30 October 2018

European Defence Fund - Opportunities and Challenges for Romania

Niculae Iancu | Gheorghe Tibil

Opening common investment prospects for research, development and procurement of military capabilities by implementation of EU funding is a major paradigm shift for both the European defence integration and the European defence industry cooperation. The initiative launched by the European Commission in June 2017 is the first of this kind in the Union’s history and is the most consistent cooperation development aiming at amplifying the investments in what is meant to be the military dimension of “European sovereignty”.

Image source: Mediafax

The main goal of the ongoing phase of European Defence Fund (EDF) is to design and test the concrete funding mechanisms of the two EDF “windows” opened for the member states - research and capabilities. With this foundation, which is to be consolidated inclusively during the Romanian Presidency of the Council of the European Union, the allocated funds through EDF will reach a level of at least EUR 13 billion within the EU’s future financial framework (2021-2027). Funding perspective has already led to clusters building between economic and research actors from different member states to elaborate collaborative projects, even a mandatory condition for funding.

With lack of a relevant collaboration tradition and a competition-based funding experience, the Romanian defence industry is not properly prepared to approach EDF incentives. In the absence of a smart involvment of government, industry and research entities for an immediate and efficient coordination with the EU processes, our country is risking to miss the unprecedented EDF opportunities.

General framework

In a changing security environment, where threats are more and more versatile and instability and conflicts are located in Europe’s neighbourhood, the European Union is forced to rethink its security and defence priorities, on medium and long term, and to act in order to enhance its strategic autonomy across the nowadays international security architectures. Security threats from the East and the South, migration crisis, terrorist attacks, Brexit and Trump’s administration isolationist tendencies led to advancing integration processes in security and defence, based on the priorities identified by the EU Global Strategy for Foreign and Security Policy.

The little coordination in defence planning and the high degree of fragmentation of the weapon systems development and procurement for all military branches of member states, together with the aggressive competition on defence international markets are diminishing EU capacity to respond to emerging crises and conflicts around the world. Furthermore, the social responsibility and the insufficiency of the national funds allocated for defence demand the continue increase of investments efficiency in research, development and production of state-of-the-art weapon systems and advanced military technology, as well as the significant increase of interoperability and interchangeability of dual-use technologies.

The Union response to these major challenges has been to lately define defence as one of the major priorities on EU agenda. As the President of the European Commission, Jean-Claude Juncker was saying in his speech on the State of the Union addressed to the European Parliament this month, “the time for European sovereignty has come. It is time Europe took its destiny into its own hands. It is time Europe developed the capacity to play a role, as a Union, in shaping global affairs. Europe has to become a more sovereign actor in international relations”. And one of the most important meanings of sovereignty, if not the most important one in the current security context, is still to be the military one.

Nevertheless, based on the EU Global Strategy priorities, EU member states agreed on a series of new and ambitious initiatives within the PESCO-CARD-EDF framework.

From the vision grandeur to the implementation challenges

The special priority granted on long term by the European Commission to the defence domain is proved by its proposal budget for the 2021-2027 Multiannual Financial Framework. Hence, the Commission proposed the increase of the Union’s strategic autonomy by allocating EUR 13 billion to the EDF – EUR 4,1 billion for the direct funding of collaborative defence research projects and the amount of EUR 8,9 billion will be allocated to co-finance member states investments in the development and acquisition of the defence capabilities, through co-funding development, test and certifying activities. The mentioned amounts can be exceeded, according to member states commitment to increasly invest in the development projects, a behaviour expected to be greatly influenced by the success of EDF gradually implementation.

If we add to these amounts the funds for the EU Military Mobility (EUR 6,5 billion) and the ones for the Instrument contributing to Stability and Peace (EUR 10,5 billion), wherefrom will be financed including operations undertaken under the aegis of Common Security and Defence Policy, we have a broaden image of Union impressive commitment to consolidate the European defence in the future Multiannual Financial Framework.

The Fund announced by the president Juncker in September 2016, endorsed by the European Council in December 2016 and officially launched by the Commission in the summer of 2017, will coordinate, supplement and amplify the national investments in defence research, innovative technologies development and military capabilities procurement.

EDF has two components: research window, respectively, capabilities window dedicated to development and acquisitions. By opening to funding the research window, EU wants to emphasise its commitment to fundamental and applied research, considered as essential strand to increase the European global competitiveness for technological supremacy, dominated by the US and China. EDF research strand is aiming at increasing the capacity to predict and tackle emergent and future threats, particularly through both an enhanced cooperation between national research entities and the orientation of the results to innovative and advanced technologies less feasible to be successfully addressed at the national level.

The expected results are strategically related to defence capabilities priorities, agreed at the politic level by the member states. The research element has benefited from financing starting with 2017, to reach then a EUR 90 million budget until the end of 2019. After 2020 it will be allocated EUR 500 million per year for research, exclusively dedicated through specific research partnerships between eligible entities from the member states.

If we can say that EU research has already a relevant experience, getting to consolidate a scientific profile through successful collaborative projects under the aegis of some research programs, like the Horizon 2020, or under the coordination of some organizations which prove to be functional, like the European Defence Agency, the biggest challenge for EDF success will be the capabilities window. Common development and acquisition of some major capabilities for common defence can be seen as the critical test for EU transition to its new security identity, the multidimensional and transnational integration under the aegis of “European sovereignty” vision.

The difficulty of defence capabilities development integration does not consist only in the economic factor, but mostly in the security special sensitiveness. Security has been, for many years, a statehood characteristic, a quite closed space, an essential power factor and an important element of the national pride, all placed under the national interest meanings. These are the reasons why the possible “specialization” of the member states for the development of the military capabilities on Europe’s territory following other criteria than the national one is risking to produce trembles for some policymakers in various European offices. This future specialization must be understood not only through the equipment and technologies categories that the member states could benefit after the common financing, but also through the “reorganization” of the European defence industry as the “common technological and industrial base”, which will eventually lead to the preferential common financing of some member states industrial capacities, based on their confirmed competitiveness and not on their strategic importance for the respective states.

On the other hand, the success of common development project of defence capabilities will depend on member states availability and their production capacities to exchange sensitive industrial information and offer an extended access to the know-how, considering the more and more strong competitiveness of the defence market, where the global tendencies seem to be more protectionist and competitive-aggressive, especially in advanced technology, like the fully-autonomous military capacities and artificial intelligence.

For the capabilities window it will be eligible for common funding only the collaborative projects between at least three participants from several member states. The budget of this EDF strand will be of EUR 500 million for 2019-2020, respectively, one billion per year, starting with 2021. The financing will be ensured through the new European Defence Industrial Development Program (EDIDP), which will cumulate common funds with national financing, being anticipated a total budget of EUR 5 billion per year for common defence investments, after 2021.

One of the EDIDP specific characteristics is to support small and medium-sized enterprises (SMEs) participation as by favouring collaborative projects that include SMEs. On the other hand, PESCO projects can benefit from a supplementary financing of 10%, up to 30 percentages from their total budget.

Opportunities and challenges for Romania

Romanian official position is to support the launch of EDF, as an important and beneficial initiative for the development of defence capabilities to support EU capacity to ensure its own security, complementary to NATO consolidation and a better and fair burden sharing in the Trans-Atlantic context.

The Romanian Presidency of the Council of the European Union in the first semester of 2019 gives Romania the opportunity to assume a central role for EDF conception and implementation tools which are about to be created and validated in this period, but also for promoting some major projects under EDIDP aegis. To get a relevant position across the future European architectures of research, development, production and acquisition, it is important for Romania to establish its medium- and long-term priorities, considering its geographic position and its strategic importance within EU, as well as its long tradition in research domain and defence technologies and capabilities production.

Furthermore, by organizing some specific actions with the involvement of the main actors from the government – defence, foreign affairs, European affairs and economy, the representatives of the EU structures - Commission, EDA, Parliament- and from the Romanian industrial environment, it could be assigned certain institutional responsibilities, trans-sectorial roles, interdisciplinary formats, concrete objectives and strategic priorities, which could be organized under a specific National Initiative and Action Architecture for early identification and exploitation of the main opportunities generated by the EDF.

The decision of allocating on medium term 2% of GDP for defence and a significant percentage from this budget for capabilities acquisition ensure the proper financial framework to transform Bucharest in an important pole in the main EDF areas, in the Central and Eastern Europe, as well as for actively promoting some relevant positions at Brussels on this topic.

EDF opportunities for Romania are huge, but so does the challenges. Considering the present state of the Romania’s defence industry and research, the possibility to access some considerable European funds, on the long term, is a true oxygen balloon that these domains.

The effective exploitation of these opportunities is directly linked to how quick the policymakers and the expert structures from the defence planning and defence capabilities, acquisition and industry will understand that this time the stake is real and “important things are to happen” on EDF strands. In the absence of a real support from these actors and a major mobilization of economic agencies to identify connections and potential collaboration projects with important European companies, as part of the clusters that are already in place, we are risking to repeat the weak performance from EU structural funds accession domain. The likely result will consist in transforming Romania in a net contributor to the big European defence companies without significant benefits.

Moreover, this time it is also about both Romania’s role within the future common security architecture and the intelligent approach of defence investments necessary to accomplish Bucharest aspirations to enhance its regional relevance as security provider in the Black Sea and Western Balkans.

(About EDF development phase and its specific tools, as well as about the particular challenges for Romania, in our next analysis on this subject).