preparation of the project, instead of considering only the

integration of the SME’s solution in the system design (as happens today), the Older Brother company will take into consideration the transfer of the maintenance and support for the long run;

✓ This mechanism shall be a formal requirement similar to Offsets/ToT conditions (Malaysia, KSA, India…) where the recipient is determined before launching the project. It might be included for instance in European Defence Fund terms and conditions.

This should be more efficient and effective than having on one side some contracts fostering innovation by SMEs and on the other side some contracts for Development and In-Service support by big defence groups and no bridge, no link between them

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Ecosystem Framework

SMEs are the backbone of Europe’s economy and are therefore of strategic impor-tance. SMEs represent about 99% of Europe’s businesses and create more than two thirds of employment in the private sector. Key figures show that SMEs are key enablers of innovation and growth: for each euro of added value, 58 cents can be attributed to SMEs.

SMEs have gradually increased their involvement in the European Defence Technological and Industrial Base (EDTIB), and nowadays play a central role in the complex defence supply chains in Europe. SME’s ability to respond promptly to changing military needs, as well as their ability to conduct significant research, technology and innovation activities, is recognised by both Member States and Prime Contractors.

The defence sector market and its supply chain distinguishes itself from the usual business market for several reasons: goods are often unique, defence activities are sensitive and subject to specific national rules for handling classified infor-mation and export control, security of information is absolutely essential and procurement is mainly carried out by tendering to Member States’ Ministries of Defence as the single national clients in defence procurement.

Tier 1 contractors

Specialised systems producers, for example in electronics, and producers of complete sub-systems or major components are often subcontractor directors to the prime contractors. Often, these are also risk-sharing partners. Examples of such companies are Rolls Royce (UK), Groupe Safran (France), MTU (Germany) in engines, and Indra (Spain) in electronics.

Tier 2 contractors

These contractors produce components and supply services: electrical & elec-tronic equipment, mechanical engineering, metalworking, casts & moulds, etc., along with a variety of services. They are usually SME or subsidiaries of the major defence producers (prime contractors and subcontractors). The Tier 2 companies often produce dual-use goods or services. They are not always listed as defence producers since they operate on the margin of the defence sector.

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Tier 3 contractors

These are commodity suppliers and general service suppliers, as well as capa-city contractors. This level also includes all providers of general economic infrastructure services (transport network and services, communications, exter-nalized training, etc.). At this level of the supply chain one finds a large number of SME as well as subsidiaries of major defence producers (prime contractors and sub-contractors), which supply dual-use products to prime contractors or subcontractors. In the statistics of the EU defence industry or in company lists of the defence sector, these companies are usually not listed since they operate mainly at the margin of the defence sector and often produce non-defence goods alongside defence ones.

NDIAs and defence-related clusters can play an important role in the supply chain process. Among other works, they provide contacts to industry, privile-ged access to information on the defence supply chain system and facilitate the development of SMEs within a competitive supply chain. As mentioned above, they offer different services, both general and specific on defence procurement, defence supply chain, access to finance and support to innovation.

The defence market offers great opportunities for both civil and defence SMEs. This market is heavily regulated and supervised and is structured around large ordering customers (both public and private). In this context, it appears crucial to identify the code of success as described in the enablers to create an ecosys-tem framework.

Picture: Ecosystem framework for SME / Civilian companies to succeed with defence

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Recommendations

The key issues in strengthening collaboration between Member States and joint pooling and sharing between civilian and military in a viable ecosystem are:

✓ Facilitating easier export control and regulation;✓ A clear statement on IPR and how to create trust between the parties involved;✓ Utilization of critical competences and expanding the customer base by

opening up markets between civilian and defence industry;✓ Giving access to knowledge by sharing data and development roadmaps

faster and more effectively to develop products and services cheaper;✓ Creating working models for SME involvement total lifecycle management.

Below a summary of the recommendations described in the document outlining what needs to be done to address these areas and to ensure that there is a more readily accessible ecosystem for civilian and defence industry collaboration.

The Export Control Authority in the Member States should strengthen their support to SMEs. The relationship of Industry with Ministries within the appli-cation process is up to a certain degree bound by the government political will, sometimes with unpredictable outcomes. This can have a direct impact on the costs for SME that may have gone through the whole sales circle to not be allowed to deliver to the end costumer.

Already established ways to support Industry and SME are for example Foreign Military Sales and Government to Government Sales. These vehicles give govern-ment the opportunity to support specific companies and products and could be considered also in the EU.

EU should consider issuing a list of non EU Member States that are eligible for export, going beyond the nations that are under embargo, setting common approach to its entire MS. Currently different EU MS act differently and some do export to certain nations, whereas others are more restrictive.

In cooperative programmes, different products generally come from different industries based in different Member States. The process would be easier if the export license could be coordinated, even when production is performed in several countries. In cooperative programmes, different products generally come from different industries based in different Member States. The process would be easier if the export license could be coordinated, even when production is done in several countries.

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Create a marketplace and rating system for SMEs interested in defence and defences OEMs through government and industry jointly developing a web based database of SMEs.

Establish European IP support services for SMEs through awareness initiatives, provision of IPR consulting services and providing support to SMEs for effective contracting with big industry.

Harmonise European regulatory framework for IPR through driving through a unitary patent system that spans the EU.

In opening up markets, there needs to be a systematic exploration of the poten-tial of combining civilian and military capabilities, as there is much overlap in sectors such as border control, maritime safety and security, cyber security, energy security and environmental protection looking for dual use synergies. We need to ensure that money is put to best use and not be spent at purely a single nation level. As an example through collaborative programmes across nations and ensuring that capabilities needs are fulfilled through most efficient use of European nations defence funding. We need to improve civilian and defence industry co-operation in the fields of compatible / interoperable solutions and products (e.g. intelligence / C4 systems, cyber defence, site protection), through sharing of solutions to the common threats and looking to dual purpose such solutions.

In sharing roadmaps, COTS could potentially drive innovation: for example in navigation, positioning and communication. The proposed action requires domain specific demo projects, in particular regarding how to solve military spe-cific security requirements based on a COTS platform. There are also structural efforts such as the formation of an incubator. For some technologies, military applications are natural first adopters, but civilian applications may follow, hence motivating civilian R&T investment and enabling lower cost supply for military use in the future. Specifically the proposed action focuses on identifying civilian stakeholder and building joint communities. In the creation or securing defence specific suppliers, there are many candidate areas for this tool, including major military-specific R&T efforts on specific topics.

Our proposal, however, is for a relatively small and industrially oriented pilot to explore and address the policy, legal etc. issues associated with a multinational setting. Technology foresight with early identification of emerging and key ena-bling defence technologies is for coordinating and enhancing existing European efforts to identify and early stage technologies with potential for defence. This would be delivered though establishing a capacity to synthesise existing foresight

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analysis and priorities coordinated investment. Although many European defence suppliers have structured risk management systems in place for technology dependences, there are very few examples of sharing knowledge and sharing good practice between defence suppliers.

Hence, we propose an initiative to pilot and establish a joint monitoring framework though creating the right behaviours and incentivizing trust and information sharing. The EU-US market intelligence working group initiative would establish a joint working group designed to exchange good practice, share information on supply and demand of raw materials and standard components, and improve forecasting capabilities. The proposed action would create stronger collaboration in terms of exchange of models, exchange of data and joint experimentation for validation and data generation.

It is difficult for an innovative SME to commit itself to deliver and support the same equipment for 40 years and it is difficult for a big defence group to integrate a solution without having secured all the commitment ensuring the customer satisfaction all along the 40-year life cycle. Thus, the first approach is to encourage SMEs to team together and to develop partnerships covering all of the life cycle. In that perspective, the idea is to set up a network gathering SMEs, not only focused on R&T in a given technology field (there are already many networks of this kind), but a set of SMEs each of them covering part of the life cycle : some focused on innovation, others development, and others on In-Service Support. This would help SMEs to get on board some defence projects offering an end-to-end solution, relying on a multi-SME partnership. This network might be organised, maintained and sponsored by EDA. Even more innovatively, we recommend identifying, at the earliest stage of the project, the Older Brother Company to produce & support the equipment during all the life cycle.

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Annex 1: 12 Disruptive Technologies

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Committee 5Which role does your committee foresee for the EU in defining the procurement strategies for European military R&Dand other capability programs?What legal & institutional links arein place between national andinternational programmes to ensurea coherent, collaborative picture (OCCAR, EDA etc)?” Pilots: Ron NULKES , Co-Pilots: Reinhard MARAK


Bruno MILARD Gerhard RAUNIAK Martin SOEEGAARD (Secretary)Stein Havard BERGESTAD Balz Gregor BUETIKOFER Per SAMUELSSON (Chairman)Maria Jesus DURAN Tadija LUCIC Aleksandra ROTNICKA Gerlof DE WILDE Luca Vincenzo Maria SALAMONE

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Abstract

This year’s SERA 30 has the overall theme "Europe first!?" – How to strengthen the European Armaments, Security and Defence Co-operation? Qué sera?”.Within this scope the committee set out to investigate the role for the EU in defi-ning the procurement strategies for European military R&D and other capability programs? Furthermore what legal and institutional links are in place between national and international programmes to ensure a coherent, collaborative pic-ture i.e. OCCAR, EDA etc.?

The main conclusions are that EU to some extent already has cooperation between the member states, but not yet rooted within a real EU framework governance-wise and mainly as a “coalition of the willing”. Although EU has ini-tiated several programs and bodies to oversee mainly R&D areas, the EU has to do more if EU wants become the focal point on defining procurement strategies and trim the defence procurement policies of the Member States.The current legal and policy foundation within the defence area is not yet fully capable of handling the future move towards deeper integration and implemen-tation of the notion of strategic autonomy and would therefore need adjustments and ratification and also delicate lobbying towards the Member States when it comes to discussions on sovereignty and local defence industry.

With the implementation of European Defence Agency and European Defence Fund EU has set a course towards more integration and has clearly ambitions within the defence area, but there is still some way to go before we see the high ambition scenario as set out in the roll-out documents from the EDF, where there is a very high degree of harmonization of national procedures and common procurement.

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Different member states and coalitions of member states procure in different ways. Since the European Security and Defence Policy (ESDP) were introduced and the EU began defence capability planning, there has been a focus on avoiding unnecessary duplication of defence

capabilities. However it has always been related to common defence capability planning and not development(1). Yet at present there are some trends that may contribute to enlarging the scope to also include more common development and more committed cooperation. The Permanent Structured Cooperation together with the Military Planning and Conduct Capability, the European Defence Fund and the Coordinated Annual Review on Defence may become game changers. The question is how these arrangements could improve the situation for European defence industry.

The defence budgets are under increasing pressure and in addition, more sophis-ticated and expensive military equipment is leading to higher procurement costs and increased necessity for training and exercise(2). The western national defence industries, the main pillar for defence capability development, are also gradually affected as the national market is no longer sufficient for the national defence industry.

The defence industry in the European countries plays a major role regarding developing military capabilities. A high technology level and effective assets attained through long term R&D investments has brought EU countries superiority in military capabilities development. However the cost of defence equipment units has simultaneously been raised together with operational costs, resulting in significantly reduced the overall military capabilities in the European countries(3). The challenges for the defence industry are espe-cially severe since they operate in a much protected market, as the larger EU countries procure more than 80% of their material from their own national industries.

The EU states may face several potential risks. They may lose their technological superiority because R&D activities are also reduced, and finally the secure supply

(1) Sven Biscop, “The Summit of Our Ambition? European Defence between Brussels and Wales”, EGEMONT Security Policy Brief, No. 55, March, 2014, p. 2, http://aei.pitt.edu/63593/1/SPB55-Summit-of-our-Ambition1.pdf

(2) Claudia Major and Christian Mölling, “The Framework Nations Concept”, Stiftung Wissenshaft und Politik, SWP Comments 52, December 2014, http://www.swp-berlin.org/fileadmin/contents/products/comments/2014C52_mjr_mlg.pdf

(3) Christian Mölling, “Europe without Defence”, Stiftung Wissenshaft und Politik, SWP Comments 38, November 2011, https://portals.ndc.nato.int/AP/SP/C/C8bR-Europe%20without%20Defence_Christian%20Molling.pdf

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of defence capabilities may be impeded as the industry may lose its industrial capacity(4).

The EU has, launched several initiatives(5) to secure its supply and maintaining its technology edge within Europe. Among others, an initiative to facilitate a common military market was introduced, but it did not work.

The defence industry is currently the only area where nations may place contracts directly with their national industries without competition. However, a more competitive defence industry is crucial and one effective approach is to create a common market and let it work. This will also enhance the industry to be more competitive regarding third parties.

Member state existing mechanisms and procurement strategies

The countries in Europe have developed strategies to involve and secure their defence industry as in their developing of military capabilities. These strategies are different as the countries vary in size, industrial capability and national ambitions. The strategies have to balance being able to support the national home marked and be a competitive international actor.

We will describe these strategies, for smaller countries, medium countries and larges countries, which procure most from their own industry.

Describing the strategies from medium countries, we looked into the defence industry strategies smaller, medium and larger European countries and used examples from the Czech Republic, Finland, Norway, Spain and United Kingdom. The Norwegian defence industrial policy is outlined in a government white paper published in October 2015(6). It underlines that in general all Norwegian procurements shall be based on principles of competition as long as national security issues does not requires other procurement strategies. The paper des-cribes national defence acquisitions and technological areas where competitive national defence industry is important due to special national factors as climate, topography and geographical location.

(4) Marc R. DeVore, “Producing European armaments; Policymaking preferences and processes”, School of Internatinal Relationas, University of St. Andrews, UK, 2014, http://cac.sagepub.com/content/early/2014/03/20/0010836714525052

(5) “More sophisticated and expensive military equipment leads to higher procurement costs and increased necessity for training and exercise”, European Commission, Brussels, 24 June 2014, http://europa.eu/rapid/press-release_IP-14-718_en.htm

(6) St. meld. Nr 9 (2015-2016) Nasjonal forsvarsindustriell strategi

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The Finnish defence industrial strategy was presented in a white paper(7) already in 2007, and is later updated in in white paper in 2016(8). Here we find similar approach as in the Norwegian defence industrial policy. To secure national security and the home defence, industry in some important capability and technological niche areas is given priority.

To develop products and capabilities to national security needs the Norwegian policy put great emphasis in a triangular cooperation between The Armed Forces, the defence industry and the Norwegian Defence Research Establishment (FFI) is established. Many smaller countries use this model, as it is well suited where there is limited opportunity to duplicate expertise and create competition. In the Finnish strategy also improvement of the cooperation between the research, the Armed Forces and the industry are emphasised.

Both countries address military industrial collaboration, within NATO, EU, The Northern countries and bilateral cooperation.

Strategic partnership creates stability through long term relations, common requirements and goals, exchange of information and economic benefits and burden sharing. The common industrial development and production gives also higher military readiness by common logistic supply and exchange of personnel and material.

Strategic partnership in many cases allows smaller countries to develop expensive and sophisticated products and to get access to the limited and closed defence market.

In the following examples the paper describes different defence strategies and how different MS defines them.

The defence industrial strategy of the Czech Republic is described in a strategy and doctrine document(9) published in April 2017.

In all countries, defence procurements are undertaken by the government with one major goal; national security. In today's international system, national security often has an explicit economic component, such as protecting or stimulating the defence-industrial base. However, in many parts of the world, national security is seen as synonymous over time with industrial strength and national technological

(7) Defence and Security industrial strategy(8) Securing the Finnish Defence Technological and Industrial Base(9) Czech MOD Strategy and doctrine

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capability. Procurement strategy is a part of an effort to enhance the overall resi-lience against the negative impacts of the unstable security environment and to support the ability of the whole society to withstand them.

In response to the deteriorating security environment, the Czech government has begun to increase defence funding and to invest more in building the capabilities.

The Czech Republic's Defence Strategy states that the Czech Republic ensures its defence primarily within the framework of NATO’s collective defence; it does not free its Armed Forces from the primary responsibility of defending its own national territory.

The common defence capabilities are developed in the multinational framework, within the NATO and EU frameworks, particularly if their acquisition and ope-ration falls outside the Czech Republic’s resource and technology capabilities, including the capabilities in the cyber domain.

As one of the pillars of the national security infrastructure, the Czech defence industry will receive support in order to ensure the highest possible degree of security of supply for military purpose, procurement and maintenance of crucial capabilities for the Czech Armed Forces. It especially means the preservation of specific military and otherwise irreplaceable capabilities in industrial production, research and development, particularly through state enterprises. In this regard, the Government ensures its continued development in attainable areas critical to Czech Armed forces.

The defence industry and armaments policy is set out in detail in the Armaments and Defence Industry Development Support Strategy(10). The Strategy addresses the armaments and the support of the development of the Czech defence indus-try development during peacetime. The need of the armed forces in state of emergency or war is not part of the Strategy, and the peacetime capabilities are the foundation of wartime armed forces. The government and Ministry should provide an adequate response to changes in the security environment based on this principle. The In the case of the Czech Republic, the procurement strategy also has to address the consequences of the long-term under- financing of the Czech Republic’s defence budget, especially for the strategic armaments projects or systems that are considered as the backbone of the military.

(10) Armaments and Defence Industry Development Support Strategy

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The Ministry observes the rules of transparency and fairness, equal treatment, and the ban on discrimination while procuring military materiel and services, whatever the means of acquisition .While procuring property and services the Ministry consistently applies the principle of a competent treasurer’s approach (effectiveness, efficiency and economy).

However, while providing for the strategic armaments projects, the security of supply and the sovereignty of the Czech Republic when choosing of the supplier is seen through the life-cycle of the capability or system that is being procured. The security of supply is seen as ensured only if the Czech defence industry is involved in the supply of military materiel and services, particularly in ensuring the lifecycle of military materiel within the Czech Republic itself. In a range of justifiable cases and, in order to ensure security of supply and the protection of essential state security interests of the state, the Ministry requires the process of supplying military materiel and services to be carried out via state enterprises which have been appointed by the Ministry.

During the third SERA week the Spanish Defence industry strategy was presented and Spain has 27 areas where it is strategic important to safeguard technology and capability. The areas are classified. In addition the Spanish defence indus-try enters the Spanish market by collaborating on research and development projects. This gives companies an opportunity to design, develop and market products within the country.

United Kingdom issued the paper National Security Through Technology, Technology, Equipment, and support for the UK Defence and Security(11). The paper replaces the Defence Industrial Strategy of 2005. A significant change is that areas, which are protected, are not listed, but the paper focuses on the operational advantages and freedom of action to protect. Further the paper emphasises best value for money and how to use competition and domestic and global market and always securing the technological advantage for national security.

The UK paper favour bilateral collaboration and continue to work multilaterally through NATO and EU where it is a clear benefit for the UK. Such programs provide important opportunities for UK based industry, which is encouraged to partici-pate. Although the UK defence industry cover the whole spectre of capabilities and needs for the UK armed forces the emphasised focus on competition, best value for money and international collaboration is clearly stated in the paper.

(11) National Security Through Technology, Technology, Equipment, and support for the UK Defence and Security

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Germany and France is the leading framework nations within EU. They have recently issued defence policy papers, Germany a white paper in July 2016 and France a strategic review in October 2017.

Both nations acknowledge a development of a common European defence indus-trial base (DTIB) to solve the challenge with limited resources and the need for more military cooperation. They recognize the need to move towards shared sovereignty and mutual interdependence, away from independence and national sovereignty, however both have a few certain areas where they want to maintain sovereignty and maintain a technological national capability. These areas give room for the nations to protect their core interests, incl. industry, as they at the same time indicate willingness to cooperate in many areas.

As a conclusion the European countries have developed national industrial strate-gies to secure their national defence capability. Smaller and medium countries are not able to fully cover their national needs with their industrial base, but they develop technology and capability in certain niche areas important for their special national factors. These nations try to facilitate their defence industry to enter the international defence marked by bilateral and multilateral collabora-tion and development projects within their niche areas. Larger nations protect their industry to secure the national security and enter often into international cooperation as a framework nation. This gives companies from smaller nations an opportunity to design, develop and market products within the framework nation concept. However lately the larger nations have indicated willingness to cooperate in many areas and with the new initiatives from EU this could be the start of a more consolidated and common European DTIB.

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European union defence initiatives

In order to understand the EU defence initiatives it is necessary to have a clear, global picture of what EU has been establishing, coordinating and setting in order to foster and promote EU Defence Activities.

The High Representative of the Union for foreign and security policy / Vice-President of the European Commission Federica Mogherini launched in June 2016 the “European Union Global Strategy (EUGS) for the European Union’s Foreign and Security Policy”, with the aim to relaunch the process of European integration after the British referendum and setting a new European “Level of Ambition” (LoA) as well.

Within the EU and in support of its LoA in security and defence, common defence capability priorities are defined notably through the “Capability Development Plan” (CDP), to be revised periodically, also taking into account the findings under the “Coordinated Annual Review on Defence” (CARD).

Preparations for a “Permanent Structured Cooperation” (PESCO) on defence among MS are moving forward with the emission of lists of multiple project “waves”, indicating a leading Nation for each PESCO project. The Global Strategy’s push for a European Union of security and defence, in complementarity with NATO and other partners, anticipated the debate on military burden-sharing across the Atlantic. Moreover the “NATO-EU Joint Declaration” (and “Joint Declaration Implementation”) was clear steps in the direction of a stronger and more effective cooperation between the two.

Following the EUGS, a “European Defence Action Plan” (EDAP) was launched, including the “European Defence Fund” (EDF), which started on 7 June 2017 in order to optimize the MS resources in the Defence sector.

The reasons from which the EUGS originates are to be found in the age of changes and deep existential crisis experienced both inside and outside the EU. The long period of peace, prosperity and democracy that the European project has been able to guarantee from the post-war period to the present day, has been placed under threat mainly due to:

✓ The crisis in Ukraine and Crimea in the east,✓ Terrorism and violence throughout North Africa, the Middle East and

Europe itself,✓ Climate changes that generate destruction, and✓ Severe demographic challenges in parts of Africa.

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The EU therefore found itself in the need to face these difficulties, pursuing its common interests and guided by its own principles and priorities, to guarantee peace and security to its citizens in their territories.

The EUGS outlines the new role to which the EU must focus on being a global security provider, i.e. it defines a Union with strategic, technological-industrial autonomy and operational intervention capacity. This is to be in synergy with its partners, first and foremost NATO as a reference for collective defence and capable of exercising "strategic influence" in the international scenario to protect its own interests and those of the MS. The EUGS has defined the strategic interests and the principles of the EU to enable it to face the emerging challenges of a new global world, giving the Union a common and shared direction of movement. The ambition is to make Europe stronger, an actor even more united and influential on the world stage, which takes care of the safety of its citizens, preserving their interests and keeping their values high.

The EUGS defines the three priorities to which the EU must contribute:

✓ Respond to external crises and conflicts,✓ Strengthen partnerships, and✓ Protect the Union and its citizens.

It aims to translate vision into action and in this sense the Foreign Ministers have defined the main strategic priorities for implementing the EUGS, which are:

✓ Security and Defence,✓ Building resilience and taking an Integrated Approach to Conflict and Crisis,✓ Updating existing strategies and preparing new ones, and✓ Enhancing Public Diplomacy.

In implementation of the indications received from the European Council, the HR has led the work aimed at strengthening the Common Security and Defence Policy, along three pillars:

✓ The Implementation Plan on Security and Defence (IPSD),✓ The European Defence Action Plan (EDAP), and ✓ The Common set of proposal for the implementation of the NATO-EU Joint

Declaration.

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The IPSD, which received the approval of the MS with the Council Conclusions (CC) of November 2016 and December 2016, defines the EUGS implementation strategy and conceptually illustrates the new LoA, according to which the EU must strive for the role of Global Security Provider. EU needs to acquire strategic autonomy both technological and industrial and capacity for operational inter-vention, while maintaining NATO as a reference for collective defence in order to protect own strategic interests and that of the MS.

The CDP is the primary tool for the development of the military capabilities of the European Union, through which the EDA identifies the capability gaps to be developed and the subsequent priorities. CDP can be divided into 4 "Strands", in which the inputs provided by MS are developed. The structural reference base for each Strand is the same and consists of the GMTL (Generic Military Tasks List). This is a list of 103 military capabilities hierarchically articulated, on 6 capacitive macro-areas: Command, Inform, Engage, Protect, Deploy and Sustain. The Strands mainly contains the following elemebts:

✓ Strand A: military capabilities necessary for the EU in the short term,✓ Strand B: Perspectives on the military capabilities necessary for the EU in

the long term (+2035),✓ Strand C: potential for capacitive development in cooperation between MS

in the medium term, and✓ Strand D: Lessons Learned from theatres able to address capacitive deve-

lopment in the short term.

Based on the findings in the 4 individual Strands Priority Actions (PA) are ela-borated as guidelines for the process of capacitive development of the EU. In 2017 a new process of revision of the CDP began, which will lead to the elabo-ration and approval of the new PAs by autumn 2018. This process is structured on 3 phases:

✓ Phase 1: analysis of the results obtained in each Strand and first draft of an objective and all-encompassing ranking of the 103 tasks of the GMTL;

✓ Phase 2: involvement of the MS for the possible modification of the afore-mentioned ranking, and

✓ Phase 3: transformation / association of priority tasks in PA proposals.

The Implementation Plan on Security and Defence (IPSD) introduces the pro-posal to implement a Coordinated Annual Review on Defence (CARD), in order to improve the exchange of information, planning and cooperation.

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In summary, the CARD is similar to the NATO biennial Capability Review car-ried out to examine the capacitive and financial plans of the allies, in view of the commitments undertaken with the Capability Targets. It is inserted in the context of the CDP, constituting a step of verification of the results obtained by the individual countries. CARD is based on a concept paper drafted by the EDA and revised jointly with the Member States.

The overall basic principles for CARD are:

✓ Every two years Ministers provide the high-level guidelines and interim updates on an annual basis at Policy or Capability Director level and present the bi-annual CARD report to the EDA Steering Board,

✓ Countries take voluntary commitments in terms of capacity development, gradually deepening these commitments up to more binding forms, concer-ning long-term programs and projects,

✓ EDA provides the secretariat, facilitating the sharing of information and updating the political level, and

✓ All the actors, in particular EUMC and EUMS, are involved, also in the context of bilateral dialogues with the MS, in order to assure consistency and synchronization with the NATO Defence Planning Process (NDPP).

The information collected and shared within CARD should allow the identification of progress, while at the same time directing future development. In this sense it is estimated that CARD will collect information regarding:

✓ Defence expenditure and related priorities,✓ Research,✓ Participation in cooperation programs,✓ Emerging national capacitive gaps,✓ Long-term strategies, and✓ The national policy.

In particular, the adoption of a two-year cycle at the political level, with interim annual updates at the Policy / Capability Director level, would allow CARD to be synchronized with the Capability Review within the NDPP.

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Another powerful instrument used by EU is the European Defence Fund (EDF). It comprises two sections, commonly referred to as “windows”:

✓ Research Window: The "research" element of the Fund is already yielding results. For the first time starting in 2017 the EU assigns grants for collaborative research into innovative technologies and defence products fully and directly financed by the EU budget. The Preparatory Action on Defence Research (PADR) which articulate working programs per fiscal year i.e. technological demonstrators, advanced soldier systems etc.

Projects eligible for EU funding are to focus on priority areas previously agreed by MS and may include electronics, metamaterials, encrypted software or robotics. The signing of the first grant agreements took place in the end of 2017, other 4 grants followed in the first 4 months of 2018. Starting from 2020-2021 the Commission will propose a specific EU research program in the field of defence, called the European Defence Research Program (EDRP). This has an estimated annual budget of EUR 500 million, which will make the EU one of the largest investors in research in defence sector in Europe.

✓ Capability Window (Development):The Fund will introduce incentives for MS to cooperate in joint development and acquisition of defence technologies and equipment through co-finan-cing from the EU budget and with practical support from the Commission. Only collaborative projects will be eligible for funding and part of the total allocation will be destined to projects involving cross-border participation of SMEs. The co-financing budget offered by the EU will be EUR 500 million for 2019 and 2020 and in the framework of a specific defence industrial development program proposed today. A larger program will be prepared for 2021 and beyond, with an estimated annual budget of EUR 1 billion. The program are to stimulate national funding with an expected multiplier effect of five and could therefore generate overall investments in the development of defence capabilities with EUR 5 billion a year after 2020.

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State and EU legal and institutional links

When it comes to legal issues, it is hard to convince the countries to give away their authority in defence area. The key argument is the strong link between internal/external security and the sovereignty in defence.

Defence and security is recognised as crucial to ensure the sovereignty of the states and a great share of it lies in defence industry hands as a provider of equipment and its maintenance. Therefore the question of MS sovereignty in decision making on how to use the armed forces, the accessibility to its own equipment (no limits in operational use) and industrial sovereignty (ex. IPR) is very challenging. This is also recognised in the unique features of defence market and the strong links between defence industry (commercial societies) and governance of the states. There will always be a conflict between freedom of IPR disposal and states sove-reignty and new instruments, enabling Member States to keep control over the foreign entity to which IPR/technology has been transferred, is needed as the defence industry cannot be subject to the same rules as all the other business. That is why new instruments enabling Member States to keep control over the foreign entity to which IPR/technology has been transferred is needed.

European institutions and mechanisms (including the law system) are not well prepared to act in a defence environment which has many features making it different it from a purely economic rule. For example there is no efficient defence market (defence industry) without some level of state protectionism which on the other hand is forbidden by the EU (as a general rule). EC is beginning to notice these differences, and new regulations (like EDF) are aiming to introduce some level of protectionism into defence market. However the Commission acts as if Europe was one state. The problem is that defence is excluded from the area of competences of EU according to art. 5.2 TEU(12). Commission is trying to act in the scope of common security, but those two areas do not cover each other. Another problem is competitiveness on the defence market. In general com-petitiveness is promoted within the EU(13). But competitiveness is not always

(12) According to The Treaty On The Functionning of the European Union defence policy is neither in the area of exclusive nor shared EU competences. Art. 5.2 TEU „2. Under the principle of conferral, the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.”

(13) Treaty on European Union preambule „RESOLVED to implement a common foreign and secu-rity policy including the progressive framing of a common defence policy, which might lead to a common defence in accordance with the provisions of Article 42, thereby reinforcing the European identity and its independence in order to promote peace, security and progress in Europe and in the world”

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profitable for the defence market. Moreover, most of the European countries consider their defence industry as a part of their defence policy. This can become an obstacle on the way to create a more common defence market, as MS will use art. 346.1b TFEU to protect their essential security interests, with the following consequences:

✓ The capacities of defence industries within Europe differ a lot and there is no equality which is a prerequisite condition to ensure a real competitive-ness. From the strategic point of view the regular collocation of industrial capacities is also desirable, at least for a reason of security of supply.

✓ Compared to the US, European armed forces have too many military capa-bilities. In 2016 EU Member States had 20 different types of fighter aircrafts (compared to six in the US), 29 frigate types (in the US four) and 20 types of armoured combat vehicles (in the US two). So there are a lot of products which is a feature of a competitive market, but while taking into conside-ration each separate state it cannot be overlooked that each state protects its own interests.

This leads to a question on what kind of competitiveness(14) is EU searching for? Internal or external? In some way initiatives like EDiDP or EDF can lead to a limited internal competitiveness in Europe. On the other hand it should strengthen the position of Europe in the world market. This is a goal of the Commission but not necessarily of single MS.

(14) Art. 3.3 TEU „3. The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.It shall combat social exclusion and discrimination, and shall promote social justice and pro-tection, equality between women and men, solidarity between generations and protection of the rights of the child.It shall promote economic, social and territorial cohesion, and solidarity among Member States.It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe's cultural heritage is safeguarded and enhanced.”

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As for the institutions it may be practical to have one executive agency for the entire defence cooperation within European Union, as like NATO. EDA could potentially be this kind of agency(15). EDA is subordinate to the High Representative of the European Union for Foreign Affairs and Security Policy who is responsible, among others, for the defence area. This should not be area governed by EC although Commission has some ambitions in this field. Of course the EC manages the finances, monitors and controls its use but it should not manage the programs just because it is within its competences according to the treaties.

EDA has not been very successful until now and it is questionable if it is ready to act as an executive agency for EU defence. Deepened EU defence cooperation through PESCO was launched at the end of 2017 but time will only show if it helps to achieve something essential.

Keeping in mind that European Union itself has no agility to act in case of aggression on the territory of the Member State according to art. 42.7 TEU(16). In the further perspective it might become fundamental to articulate an upper organisation in the shape of “European Major Staff” with a competition to asses capability requirements and conduct joint force actions, financed on an EU budget and acting on the basis of programmes established by volunteering MS (on the same or similar principles as OCCAR).

To sum up, there are possible ways to strengthen European input in common security and defence, but all of them require changes of the treaties. It can be done by small steps only as defence is seen to be a very fragile area, in which one step too far or too quickly may cause the withdrawal of the MS if they assess that their sovereignty is endangered.

(15) According to Baudouin Heuninckx in „The Law of Collaborative Defence Procurement in the European Union” Cambridge University Press 2017, p. 96 „The EDA has to pursue close working relations with OCCAR and with institutional elements established under the EDIR-FA, with a view to incorporating tchem or assimilating their principles and practises in due course, even though, initially, the EDA prepares programmes to be manager by OCCAR. The EDA, which has already taken over most of the tasks of WEAG, is therefore clearly seen as the future single European organisationin its field of activities.”

(16) Art. 42„7. If a Member State is a victim of armed aggression on its territory, the other Member States shall have towards it an obligation of aid and assistance by all the means in their power, in accorance with Article 51 of the United nations Charter. This shall not prejudice the specific characterof the security and defence policy of certain Member States.”

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EU ambition levels

Upon the launch of EDF(17) the EC has described different scenarios in the roll-out documents. These scenarios describe a low, medium and high ambition for cooperation on defence within the EU.

The aspects/elements we consider relevant for cooperation are:

✓ Ambition/ political will and declarations ✓ Legal aspects✓ Human factors/ cultural elements ✓ Timing ✓ Budgets ✓ Level of common capability planning and related activities such as certification ✓ Procedural aspects✓ Sovereignty issues / (loose of ) own control✓ Industrial aspects including IPR handling

Then specifically for (common) procurement as a derivative of the cooperation the EU roles that can be envisaged and related to in what way EU can support the procurement strategies are detailed. The hurdles foreseen and solutions to overcome those are also described.

The low ambition scenario case

Ambition/ political will and declarations

In this scenario there is a low ambition to international cooperation. Only in certain cases cooperation is recognized as a good option for achieving goals regarding capability development. National priorities do prevail and national agendas are the basis for action and initiatives.

(17) Commission publication on EDAP/EDF

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Legal aspects

National laws and regulations are in place and are the basis for Defence deve-lopments and procurement.

Human factors/ cultural elements

The culture within the Defence organization is inwards oriented and national thinking prevails. The national interest is taken as the first priority. There is no initiative for change or more international thinking. International cooperation is mainly seen as “disturbing” the national activities both in terms of losing control as well as delaying the national processes.

Timing

Timelines for activities or procurement is based upon national planning pro-cesses. Compromises are not accepted. Sharing of Defence planning data is not foreseen or done.

Budgets

Procurement is based upon national budgets and there is no spending from the EU budget. In specific cases of international cooperation national budgets are brought together within projects in specific organisations such as EDA (cat A/B projects processes)

Level of common capability planning and certification

Level of common planning and certification is low and only coincidentally applied in certain cases

Procedural aspects

Procedures are national and do not take into account elements that stimulate or facilitate cooperation

Sovereignty issues / (loose of) own control

Decisions are taken on national basis and sovereignty is perceived as very impor-tant for Defence action and decisions

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Industrial aspects including IPR handling

National industrial interests do influence decisions on Defence developments and procurements. There is no EU industrial strategy or vision on the industrial and technological base. Strategic autonomy is only applied on a national basis. IPR stays in the originators and Defence claims user rights.

The medium ambition scenario case


In this moderate scenario there is a political will to cooperate especially within the EU. Political declarations do exist but not always find clear implementation on national level. Cooperation is seen as necessary in certain fields. There is however no common agreed view on which areas are priorities.

Legal aspects

Laws and regulation developments are seen as needed. The Treaty of the EU allows the EDA to act in the Defence field. The EU commission influences defence processes through directives (on procurement etc.), Preparatory action and regulations (EDIDP) but only on the basis of acting in areas related to the research and defence industry.


More and more Defence cooperation is seen as needed but in practice people act nationally and still the negative aspects of cooperation do play a role in decision making. There is a movement towards an “EU thinking” on defence. The EU that protects is understood and accepted.

Timing

Timing and planning of capability development is more and more harmonized but still national planning is the basis for action. Different timelines of develop-ments and procurement still hampers the cooperation.

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Budgets

National budgets are brought together for cooperative projects (such as EDA cat A and B) and EU funding become available for R&T&D of defence systems. PADR and EDIDP are pilots for bigger EDF EU spending on Defence.

Level of common capability planning and certification

Attempts are made to harmonise defence capabilities. EDA works on the CDP as a basis for common capability development. Certifications are done nationally but cooperation in this field is piloted and promoted.

Procedural aspects

Different national procedures exist and do hamper cooperation. In specific cases procedures are harmonized. EDA and the European commission work on tools and common procedures for cooperation and procurement purposes


Defence is still seen as a sovereign area and decision are mainly taken on national basis. In specific areas it is understood that cooperation is needed and national control is given away to an agency or organization.


Industrial policies are national. There is a common understanding that European strategic autonomy needs a further definition in terms of industrial areas but the protectionism of national industries makes implementation difficult.

The high ambition scenario case


In this scenario there is a high ambition for international cooperation also wit-hin the EU. This high ambition is laid down in political declarations that have common agreed implementation plans that are fully accepted and followed up upon. Within the EU these political declarations are on the highest level of the EU Council and Councils of Ministers.

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Legal aspects

Laws and regulations on Defence action and procurement are national but fully take into account elements that support and facilitate international cooperation. Legal aspects do not hamper cooperation or common action/procurement. International law includes common agreed articles on Defence. The Treaty of the EU gives mandates to European Commission to act in the Defence domain, in accordance with the intergovernmental bodies EDA and EEAS mandates and activities. Common ownership of certain Defence equipment is possible, accep-ted and legally enabled.


The culture in Defence organisations allows and facilitates the high level of ambition on cooperation. International cooperation especially within the EU is seen and felt as a priority. People think “European” and cooperation is the “new normal”. There is a common agreed view that technological developments in many areas and defence system developments cannot be done any more on national scale. Common procurement is understood and constitutes a significant part of the total procurement activities.

Timing

Timing and planning is harmonized and compromises are seen as necessary to meet the high ambition. Common procurement activities are facilitated by planning, priority setting and review methods for which CARD and CDP are precursors.

Budgets

National Defence budgets are cumulated within international projects. Significant EU funding is available for (co-) funding and financing of Defence R&T&D and common procurement activities. The EIB supports certain Defence R&T&D activities and finances certain common procurement activities.

Level of common capability planning and certification Capability planning and certification is fully harmonized within EU and with certain third parties. The EDA CDP is a precursor for a fully and common agreed capability development planning that is aligned with the NATO processes thereto.

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Procedural aspects

National procedures are aligned in order to support and facilitate the high level of ambition on cooperation. Compromises are fully accepted. EDA and the European commission in full harmony developed a tool box for financial and cooperative models to facilitate common R&T&D and procurement including public private partnerships and leasing.


Sovereignty is applied for decision on Military action but processes such as R&T&D and procurement are not seen any more as sovereign. EU sovereignty has been accepted and interdependency is seen as necessary. It is accepted that on elements of the R&T&D and procurement process the national control must be given up in certain steps in exchange for a more common way of working. The European thinking is there and is stronger that national sovereignty in all aspects of Defence.


National industry policies are in accordance with a common agreed and imple-mented view on EU strategic autonomy. The notion of Strategic autonomy has been defined in terms of capabilities and industrial areas connected to those.Shared IPRs and open innovation are accepted: in certain fields information sharing is becoming more important than information protection.

In conclusion the description of the current situation shows that the EU defence cooperation is in the medium ambition scenario.

To move this situation further and achieve a higher ambition as understood by the political environment, it is clear that harmonization of national procedures and planning is needed to achieve more common development of defence capabilities.The European Commission needs to be empowered to act in the Defence arena. The EDA role, as intergovernmental agency who does harmonization, planning and review needs to be fully acknowledged in the European institutional setting in which EU funds are used for Defence through EDF in the next MFF.

Strategic autonomy on EU level needs a clear definition and implementation in terms of industrial capacities.

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Common procurement is a logical step in cooperation and needs facilitation by the tools developed by EDA and European Commission. These tools need consideration on ownership, life cycle management and applicability on the different kinds of capabilities. Models such as MRTT could play a precedential role in common procurement.

The role of the EU in common procurement is mainly facilitation and support. For certain capabilities however the EU could support other than national ownership by establishment of specific models or organisational elements (NSPA is owner of MRTT aircraft for example).

Conclusions – the recommended way forward

The committee set out to investigate the role for the EU in defining the procu-rement strategies for European military R&D and other capability programs? Furthermore what legal and institutional links are in place between national and international programmes to ensure a coherent, collaborative picture i.e. OCCAR, EDA etc.?

The paper has identified that the two of the three ambition levels investigated are currently in use to some extent in defining the strategies and institutional links. However it is also found that the levels evolve around the “coalition of the willing” and not as such an integrated part of EU defence DNA.

Being given an assumption that most of the Member States is currently on the medium level of ambition, the paper has identified that the only effective way to achieve an actual effective cooperation in defence (including defence acquisition) is to reach the high level.

In order to serve the high level of ambition a political will is needed and and a political body to govern the declarations and the common goals strategies.

In order to enhance focus on defence matters inside EU a High Representative for Defence (HRD) and a Council of Ministers of Defence (CMD) is proposed. A new EU Commission Directorate General on Defence, could execute the defined strategy by HRD and CMD.

The role of the Commission should be to ensure that the positions, interests and requirements of smaller nations are taken into account through governance on equal return on co-operation efforts and investments. This will create a more balanced and incentivised environment for both small and large member states.

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As for the timing, budgets, level of common capacity and certification, EU should profit from the already established European Defence Agency which needs to be provided with an adequate framework to be able to effectively meet the new challenges.

On the procedural level EDA should propose guidelines for harmonization of defence capability planning and acquisition processes to broaden common pro-curement. This has to be synchronized with NATO in order to be complementary and thereby avoiding unnecessary duplication.

The model of OCCAR should be considered as a benchmark for independent expertise, including the requirement harmonization, feasibility and affordability assessment. This model should also ensure that EU are able to conduct the inde-pendent review of the achievement of the milestones in the development of the EU funded capability programs, in order to be able to decide on the continued feasibility of the program.

Defence and security is recognised as crucial to ensure the sovereignty of the states and a great share of it lies in defence industry hands as a provider of equip-ment and its maintenance. The conflict between MS sovereignty and current legislations and policies deems that new instruments are needed as the defence market is a unique area.

When looking at the EU and its ability to define procurement strategies there is also a need to review the legal/law and policy body around the union as such but also in order to give different institutions inside the governing EU, MS or commercial societies the optimal framework. The paper has found that changes in law would foster a better climate for EU and other EU actors to operate in.

✓ The EU treaties have to be amended with the aim to legally authorize the EU to act in defence area.

✓ Defence societies should have their own, separate form and regulations, ensuring adequate state control especially in case of MS cooperation (each state should have an effective tool to ensure its security of supply or opera-tional accessibility independently of the other states’ – ex. “golden share” etc.). This might be achieved by adding an EU Directive on Commercial Code in the Defence Sector.

✓ For already existing multinational programmes, the exemption of the com-petition prerequisite could be established (besides the existing cooperative R&D). This would help to strengthen the position of existing programmes and avoid duplications within Europe and as the consequence improve competitiveness of European defence products in world market.

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✓ A new policy is to be established in order to incentivise harmonization of requirements by the member states and balance the need of industry and competitiveness in order to ensure best in-class innovation and products.

The steps proposed above might meet a strong resistance between politicians and society of the MS. This is connected to the traditions (ex. state exclusiveness on the defence area and strong reliance on own defence industry) and culture. For this reason all recommended steps should be made very carefully and simul-taneously with the education, promotion and a dialogue between EU and its citizens. By establishing an institute promoting a understanding of defence issues that also value feedback from public opinion could be helpful in this case. The risk is that a single false step or correct one timed wrongly may be understood as an attempt on MS sovereignty and may cause withdrawal of the MS, not only to the starting point of “low ambition level in cooperation” but in severe cases even to “state exit”.

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Bibliography

1. Treaty on European Union2. Treaty On The Functionning of the European Union3. Directive 2009/81/EC of the European Parliament and of the Council of 13

July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC

4. Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts Text with EEA relevance

5. Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC

6. Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC

7. Baudouin Heuninckx „The Law of Collaborative Defence Procurement in the European Union” Cambridge University Press 2017

8. EU law: treaties (attention: art. 346 TFEU), directives (23/2009, 24/2009, 25/2009, 81/2009, regulations (EDF)).

9. Council decision (CFSP) 2015/1835 - 12 Oct 2015 “ defining the statue, seat and operational rules for the EDA”

10. Draft general budget of the European Commission for the financial year 2017 - Working Document Part IV Pilot projects and preparatory actions European commission - com(2016)300 - June 2016

11. Proposal for a regulation of the European parliament and of the council esta-blishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovative capacity of the EU defence industry {SWD(2017) 228 final} – European commission - June 2017

12. Commission staff working document Ex-ante Evaluation Accompanying the document Proposal for a Regulation Of The European Parliament and of the Council - European Commission June 2017

13. Reflection paper on the EU Defence” European Commission Communication (2017) 315 7th June 2017.

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Committee 6State of play and focus on the future trends of European Defence (Armament) CooperationPilots: Jean-Charles BOULAT , Co-Pilots: Olivier GRAS


Eric WEISSENBÖCK (Chairman)Claus Lundholm ANDERSEN Priit SOOSAAR Jussi MATTILA Emmanuelle GOULARD Kim Eduard LIOE Margherita GAETANI Morten GJELLERUD Andreas ZEKORN OCCARFlorin CRISTINEL URECHE Israel LOZANO Neil TERRILL (Secretary)

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Executive summary

This report captures several issues and themes arising from committee discus-sions and analysis during the 30th Session pour les Responsables des Armements (SERA) course during March – June 2018. The SERA course brings together par-ticipants from across Europe with around 25 countries and 72 people involved to learn about, see in practice and discuss a wide range of European Defence Collaboration issues. This committee report has focussed on the theme “State of play and focus on the future trends of the European Defence (Armament) Cooperation” as a platform to analyse and consider many of the issues raised during the course. The theme is broad with further sub-areas suggested, however the committee has taken the top-level subject to give an open look across many issues faced and has narrowed its focus in the report and a few key topics and considerations.

The report discusses the current state of European armament cooperation, investigating a number of problems and potential areas to stimulate growth and collaboration. The analysis has exposed that these vary significantly depending on the viewpoint, for example across larger and smaller countries or industries. However, it is recognised that more successful collaboration across the whole of the European club needs to address all these needs, not just optimise for the larger players who lead the pack, nor the smaller players with more specific needs and support.

Several drivers and issues are considered in the subsequent sections, covering discussion areas that repeatedly arose during the SERA course, such as the Strategic Autonomy, geopolitical/geographic issues and financial/economic considerations. Within these contexts the report covers some of the background, analysis and potential developments, including some case studies for comparison, that the committee investigated.

The EU should be able to protect Europe, respond to external crises and assist in developing our partners’ security and defence capacities. For most of this century, this has been achieved in co-operation with other Western powers, notably across the Atlantic, but recently there have been growing concerns that this position cannot be guaranteed. The USA can, and does, operate without European involvement; the converse is not true.

European nations need to identify the challenges we face; the capabilities we consequently need; then identify targets for national investment in equipment, research, development, and training necessary to make more of our armed forces; work together for efficiency; and back it up with political drive and unity.

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The course and process of developing the report has been extremely useful for the participants in their understanding of a much wider set of issues than those addressed and summarised here. The report outlines some of the challenges that need to be addressed if recent developments such as Permanent Structured Co-operation (PESCO) are truly to be seen to be game-changers and deliver effective and enduring transformation. These are intended to stimulate further discussion in the SERA and European Defence Collaboration arena rather than being conclusive in themselves as there will be many other more detailed issues, constraints and interdependencies to be developed.

Background

The European Union (EU) has an obligation to protect and uphold the basic values and freedoms enjoyed by its citizens: freedom, security, prosperity, peace and the rule of law. However, the global political situation is becoming increa-singly tense, unclear and changing at an increasingly rapid rate. While Russia remains the most direct strategic threat to Europe, there is little risk of a direct military confrontation with NATO, yet recent years have shown that Russia is able and willing to act in Eastern Europe and using alternate forms of ‘warfare’ to undermine sovereign states. The explosive growth of China challenges the financial and technological dominance of the West; while not presenting a direct military threat to Europe, it is rapidly expanding its sphere of influence. Historic reliance on NATO has meant that the EU has been reluctant to build its own military structures (although the same is not true in reverse) with little appetite for decoupling transatlantic ties. Recently, relations with the US have become strained and there is an increasing desire to be able to act independently. This is potentially a landmark moment in the western alliance; the EU has, and uses, soft political power or influence but has, in the past, shown little political will for intervention, or the will to build the capability to act on its own militarily.

Europe is collectively the world’s 2nd largest military spender but is far from being the world’s 2nd largest military power, due to both collective and individual inefficiencies in defence spending, contributing in particular to duplication and a lack of interoperability. Europe suffers from non-deployable assets, a lack of training and problems related to hardware maintenance as well as slow procure-ment processes. This is all the more worrisome at a time when European armed forces are deployed in a multitude of theatres covering a wider spectrum than ever. There is no intent for a European army; even if there was, this could not be done quickly. Consequently, there is no ability to take full advantage of economies of scales and other benefits of cooperation, not the case for countries such as the US, Russia or China. In the EU, 84% of all equipment procurement took place at national levels in 2013 and Research and Development (R&D) investment has

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dropped from above the 20% benchmark in 2006 to 17.9% of total defence expen-diture in 2014 and just 8.6% spent on collaborative defence R&D. Over the last decade EU Member States have decreased defence spending by nearly 12% in real terms, but this has not been compensated by more European cooperation. The lack of cooperation between Member States in the field of defence and security is estimated to cost annually between EUR 25 billion and EUR 100 billion.(1)

Defence is inexorably linked to the wider European project and its many, diverse aspirations; it cannot be seen in isolation, particularly in terms of employment and national interests and cultures. When Prime Minister Theresa May triggered Article 50 of the Treaty of Lisbon in March 2017, new impetus was given to the consolidated European vision for defence and security co-operation, over-coming the long-standing (and over-debated) policies of a Southern Europe focus versus an eastern European one. At their first meeting after the Brexit referendum, the EU’s Heads of State and Government declared that “we need the EU not only to guarantee peace and democracy but also the security of our people.”

European Defence Co-Operation

European armament cooperation has become primarily focused on mitigating declining defence budgets and to fill, as much as possible, the most urgent capability gaps. In recent years, driven by the emergence of nationalistic and populist interests, EU defence cooperation has developed ‘more in the last 18 months than in the last decade’.

European Commission President Jean-Claude Juncker said “to guarantee our col-lective security, we must invest in the common development of technologies and equipment of strategic importance – from land, air, sea and space capabilities to cyber security. It requires more cooperation between Member States and greater pooling of national resources. If Europe does not take care of its own security, nobody else will do it for us. A strong, competitive and innovative defence indus-trial base is what will give us strategic autonomy”.(2) Whilst striving to achieve the long-standing NATO spending target of 2% of GDP (Gross Domestic Product), it might be that the focus now shifts to achieving European strategic autonomy.

(1) European Commission - Press release, European Defence Action Plan: Towards a European Defence Fund; Brussels, 30 November 2016 - http://europa.eu/rapid/press-release_IP-16-4088_en.htm

(2) 2016 State of the Union speech

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Most notably, on 13 November 2017, ministers from 23 member states(3) signed a joint notification on the Permanent Structured Cooperation (PESCO) offering the opportunity for EU member states to work more closely together in security and defence. This permanent framework for defence cooperation allows those member states willing and able to jointly develop defence capabilities, to invest in shared projects, or enhance the operational readiness and contribution of their armed forces.

Article 42 (6) of the Treaty of Lisbon, Permanent Structured Co-operation (PESCO) allows for any EU member state “whose military capabilities fulfil higher criteria and which have made more binding commitments to one another in this area with a view to the most demanding missions” to cooperate more closely than the EU 27 context permits.

Under the auspices of PESCO, a Coordinated Annual Review on Defence (CARD) institutionalises systematic exchange between member states under the European Defence Agency (EDA) contributing to identifying and closing gaps in member states’ military and civilian resources.

Additionally, the European Defence Industrial Development Programme (EDIDP) is a new European Commission (EC) programme that has been designed to focus on cross-border development of EU defence capabilities as part of the imple-mentation of the European Defence Action Plan (EDAP). It is the first time the European Union is planning to use EU money to develop defence capabilities.

That plan announced setting up the European Defence Fund (EDF) that would support collaborative research in innovative defence technologies, the com-petitiveness and innovation capacity of the Union's defence industry and the development of defence products jointly agreed by the Member States. The bud-get for that is 500 million € for 2019-2020. Countries and industries have already started to cooperate to find common new ideas what they can jointly execute.

The EDF will co-finance initiatives where at least three EU states join forces to develop and procure defence products and technologies. Once finalized, it will allow states and companies to operate more cost-effectively as benefits and fun-ding will be strongest with initiatives falling under cooperation within the PESCO framework, incentivising more efficient spending in joint defence capabilities,

(3) The member states who signed the original joint notification: Austria, Belgium, Bulgaria, Czech Republic, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Romania, Slovakia, Slovenia, Spain and Sweden. Everyone have now joined bar the UK and Malta

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strengthening European citizens‘ security and fostering a competitive and innovative industrial base. One question is yet to be resolved, what is meant by European? Is it bounded by the EC and, more specifically, are Norway and UK included? If included, what contribution towards the EDF are they required to make; if excluded, what impact does this have on security along Europe’s nor-thern frontier?

The EDF has 2 complementary ‘windows’ that differ in their legal structure and budget sourcing, the:

✓ The EDRP ‘research window’ funds collaborative research in innovative defence technologies, such as electronics, metamaterials, encrypted sof-tware and robotics. The Commission has already proposed EUR 25 million for research as part of the 2017 budget, growing to EUR 90 million each year

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until 2020 and thereafter providing a dedicated defence research programme with an estimated amount of EUR 500 million per year.

✓ The EDIDP ‘capability window’ acts as a financial tool allowing participating Member States to purchase certain assets together to reduce their costs. The capabilities would be agreed by the Member States, who would own the technology and equipment. For example, Member States may jointly invest in drone technology or bulk-buy helicopters to reduce costs. As an order of magnitude, this window should be able to mobilise about EUR 5 billion per year.

The EC also intends to strengthen the conditions for an open and competitive defence market in Europe to help companies operate across borders and help Member States get best value for money in their defence procurement, pushing ahead with 2 directives facilitating cross-border participation in defence pro-curement, supporting the development of industry standards, and promoting the contribution of sectoral policies to common security and defence priorities, such as EU space programmes.

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European defence industry

The global arms trade is significant, with over $1.69 Trillion spent on military equipment in 2016, or just over 2% of global GDP. The US and Russia are res-ponsible for over half of all weapons exports globally. China is the world’s third largest exporter of major weapons, having overtaken Germany, France and the UK in 2016. Exports of major conventional weapons have reached their highest volume since the end of the Cold War with over a quarter of global exports of major conventional weapons going to countries in the Middle East and North Africa.(4)

The defence industrial sector is special in many ways; states are the only clients, companies are heavily dependent on government procurement decisions, R&D cycles are long and costly due to complexity and companies require state com-mitment to engage in them. Yet economic considerations are not necessarily the determining factor in defence procurement, governments have other drivers than financial or technological; employment or securing good relations with the US are also top policy objectives for many governments.

(4) https://www.sipri.org/commentary/blog/2017/state-major-arms-transfers-8-graphics

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Any defence industry is not sustainable without exporting its products beyond its domestic market. At a European level, the sector is highly fragmented with nation-centric defence industries competing for both EU and global markets. Most European companies are too small to develop high-end technical military capabilities and few have grown big enough to become global players. Among those some enjoy substantial political support in their export activities. European companies are in a more disadvantageous position than their consolidated US, Russian and Chinese rivals who also often have higher R&D budgets at their disposal. These weaknesses of the European defence market and especially the problems that arise from its fragmentation and the absence of a true European Defence Technological and Industrial Base (EDTIB) in line with a joint European strategy have been known and neglected for some time.

Defence industrial integration and cooperation has many difficulties: nation interests and priorities should be aligned, as does military or capability requi-rements; states are hesitant on sharing defence technologies which have been developed with national resources. The EU member states and the EC have worked for 20 years to build a framework supporting industrial consolidation, a harmonized legal framework and open European defence markets. This is to be now enhanced by the adoption of PESCO, where cooperation in both defence and security R&D or procurement is seen as a way to accelerate technological innovation and lower costs, and assist provide strategic autonomy.

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What is meant by ‘european strategic autonomy’?

The main attention of the EU defence operations will, for the foreseeable future, focus on securing borders, fighting terrorism at home and abroad, crisis mana-gement operations, supporting allies, and now, achieving strategic autonomy – of key importance “for Europe’s ability to promote peace and security within and beyond its borders”.(5)

Strategic autonomy is based on 3 interdependent components and 3 elements:

✓ Political autonomy: the state (or states) being self-governing and having the capacity to define foreign and security policy goals and to decide over the tools to be used in their pursuit,

✓ Operational autonomy: the capacity, based on the necessary institutional framework and the required capabilities, to independently plan for and conduct (civilian and/or military) operations.

✓ Industrial autonomy: the ability to develop and build the capabilities required to attain operational autonomy, throughout the supply chain.(6)

For example, having a competent industrial base and military capability is of little consequence if there is no consistent political will to act. Is Europe ready to be a unitary actor on the international stage? Each of the 3 components has 3 elements:

✓ Autonomous situation assessment: the ability to make judgement✓ Autonomous decision-making: the ability to choose a course of action✓ Autonomous action: the ability to act (decisively)

However, when discussing European defence and security, we must add the words ‘free from external (or radical internal) influence or threat’ – a reflection of the US constitution to ‘protect against enemies foreign and domestic’. The operational component of strategic autonomy is simply the ability for Europe to act without the US when required. Consequently, there is a need for a defence industrial sector that can produce everything, or at least the critical or strategic elements that this requires.

(5) Global Strategy for the EU’s Foreign and Defense Policy 2016(6) SERA presentation Olivier Landour DGRIS 5 Mar 2018

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The EU Global Strategy for Foreign and Security Policy (EUGS) is one of the most ambitious EU documents on defence to date. Presented to the Heads of State and Government by High Representative Federica Mogherini in June 2016, it is the first EU document to see strategic autonomy as the objective. Not a moment too soon, as security challenges inside and around Europe are rising, while the US has made it clear that it will not, and cannot, solve all of Europe’s problems. The EUGS sets out four major military tasks:

✓ To help protect the European way of life; ✓ To maintain stability in the broad neighbourhood; ✓ To maintain the freedom of the global commons; ✓ And, to contribute to United Nations collective security.

These 4 tasks clearly increase the burden placed on Europe’s armed forces. While the priority is increasing resilience, and building capacity, EUGS also commits the EU to protect civilians and to consolidate local ceasefires in warzones and calls for “full-spectrum land, air, space and maritime capabilities, including strategic enablers”. However, the EUGS provides little of the level of detail required – how many of these operations should Europe be able to undertake, concurrently and with, or without, allies? If the target is not defined, how will we know when we have reached strategic autonomy; not having a defined goal might make life easier for politicians but not for the military planners who might have to conduct subsequent operations. It is clearly apparent that there are different degrees of strategic autonomy; the ability to scaled military operations does not require full scale warfighting capability against a peer enemy without allies involved. Clear direction on what is to be achieved must be given.

When the EU expanded to 27 countries the ‘Headline Goal’ for European forces was increased to 1.35 million troops and a total defence expenditure of $200 bil-lion; but did little to avoid duplication of capabilities across nations and to target key strategic areas. Setting unachievable objectives must be avoided. Realism is required. To avoid waste and inefficiency, so is focus. Simply funding (R&D) cannot overcome lack of clear guidance and direction at a political level, inclu-ding prioritisation of critical or strategic importance. Moreover, such analyses and prioritisations must be compatible, or at least acceptable, across nations with clearly differing concerns. Decisions must also be made about what critical systems and industries need to be available within Europe, what can and should be imported from allies, and what can be purchased on the world market?

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What will the world be like in 15 years time?

The insecurities and threats that Europe will face in the future are unclear; documenting all the possible, or even likely, scenarios are well beyond the scope of this paper. The best that can be hoped is for a Europe not at war within its borders, but struggling to cope with forces beyond. Continued globalization, employment concerns, climate change, energy and water insecurity, religious extremism and political division on its doorstep and population migration are all major concerns; let alone conflict and instability in regions where we have economic as well as moral interests, which threaten our security as well as our prosperity. In addition, our world is being transformed by rapid advances in sciences and technology that are touching every aspect of our lives, and which most of us couldn’t have imagined a decade ago.

The influx of refugees has challenged the present state of border control in the EU as well as the solidarity between member states all while contributing to the rise of populism throughout Europe. Politically, for now at least, the nationalistic trend in the EU has been slowed following the election of Macron in France, but only time will tell if this this was merely a temporary riposte after Brexit or the resurgence of European fraternity. However, 2 years on from the decision of the UK to leave the EU, what Brexit means remains painfully unclear. The United States is following a national agenda with Trump’s clarion campaign call for ‘America First!’ and the introduction of trade restrictions is straining relations with Europe’s historic allies. The new President’s inconsistent views (tweets) on NATO and Europe have led to a strategic uncertainty which unfriendly nations will seek to exploit, let alone providing impetus of the EU to be more autonomous in international relations, including security and defence. The usual turmoil of the Middle East continues with the competing nations of Israel, Iran and Saudi Arabia; with the former powers of Syria and Iraq falling to internal conflicts. To the east, Europe’s neighbours of Russia and Turkey continue their own unique, self-serving journey but, in so doing, providing new terror and cyber threats to the democratic freedoms enjoyed by the EU. Europeans will continue to suffer from terror attacks from non-state organisations which are only likely to increase in number and vehemence. However, perhaps of most concern, is the perceptible continued growth of new economic powers in the Far East that will likely domi-nate the world’s economy in the years to come - a painful new reality for Western powers. The US continues to spend more on defence than it has the means to support; in such terms the US is already losing the economic war of political ideology. China philosophy tends to take a longer-term view, not the short-term view to create profit possessed of the West but already becoming more active in the defence market. Meanwhile, universities continue to increase their intake of foreign students, with seemingly little regard for the consequent transfer of

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technology, knowhow, and innovation out of Europe, giving away both military and economic advantage. When EDF research grants funding, one criteria for making such awards might be that it requires universities to protect from, or restrict, foreign students.

Although the global economy continues to grow, which normally favours a libe-ral world order, the world is becoming increasingly polarized. The EU political organisations will need to guarantee access to essential raw materials and food supplies; to maintain employment, prosperity and civil order across an increa-singly diverse Europe; to face emerging super-powers and technological threats whilst retaining and protecting democratic freedoms.

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The strategic priorities for defence

In response to an increasing uncertain world, the EU needs to:

✓ Be able to respond more comprehensively, rapidly and decisively to exter-nal conflicts and crises; to enhance the security and defence capacities of partners

✓ Strengthen the EU’s capacity to protect European citizens (and in an increa-singly global community, this should be explicitly expanded to ‘at home and abroad’)

✓ Work in an integrated, co-ordinated, inter-operable and cohesive manner on internal and external security

✓ Strengthen the EU–NATO strategic partnership and perhaps forming a jointly funded EU-NATO defence program

✓ Support a European industrial basis for defence, rather than a national one✓ Support focused defence research✓ Improve the single market for defence and unlock investment in the European

defence supply chain end-to-end.

Even focusing on the last 3 bullets, delivering European autonomy is not simple, at least if it is to be done effectively and efficiently. Since the collapse of the world economy, there has been a 15-year gap in R&D and investment and a significant reduction in the defence market as many nations implemented austerity measures. Advanced technology brings a military advantage and deterrence, at least until copied or counter-systems developed – to prolong that advantage, exports might be delayed. However, export also brings employment, income and contributes heavily to support the industrial strategic autonomy. This presents a dichotomy across nations regarding what exports might be allowed, when and to whom; a standard European legal position, bound by Treaty, is essential to level the playing field and encouraging exports wherever possible but ruthlessly enforced where they are not.

Increased and centrally managed funding for both R&D and procurement assis-tance is naturally welcomed, particularly after the dearth of funding in both R&D and equipment over the last decade. Many companies and national interests will eye the resurgence of R&D brought through the drive to achieve autonomy and the adoption of PESCO as the feast at the end of the famine; but there cannot be enough for everyone. Given necessary budget limitations there needs to be a hard-line approach to the achievement of not just interoperability, but common military doctrine, common equipment, common requirements and capability

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– the aspiration should be for a common European Armed Forces – even if it is unlikely to become a reality. Even so, that will not be enough, there has to be a ruthless focus on driving out industrial and R&D duplication across Europe, to the cost of some and the advantage of a few. Similarly, there must be a clear priority on strategic or emerging technologies that give military advantage which, regrettably, are likely to drain the R&D budget and not dissipated to deliver other more political results. With a 15-year R&D backlog to address, with the world emerging from an economic slump into which it still might slip and political uncertainties, what will be the priority? The foreseen cooperation under PESCO might not be efficient because the structure of the European defence industrial base is not yet adapted to deliver such cooperation. Currently, Europe is clearly dependent on foreign technologies, for which IPR is owned by foreign industries (US, China, etc.) and little can be done to mitigate this dependency in short term. As we recognise that there are some capabili-ties still needed in today’s European defence inventories, it is more and more clear that the future battlefield will dramatically change. We should explore the opportunities for the future technologies (AI, disruptive, space) and channel the investments in these, to become competitive with other nations actors already hugely investing in this area.

It is obvious that European nations cannot afford or sustain capabilities to the same degree; financial positions diverge markedly. We need to define the key capabilities required to achieve strategic autonomy, this being necessarily linked to the degree of autonomy the EU aspires for. But this does not have to be the same across the whole and should address on a case-by-case basis. A realistic approach is to become world leaders in selected areas and accept risk in those less critical, perhaps also offering opportunities to collaborate with other partner nations (such as through NATO). Interoperability rather than standardization might be enough in most cases and a more realistic objective to achieve.

The European defence industry is very fragmented; there is a need for consoli-dation but creating large companies or even monopolies might not be the right answer. Is Europe able to sustain two champions against global competitors? It might be openly resisted; there are differing perceptions across nations about the importance of SMEs versus large companies or even national government-owned industries. At the very least, smaller European nations would not favour policies that would tend to favour the larger. Jobs are always a priority but the need to guarantee defence and security has become increasingly higher on the agenda over the last few years; yet this not always be the case.

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The ever-increasing rate of globalisation and digitalisation of recent decades have resulted in an interconnected world and interconnected societies; retrenching to an ‘American First’ or ‘Europe First’ seems to conflict with this. Politically, economically and militarily, the international system is moving towards a multi-polar order as witnessed by the rise of China, and India. It is for Europe to choose whether to join the emerging world order or to shy away from it and follow the increasing isolation of the US. There is now the ability to access information and technology regardless of its geographic location; to many of the younger generation the cyber world is more real than perhaps what the older population perceives it to be. We must acknowledge and take account of this generational divide if the EU is going to make a substantial effort to stay in the lead economically and technologically and to remain a role model for other societies around the world “(National) security is not only a task of the state, but increasingly a joint task of the state, industry, the scientific community, and society(7)

(7) German White Paper ( 2016)

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Are EU structures able to deliver?

The current political structures, organisations and processes are inefficient and not fit for the future purpose; they must adapt, innovate and improve as quickly, perhaps quicker, than the advances in technology they hope to bring about. The comment that ‘Europe has done more in the last 18 months than in the last 20 years’ is both a praise and an indictment. The European defence industry needs to contract to be more efficient and there is some pain to endure. The ideal time to do this was in the years following the 2009 economic crisis, Europe missed that opportunity because individual nations wished to preserve national employment. Europeans must act and think like Europeans, not as separate nations bound as an economic community. In short, national interests must be given up and European-level decisions must be accepted, regardless of national or local impact.

EU member states delegate parts of their sovereignty, retaining others to maintain their autonomy; this is not consistent across Europe or across time, as shown by Brexit. There remain differing opinions on the reasons behind and the objectives for European defence and security cooperation. It is when looking for comple-mentary and compatible objectives that EU Member States can join forces in the most beneficial way; this is what is hoped for under PESCO.

To become and remain competitive with other major nations, the EU must adapt its model of business to the new reality. It will be very difficult to keep the pace with US and China, while keeping the committee, facilitator or bureaucratic decision making process that pervades in Brussels. The different timelines, changing politics and priorities and budgets of nation’s requirements makes a PESCO project difficult to manage, even if the technical and operational requi-rements are harmonized. Innovative ideas must also be embraced, not only via traditional programmes but via the private sector also, noting the rise of Google, Amazon and SpaceX. Regardless, speed is of the essence and this can only be achieved with appropriate funding, responsibility and delegation as well as lean procurement structures.

PESCO will be the political overarching context for cooperation efforts between member states for the immediate future. But PESCO does not change the current situation, it merely offers the opportunity. Cooperation in defence programs in Europe is not new, see Annex A and its remains for member states to decide if they will continue to do business as usual or take advantage of the political momentum to change something for better. However, doing something in the same manner will result in the same outcomes; this includes for armaments coo-peration programmes the cost overruns and schedule delays. If Member States

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agree to transfer responsibility, the EDA and OCCAR(8) have an important role as a broker and programme/project management office and there is the opportunity to enhance internal processes within those organisations and deliver greater value.

The criteria for participation in PESCO defined in the protocol include: member states’ commitment to set a specific level of investment expenditure on defence equipment; the harmonization of modernization plans and capabilities develop-ment; enhancing the availability, interoperability and deployability of member states’ forces; the commitment to address the shortfalls in military capabilities (including by taking part in multinational projects); participation in EDA pro-grams. For member states to have confidence in PESCO, it must deliver; ideally quickly bringing some degree of success. Yet failure is always present in complex technological projects and failure to exploit R&D funding is a major concern par-ticularly for those with limited budgets; while being tolerant of the PESCO and its agencies it their early years, Member States must establish clear monitoring with realistic targets for achievement.

The NATO alliance will remain the ultimate security guarantee for the foreseeable future and must not be undermined. A key objective for PESCO and the EDA is to remain absolutely linked to the programmes and practises already employed by NATO. There is no need for duplication and the need for full interoperability and compliance is better practised across NATO countries rather than just those in the EU. If the European objective is to achieve strategic autonomy then this could be delivered through utilising NATO, rather than EU structures, avoiding placing the relationship with other non-EU NATO countries at risk. However, the role of the US in providing leadership to NATO, which itself is becoming increasingly in doubt, precludes reliance on this. The objective is to put soldiers on the ground or peacekeepers into the field efficiently, effectively and as safely as possible – regardless of whether they are undertaking an EU, NATO or UN mission. The drive to achieve strategic autonomy is symptomatic, in part, that the EU feels that it cannot fully trust either the US, NATO or the UN to act as the EU wishes. It might be easier to simply rebuild that trust, and certtainly not to undermine it further but this requires both sides to be willing to participate. At the very least, the purpose of mechanisms such as the NATO Defence Planning Process (NDPP) and the EU Coordinated Annual Review on Defence (CARD) should be harmonized and made compatible in terms of capability development planning detailing the future scenarios, ambitions and capabilities required.

(8) Organisation Conjointe de Coopération en matière d'Armement

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Is this a game changer?

In addition to providing security, defence is an important employer with signifi-cant relevance for regional economies and local politicians, sometimes ‘trumping‘ security and defence considerations. Likewise, fears of unwanted technology transfer and distrust between companies hamper cooperation. Additionally, any industry might be viewed as key to a nation’s autonomy but EU institutions must insist on the need to move towards a more European approach and mutual nation dependency, perhaps outside or against NATO leadership. The irony is that the mutual dependency between the US and Europe is increasingly viewed as suspect and fuelling the desire for European strategic autonomy; not to men-tion the difficult position that Brexit has placed the UK in deciding its position in the world.

In some nations, defence industry-related issues are primarily considered as economic issues where market forces are generally allowed to apply. For exa-mple, the takeover of GKN (the 3rd largest defence industry in the UK) allowed to be bought by Melrose, an investment banker feared to be likely to break it up. In France, the industry is seen as a strategic asset, and partly state-owned, whereas in Germany defence industries are private, often family-run and tend to be smaller than French companies. Consequently, the state’s role is essentially different, as well as deeply embedded perceptions on what the state’s role should be. The EC, PESCO and the EDA must balance the need to deliver improved military capability against the need to allow for significant cultural differences which will inevitably manifest itself as political resistance, particularly if local livelihoods are threatened. In the past, effective and cost-efficient solutions have been impeded by political reservations and national interests, rather than in armament companies’ boardrooms or R&D departments.

The PESCO initiative may also be placed at risk by bilateral or multi-national arrangements that are not precluded by PESCO, but are not made available to all nations within PESCO. For example, in July 2017, France and Germany presented an ambitious bilateral cooperation agenda to work together on a series of defence projects including the replacement of their fighter planes, the development of a common indirect fire artillery system, to push ahead with the Eurodrone programme, as well as cooperate on a new major ground combat system.. Progress in Franco-German security and defence cooperation is a key step towards strategic autonomy with its three dimensions: political, operational and industrial autonomy Controversially, it might also be portrayed as self-ser-ving to protecting their own industries before the advent of PESCO took hold. Presumably development work will focus on satisfying the requirements of the 2 nations, not those of Europe as a whole.

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Closer cooperation between industrial partners, even amalgamation is an obvious path to choose, perhaps the only one and probably the only chance for many European defence industries to survive in the longer term. Cross-border, open supply chains are crucial as they offer some mitigation opportunities during the inevitable rationalisation, but falsely supporting local or historic supplier’s risks losing competitiveness on the global market. Differing export policies across Member States also hinder this as companies will try to avoid additional restrictions; a common European practise would assist. In such a climate, more support to SMEs might be required, including providing earlier information about long-term procurement intent and ensuring that prime contractors are required to operate to the same transparency rules as the public sector, in terms of procurement and development opportunities. There must be an incentive for smaller European countries to buy equipment developed through PESCO; engaging with the SMEs particularly in smaller countries is a way of levelling this mechanism. There may be other opportunities to co-operate, for example utilising Eastern European nations to conduct exercises, leaving and creating employment through maintaining equipment in those nations (also providing a more likely technology growth path through carrying out maintenance and repair in strategically the most likely area for that equipment to be required ope-rationally). Not unlike NATO’s Enhanced Forward Presence in the Baltic States.

Export plays an important role for the defence industry to keep engineering and production capabilities. With shrinking domestic markets, export potentials are likely to be a key incentive for countries to join PESCO or cooperate actively; for European companies a single European export policy is essential in armament programmes. If EU Nations are truly to work together in the industrial field, a common policy on the matter needs to be developed within the framework of the European Security & Defence. It might be considered that nations with strict national export regulation need to transfer this responsibility to the EU for har-monization, rather than implemented by individual Member States. Decisions must also be made to potentially reducing the volume of US participation in the European market, particularly with trade-wars threatened, buying European products instead; the US penetration into the European market far exceeds sales of European products to the US.

In multinational programmes, contracting authorities must strive for the most standardised design possible based on uniform capability requirements to effectively reduce development, procurement and maintenance costs. One lead best-placed nation should assume responsibility for the development and realisation of a project in a lead nation approach. Alternately, the OCCAR model could be used. However, production should not automatically be carried out in the lead nation but wherever there is the best industrial and technological

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expertise within Europe. A collective approach should be taken not only to deve-lopment and procurement but also to maintenance, repair, security of supply and operational support.

Another approach could be role specialization where different countries provide different capabilities on behalf of Europe as a whole. An obvious candidate might be the strategic nuclear deterrent which would clearly be the provenance of the UK and France. This requires a high degree of political integration, shared security policy and above all, trust; trust that all nations will provide full military support regardless of the scenario or impact to their individual nation and, essentially, legally bound in Treaty.

A more likely form of cooperation is the pooling of assets. This is already an initiative within NATO and should be an initiative in the European framework under the headline strategic autonomy. According to McKinsey, up to 30% of defence expenditures could be saved by pooling procurement. Historically, nations have entered this form of co-operation with the sole objective of saving money, simply be holding less equipment themselves. Far better to consider this as a support solution from the outset, such as the OCCAR management of the Air To Air Tanker fleet in which participating nations buy flying hours with the fleet operation managed under a common Nato control. Building such EU capabilities would be a huge step in ESDP and offers a real opportunity particu-larly for expensive, rarely used equipment but to be successful requires a change of mind set, accepting that they as a nation would not hold the equipment but merely being able to avail themselves of it when required.

EC funding of R&D will create several issues regarding Intellectual Property Rights (IPR) that require resolution. The EC has stated that the EU will not have any rights regarding the IP created during EDRP and EDIDP projects and that the IPR regime will be agreed by the parties that cooperate in particular project. But how does it justify leaving IPR to the decisions of those involved in that particular project, when the IPR itself (in the R&D sphere) was in-part at least paid for by all nations participating in PESCO – are they to be precluded from it, or what level of access will they have to it. Similarly if concerns of IPR are not centrally managed, even dictated, how are member states (and US and NATO) concerns regarding leakage to third countries be addressed.

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What if it fails? Historically, the issue of a European defence has been a constant and sensitive theme in the construction of Europe: a first attempt failed in 1954, when France voted against the ratification of the European Defence Community (EDC). For a long time, the European Commission did not intervene on defence: every European government wanted to maintain its sovereignty, making the concept of a ‘European Army’ far from reality.

On the other hand, the awareness of the weakness of the national defences of the European countries in the face of global challenges, which makes Europe dependent on the United States and overshadows Europe on the international scene, has meant that the integration of the European defence has always been on the political agenda. The road, however, was taken step by step, in the peace-ful context of the post-cold war world, in which defence was not a priority. In the last few years the scenario has changed; Europe faces threats, conflicts and geopolitical changes that once again make the debate on security and defence a priority.

The will of the main European countries to relaunch the European project, inclu-ding defence cooperation, is a reaction to the Brexit referendum and the election of Donald Trump, which also represents a further departure of the US regard towards European defence. However, the US approach to European defence policy does not start with Trump. In 2012 Stephen Hadley, a national security adviser to President George W. Bush said that Europe had become a “free rider.” It was taking the United States for granted in providing defence and filling military capability gaps. “Europe has become so enamoured with soft power that it has stopped investing in hard power. In terms of hard security, it makes Europe a free rider. “Mr. Hadley and other U.S. security experts insisted that they did not want a Europe that was weak and divided to the point that the grand project of European integration that the United States has encouraged since 1945 would collapse…With few exceptions, European leaders seem to ignore that Europe needs the tools of hard power if it wants to aspire to being a global player ... NATO and E.U. members put national sovereignty before collective interests’(9) In this scenario it is therefore necessary to analyse both the developments at EU level and the national perspectives towards European defence, through an approach, by political and military leadership, that takes into account the opportunities for success and the threats of a possible failure.

(9) New York Times, 6 February 2012).

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The aim of strengthening cooperation and the achievement of European sove-reignty through the numerous tools put in place (PESCO / EDF, EDAP, CARD) are intended to protect the western European democracy: coping with the growing terrorist threats in the heart of Europe and international crises, creating a European defence industrial base which can compete with major industrial realities.

But what if it fails? Will it be possible to defend Europe by remaining dependent on foreign technologies? At what level will the European defence industry be able to compete? The answers are not obvious or easy, but there are clear risks of not being able to fully guarantee European security and irrelevant to the global defence industrial sector.

At the same time, the success of European defence is inextricably linked to the success of the European project itself. Member states’ political effort towards defence cannot ignore the diverse national reality of Europe, compared to the US - and the current historic are that we are living through. The ‘old continent’ has always had to face the dichotomy between a common European culture and coexistence in the system of sovereign countries (different by language, law, poli-tics, fiscal, culture and education). Furthermore, we are going through a phase in which some parts of the population of European countries ask for national auto-nomy, pushing towards a "go national" trend, including anti-Europeanist trends.It is not possible to know how this situation will evolve and what the political, economic and social consequences could be, but the risk of disaggregation in Europe exists and, if it we cannot foresee looking ahead, we should look back, learn from history, with the aim to stop historic threats becoming a future reality.

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Conclusion

The last 20 years has seen frequent subject of debates and initiatives regarding European cooperation and results have received varying assessments of suc-cess. Due to their focus and separate plans for developing their national armed forces and favoring their own armaments industries, Member States have only exploited the opportunities offered by cooperation only to a limited degree. Consequently, the military capability of Europe has suffered with the European taxpayers getting a very poor ‘bang for his buck’. The ECs creation of the European Defence Fund (EDF) in 2017 will likely prove to be a decision that will accelerate the integration processes. Centrally financed from the EU budget, the fund may provide the impetus for innovative technological programs carried out by arms companies in the EU; achieved by offering grants for multilateral research and development projects. EU member states will also be encouraged to cooperate since the EDF will offer financial support for joint projects aimed at purchasing arms and military equipment (up to 20% of the cost). However, on its own it is unlikely to bring about genuine and substantial change in the European defence industrial landscape. If the achievement of European strategic autonomy fails, the consolidation of the European Defence Industrial Base will most likely not be achieved. National industries might struggle to survive in a global competitive environment and might merge also with other global players outside of Europe.

To be effective, the provisions of PESCO and EDF funding must wherever pos-sible be ruthlessly directed to achieving the capabilities required to achieve the goals of the EU Global Strategy. This must not be dissipated by other political interests, in a transparent manner consistent with the gaps identified by the EDA derived from a political analysis of the strategic environment and the threats posed. Individual states must be committed and held to account, with national defence planning compatible with the emerging multilateral approach. Existing ties with NATO must be sustained and improved, working together to counter new and existing threats. A more concerted European approach to the world must be developed wherever possible; Europeans need to think primarily like Europeans rather than as individual nations. Not too much to ask. However, working towards shared rules and enforcement on arms exports, enshrined in a treaty with a single common authority to decide on export applications, and governance of strategic IPR must be reasonable ambition.

The key approach to overcome inefficiencies in the defence of Europe remains the need to reduce the number of (largely similar) platforms fielded for each capability. None of the measures introduced by PESCO and the EDF substitutes the need for common European requirements and a single European customer, which itself should largely address issues of inoperability and supply. It is not

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the European defence industries that need to consolidate, it is the customer - industry will follow, or fail.

This programme can only be said to be fully successful when Member States establish common set(s) of requirements, define the future model of European defence industry they wish to achieve and commit, by treaty, to buy - and only buy – that platform for the duration of the programme. They also need to appoint an independent programme management organisation free from national interests, responsible and accountable to the EC, to run the procurement for the benefit of Europe, regardless of impact on individual nations and immune from blame once a decision is reached.

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Annex A: A history of Cooperation in defence programmes in Europe

In 1976, the Defence ministers of the then 13 European NATO nations, except Iceland, established, the Independent European Programme Group (IEPG) with the aim of creating a European Armaments Agency.

In 1993 the Western European Armaments Group (WEAG) was established to manage R&D projects, to harmonise requirements and to open national defence markets; closing with the formation of the EDA

In 1996 the Defence Ministers of France, Germany, Italy and the United Kingdom established l’Organisme Conjoint de Coopération en matière d’armement (OCCAR).

In 1998, the NATO Research and Technology Organisation (NRTO) promotes and conducts co-operative scientific research and exchange of technical information NATO nations and partners. It was replaced by the NATO Science and Technology Organisation (NSTO) in 2012

Also, in1998, a ‘Letter of Intent’ (LoI) was signed by France, Germany, Italy, Spain, Sweden and the UK and endorsed in 2000; it aimed to create ‘the political and legal framework necessary to facilitate industrial restructuring in order to promote a more competitive and robust European Defence Technological and Industrial Base (EDTIB) in the global defence market.’

In 2004, the EDA was formed to: contribute to identifying Member States’ military capability objectives and evaluating observance of the capability commitments provided by the Member States; promote the harmonisation of operational needs and the adoption of effective, compatible procurement methods; propose multilateral projects to fulfil the objectives & military capabilities; and support defence R&D and coordinate joint research activities

In 2015, an arrangement was made between the EDA and the European Space Agency a mutually beneficial cooperation on key policy topics relating to space and security like governmental satellite communications, navigation, or intelli-gence, surveillance and reconnaissance (ISR).

Formed in 2015 from its predecessor, the NATO Support and Procurement Agency (NSPA) is NATO’s main logistics and procurement agency. NATO also creates agencies to meet specific needs; such as NAHEMA (to manage the NH-90 Helicopter) and NETMA (Tornado) programme.

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In 2016 an EU-NATO Joint Declaration on cooperation was signed mainly focusing on the enhanced coordination of the activities of each, covering: preventing hybrid threats, operational cooperation including maritime issues, cyber-security and defence, defence capabilities, defence industry and research, the coordination of exercises, building partners’ capacity and resilience in the EU’s and NATO’s southern and eastern neighbourhood

Sources

European Commission - Press release, European Defence Action Plan: Towards a European Defence Fund; Brussels, 30 November 2016 - http://europa.eu/rapid/press-release_IP-16-4088_en.htm

http://www.gees.org/documentos/Documen-02639.pdf Barbara KUNZ

France, Germany, and the Quest for European Strategic Autonomy, Franco-German Defence Cooperation in A New Era Ronja KEMPIN - https://www.ifri.org/sites/default/files/atoms/files/ndc_141_kempin_kunz_france_germany_euro-pean_strategic_autonomy_dec_2017.pdf

SERA 30 REPORTS · 2018-09-28 · 2 30 SESSION EUROPÉENNE DES RESPONSABLES D'ARMEMENT T he Session...

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