Self Defense Protectionism Rules in EU Arms Industry

German Chancellor Angela Merkel loves to preach economic prudence to her European Union partners. But she looks the other way when it comes to the bloc's wasteful defense policy, and Europe's citizens are footing the bill -- to the tune of at least €26 billion a year.

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In February 2010, a group of German Air Force Eurofighter jets took off from Germany on a trip to the East. They were accompanied by a refueling aircraft, along with a cargo plane and a transport plane filled with engineers. The Germans' target was India, where their objective was to hammer out a deal on behalf of the European Aeronautic Defence and Space Company (EADS), which manufactures the Eurofighter. The government in New Delhi planned to buy 126 fighter jets, in a deal valued at up to €14 billion ($19.3 billion). An Indian newspaper described it as the "mother of all defense deals."

The counterattack didn't come from the United States, but from Germany's partners within the European Union. The French launched their own promotional campaign for their national prestige jet, the "Rafale," while the Swedes advertised their jet, the "Gripen," made by Saab.

The German Air Force pilots spent days thundering across the Indian subcontinent. The campaign cost about €20 million, but it was unsuccessful. The Indians chose the French jet instead.

This is what happens in the European defense industry: Whenever a major contract is in the offing somewhere in the world, the European nations compete against one another. But when they are the ones procuring military equipment, they isolate themselves and ignore all rules of reason and the market in the interest of protecting the domestic defense industry.

With too much competition for foreign contracts and no functioning domestic market within the EU, the national governments are essentially engaging in what they refer to on paper as "joint security and defense policy." "The fragmentation of the European defense market is a big problem," says Austrian General Wolfgang Wosolsobe, head of the EU military staff. "If we don't change our ways, it raises the long-term question of whether we, as the EU, can preserve our autonomy in defense policy."

United States Dwarfs European Defense

This misguided policy adversely affects European taxpayers. Large sums in the billions are wasted year after year because EU governments cultivate their own national idiosyncracies instead of acquiring systems that already exist or could be produced more cost-effectively as part of a collaborative effort.

The confusion also harms the defense contractors. "We didn't create the EU so that we could have uniform light bulbs, toilet-flushing mechanisms and banana sizes," rages EADS CEO Tom Enders. "We created the EU to solve major, vital issues together and to give Europe a suitable role in the world, between America and Asia."

But the reality doesn't look like that. Without the United States, Europe would be a dwarf in terms of military policy. During the war in Libya, the French and the British soon ran out of ammunition, and it is left up to the initiative of individual capitals to react quickly to crises. Even the EU Battlegroups, which are supposed to be ready for deployment within a few days, have never been allowed to leave their barracks since they were established in 2003, because the one thing that's missing is political will on the part of all Europeans.

EU leaders had intended to make defense policy an important item on the agenda at their Brussels summit at the end of next week. But the summit agenda is now so tightly packed that if all goes well, the only slot left for the leaders to discuss security policy will be shortly before the final luncheon. More than a few declarations of intent are not expected, but at least some of them will be headed in the right direction, that is, toward more market and more competition. EADS chief executive Enders warns: "If words are not followed by actions this time, our relegation to the third league will become unavoidable."

Shrinking Budgets

There is a need for action. The national defense budgets in Europe have declined significantly in the last 12 years. The euro debt crisis has dashed all hopes among defense ministers that this trend could be reversed in the coming years. In 2001, the EU member states spent a combined €251 billion on defense. By 2012, their total defense budget had declined to only €190 billion. Although the EU still spends more money on defense than China, Russia and Japan combined, most of it is spent on personnel costs, while too little is spent on equipment and research.

A method known in military jargon as "pooling and sharing" was long viewed as a solution in both the EU and NATO. It involves individual countries specializing in certain military capabilities and then making them available to the others. But the much-lauded concept is still in its early stages of development. So far, pooling and sharing has accounted for €300 million in savings. In the same time period, the defense budgets were slashed by €30 billion, or 100 times as much.

The greatest amount of waste results from the domestic market in the defense sector being virtually invalidated, writes the Academic Service of the European Parliament in a current study. The 88-page analysis, titled "The Cost of Non-Europe," bluntly outlines the shortcomings of European defense policy, with "wasteful excess capacities, duplication, fragmented industries and markets" at the top of the list. According to the study, 73 percent of procurement plans are still not being advertised throughout Europe. "Cooperation remains the exception," the experts write.

According to a conservative estimate, this creates additional costs of at least €26 billion a year. The squandered taxpayer funds could amount to as much as €130 billion. The EU countries could save €2 billion on ammunition for their armies alone, if they acted in a truly European fashion. This has long been possible from a legal standpoint. But governments generally invoke an exception clause of the EU Treaties, which permits limitations on competition if the "national security" of a country is affected -- an anachronism in times of common defense policy.

The Americans are a prime example of how to apply a defense budget more efficiently, as a look at the aviation industry illustrates. The development of the three European fighter jets the Eurofighter, Rafale and Gripen cost €10.23 billion more than the development of the American Joint Strike Fighter. The Americans also produce larger numbers of their jets with lower development costs. The manufacturers of the three European aircraft build 1,205 jets, which is 1,800 fewer jets than the Americans.

Paying More for Less

Not surprisingly, European defense policy has a miserable cost-benefit ratio. There are 16 large shipyards building warships in the EU, compared with only two in the United States. There are 16 different classes of frigate in Europe, even though only two are actually manufactured. For years, even Germany, which preaches economic prudence to other EU partners, has contributed to European taxpayers paying more money than necessary for inefficient defense projects, specifically for projects for the German armed forces, the Bundeswehr.

In the case of Europe's large-scale Eurofighter project, for example, the four manufacturing countries, Germany, the United Kingdom, Italy and Spain, have always focused on the interests of their own industries instead of efficient shared production. The result has been an appalling amount of waste due to duplication.

For instance, the production of the twin-engine fighter jet has been divided up among the partner countries from the beginning, with almost no regard to economic criteria. Four different production facilities were even developed in the four countries for final assembly. This alone is responsible for a loss in the hundreds of millions.

Because of the desire that exists in all four countries to participate in decision-making processes related to the Eurofighter, high administrative costs are also incurred. Dozens of committees discuss key strategic issues associated with the Eurofighter, but decisions must be reached unanimously. In some cases, hours, days and weeks go by before simple decisions are made, because of the need to obtain the approval of each individual partner.

There are many examples in the European defense industry of how countries are competing instead of cooperating. From battle tanks to frigates to cruise missiles, more sensible agreements could save billions across the board. A few years ago, there were 16 different procurement programs in Europe for armored personnel carriers alone. But because each party has only its own interests in mind, there has been little improvement.

The defense contractors already contend with shrinking defense budgets in Europe. The consulting firm AlixPartners does not anticipate any new major defense projects being launched in Europe in the foreseeable future, and it warns that the industry is losing its potential for innovation. This also affects the conglomerate that was once established by politicians committed to the European idea: EADS. In the next four years, EADS expects its order volume to plummet from €48 billion to €31 billion. The German defense ministry alone has cancelled €4 billion in fixed contracts.

The number of humiliating defeats associated with international defense projects has been on the rise. NATO member state Turkey is threatening to buy its air defense system from China, South Korea has spurned the Eurofighter and Brazil has shut EADS out of a deal worth €6 billion.

Germany Blocked Defense Merger

A new chapter in the inglorious history of the European defense industry is being written this week, as EADS CEO Tom Enders announces the complete restructuring of his defense division. In future, it will only be an appendage of civil aviation subsidiary Airbus. And in yet another humiliating blow to the company's proud engineers, Enders will also officially unveil the company's new name: Airbus Defence & Space.

As is usually the case with such restructuring efforts, jobs will be cut and entire facilities shut down, including a plant in the Bavarian town of Unterschleissheim. In Manching, north of Munich, where the Eurofighter is built, employees are also nervous. According to EADS officials, the future of their jobs is directly related to the question of whether the German government will buy additional Eurofighters from the latest 3B tranche.

The spring cleaning at EADS is seen as a reaction to the fact that the German government thwarted a merger between EADS and the British defense company BAE Systems over a year ago. The chancellor herself intervened in the planned merger, fearing that it would lead to her country losing influence over a group with such strategic importance. Merkel was particularly concerned about jobs at EADS subsidiary Airbus.

EADS officials still haven't forgiven the government for obstructing the deal. "This is what they get," they are quietly saying, referring to the job cuts. "Growing challenges are clashing with declining budgets everywhere," Enders explains. "It's obvious that we can only guarantee Europe's security and defense jointly."

Flame-Resistant Underwear?

The A400M transport aircraft is an example of how joint European defense projects can falter. Fundamental questions have hampered production recently, because the company lacks joint European approval of the necessary legal underpinnings. The European Parliament and the European Commission should have created the necessary legal conditions. But this has been held up by the fact that no country is willing to relinquish its sovereign rights. Now the situation is coming to a head, as Germany is expected to receive its first A400M in 2014. Officials at the defense ministry are now constantly in crisis mode because the licensing procedure remains unclear.

This has led to absurd consequences. The ministry is currently establishing an aviation office for the Bundeswehr, a new agency with more than 400 employees, whose primary task will be to develop licensing guidelines for the A400M. To make matters worse, they will only be developing German rather than European guidelines. But at least the EU leaders have included the problem of Europe-wide licensing in the agenda for their upcoming summit. In late November, the EU Council of Ministers called for "tangible measures for standards and certification" in order to "reduce costs."

In practice, however, such resolutions often raise significant concerns, even with the simplest of products.

For example, the German Defense Ministry has already considered the question of whether buying undershirts and underpants in larger numbers could substantially reduce costs, which could be achieved by purchasing the same models for all soldiers in EU countries. But then it emerged that Bundeswehr standards prescribe that underpants must be flame-resistant up to a specific temperature. It is unclear whether this regulation has ever saved a soldier's life, such as when there is a fire in a tank. Other countries lack this regulation, and yet the Bundeswehr insists on keeping it in place.

But if even underpants are an issue of national security, the odds are truly against a common European defense policy.

Translated from the German by Christopher Sultan

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