All options for the future settlement of UK-EU relations are still “on the table”, including that of a no-deal. Despite the recent votes in the House of Commons it is still uncertain when and how Brexit will happen – and how a possible extension may look like. Some have argued that Brexit would only marginally hit Europe’s defence industry because of the still modest acquis of the EU in the field. While it is true that other industrial sectors, such as automotive for instance, will probably be much more affected, many studies have rightly highlighted that the price of Brexit will be felt also in the defence domain. Conditional to the nature of the future UK-EU relationship, consequences will impact both sides of the Channel, in the short as well as medium to long term. In this regard, the future solution to the question of the Custom Union and Single Market as well as the UK relationship with the European Defence Agency will play a crucial role.
The European Defence Industrial cooperation and the UK: What’s at stake
The EU defence-industrial base is characterized by high levels of fragmentation along national lines and a diffuse tendency towards protectionist industrial policies. As a result, there has never been a genuine pan-European defence procurement market, but rather 28 national markets, notwithstanding the European Commission efforts to improve the regulatory framework governing the procurement and sale of military equipment and introduce free-market principles.
Nonetheless, intergovernmental procurement-projects have allowed for the creation of important transnational industrial ties. For instance, the UK’s involvement in cooperative projects with European partners has been remarkable and it has often played a pivotal in some procurement programmes. Interestingly enough, in the sphere of industrial cooperation, London represented an alternative to working with French industries, especially regarding fighter aircraft, engines and avionics, as well as missile systems, and helicopters.
Graphic representation of defence industry regional share (2016)
In some cases cooperation has also led to the integration of British industries within European industrial groups. To mention a few examples: in 2000 Leonardo (then Finmeccanica) acquired Westland, the avionics sector of what was then Marconi Electronic Systems and in 2005, the UK participated in the creation of the European missile developer and manufacturer, MBDA, which is a joint venture between Airbus (37.5%), BAE Systems (37.5%) and Leonardo (25%).
As mentioned above, industrial cooperation between the UK and EU Member States, will be affected by the future relationship of London with the EU Custom Union and Single Market. This aspect is particularly important considering that some of the largest aerospace-manufacturing based in the UK are owned by companies established in the EU (e.g. Airbus, Thales). Notably, the absence of an agreement could even lead these companies to consider relocation within EU member states in order to maintain access to the benefits of the Single Market, EU funds and the EU-wide supply chain.
Supply chains and multilateral frameworks in defence markets
As a matter of fact, UK exclusion from the Custom Union and Single Market will likely produce immediate impacts, such as the reintroduction of barriers to market access, including both tariff and non-tariff hurdles, like higher prices within the supply chain and custom operations. Although being relatively small, the former would add costs to products, particularly for those that have components crossing borders many times. The latter, instead, are likely to increase the total trading bill on both sides and lead to significant delays in the movement of defence items. This is especially true considering the complexity of defence-related products and supply chains.
Furthermore, possible restrictions on the freedom of movement could also undermine the defence sector’s industrial-skills base. For instance, this could result in the exacerbation of the existing shortage of skilled workers in some sectors. From a British perspective, barriers could discourage highly-skilled employees from joining companies in the UK.
Against this backdrop, other multilateral frameworks outside the EU could help to mitigate some of the possible negative side effects and serve as an important bridge over the Channel. First of all, the Letter of Intent/Framework Agreement “concerning measures to facilitate industrial restructuring and operation of the European defence industry”, signed on 27 July 2000 by France, Germany, Italy, Spain, Sweden and the UK – could provide London with a useful forum for discussion as well as with useful legal instruments to ease the management of future cooperative programmes. Similarly, the OCCAR framework represents a stable institutional tie, as Brexit will not have direct implications on it. Nonetheless, the situation may change according to the role that OCCAR would play in the future within the EU framework, especially if the Organization will assume more responsibilities in the management of European cooperative programmes co-funded through the European Defence Fund (EDF).
The future of British involvement in EU frameworks
The extent and nature of Brexit implications on defence R&D will vary according to the level of cooperation and the stakeholders involved. Thus far, European R&D activities have been ongoing on different levels:
- at the intergovernmental level, with bilateral or multilateral programmes with co-production follow-ups managed at the national level, through OCCAR, or within multilateral programmes managed by the EDA.
- at the EU level. Initially, by funding only those programmes in the security or dual-use field managed by the European Commission, i.e. via Horizon 2020, but more recently also through the launch of specific programmes within the defence sector.
With specific mention to the latter, two main issues will extensively shape the UK’s future participation to EU defence R&D activities. The first one, as stated above, relates to the question of the Customs Union membership with possible impact on freedom of movement, transfers of products, and the availability of skills and talent. The second, instead, refers to the actual possibility for the UK to access EU defence research funding and collaboration opportunities.
As a matter of fact, with reference to this second aspect, it is interesting to underline how Brexit could even compromise the UK’s future participation in EU initiatives such as Permanent Structured Cooperation (PESCO), the EDF, and the Coordinated Annual Review on Defence, although their institutional setting allows for UK participation, at least in principle.
PESCO, for instance, admits the involvement of third countries to join specific projects, provided that they “provide substantial added value to the project, contribute to strengthening PESCO and the CSDP and meet more demanding commitments”. To note, EU Member States have reached an informal agreement regarding those specific conditions in December and are now waiting for formal adoption by the Council. According to these provisions, third countries could join specific projects on a case-by-case basis, if they will bring a complementary or supplementary added value and share the EU ideals and the objectives of the Common Foreign and Security Policy (CFSP) and of PESCO. Worth mentioning is the request of respecting the decision-making autonomy of participating member states as well as the prohibition to exert any possible limitation regarding future capabilities or products jointly developed within the PESCO framework, being it intellectual property, industrial fabrication or operational deployment.
But British participation in PESCO will also be somehow conditioned by the regulation adopted for the European Defence Fund. In particular, both the regulation for the European Defence Industrial Development Programme (EDIDP), and the Commission’s proposal on EDF have strengthened the link between intergovernmental and EU dimension, by indicating that PESCO projects will enjoy an additional 10 percent of co-funding from EDF, in comparison to other projects submitted to the Fund.
Since it is likely that many PESCO projects will apply for EC co-funding, British participation in them will have to respect the eligibility criteria set up by the EDIDP and the future EDF. Accordingly, companies established in the Union and controlled by UK or UK entities can be eligible as beneficiaries only under specific conditions. Furthermore, the member state in which they are based will need to provide specific guarantees regarding: governance structure, independency from third countries’ interference, protection of sensitive information. Conversely, cooperation with industries located in the UK is subject to limitations and “the costs related to the use of such infrastructure, facilities, assets or resources and to such cooperation shall not be eligible under the Fund”.
The UK’s involvement is also theoretically possible within the Coordinated Annual Review of the Defence, the CARD, aimed at pushing member states to share military plans in order to find out cooperation opportunities. In fact, the UK participated in a CARD trial run in order to test, adapt and validate the overall approach, before proceeding with the first full CARD implementation in autumn 2019. In this regard, the UK’s future participation will be conditioned by the nature of London’s future relation with EDA.
More broadly, this will be crucial also to ensure London’s future involvement in EU defence cooperation. Such a consideration is even more valid taking into account the role that the EDA is playing within all these initiatives. According to the 2015 Council Decision, third states have the possibility to collaborate with the Agency on the basis of a specific Administrative Arrangement. That way the UK would be able to participate in the Steering Board activities in a more structured and systematic manner, with the only exclusion of issues related to the EU strategic autonomy.
How the UK can stay engaged
In light of these considerations, UK continuous engagement within European defence could be ensured from a purely institutional point of view, although it depends on the political will and commitment of both sides.
In fact, the willingness of both EU member states and the British Government to collaborate on future joint programmes represents probably the most significant challenge after Brexit. For instance, on the EU side, member states will have to decide where to devote their limited resources: to cooperative procurement programmes easily eligible for EDF co-funding and restricted to EU member states , or to programmes involving the UK and thus subject to specific restrictions in terms of eligibility? Notably, some EU member states find themselves in a similar situation regarding the projects about the development of the Future Combat Air System, with a Franco-German initiative on the one hand, and a British competing proposal on the other.
Second, with reference to commitment, the question is whether the UK will be regarded by other EU member states as committed to a stronger EU defence dimension and CSDP, especially considering that London has been opposing it for many years. Here, the challenge on the EU side will be to strike the right balance between strategic autonomy, beneficial for the EU, and keeping a close link with the UK, which would be positive for all counterparts at the political, military and industrial levels.
How these issues will be addressed depends of course on the attitudes of both actors and the biggest unknown remains the outcome of Brexit. This will deeply influence all the abovementioned institutional tools as well as the political will and commitment. More concretely, in order to avoid disruptive negative effects (also from a defence industrial perspective), it is of utmost importance to end uncertainty as soon as possible and avoid a no-deal outcome at all costs.
According to the recent words of the Head of the German Federation of Industries “economy can live better with bad conditions than with uncertainty”. While it is certainly true that uncertainty implies additional costs and negative side-effects, as companies have to elaborate new strategies and prepare for different possible Brexit outcomes, a no-deal scenario would be highly traumatic. In fact, the resulting conflicting political atmosphere would hamper future cooperation, by putting at risk current cooperative projects and probably ruling out the UK’s involvement in PeSCo, CARD and EDF.
In order to avoid this, the UK should opt for a deep and comprehensive free trade agreement or, at least, a lower profile arrangement. In the first case, defence industrial and intergovernmental cooperation would be eased by a favourable political relationship and the achievement of an administrative arrangement with EDA. In a similar scenario, the UK’s involvement within the EU initiatives would probably be ensured. In the second case, instead, parties could still be able to negotiate a dedicated partnership to allow for UK participation in relevant defence R&D activities, although in the longer term cooperation could be hindered by divergent commercial policies and regulatory standards.
It is up to the policy-makers on both sides of the Channel to tip the balance. While London certainly has to end the uncertainty over its exit and avoid a no-deal outcome, from the EU side, Brussels should resist impatience, move beyond bureaucratic technicalities and think of Brexit and its impact on European defence and security as a strategic issue. Ultimately, ensuring continuous cooperation is in the interest of both sides.
Paola Sartori is a researcher in the Security and Defence programme at the Instituto Affari Internazionali (IAI) in Rome. She is the co-author of “Looking Through the Fog of Brexit: Scenarios and Implications for the European Defence Industry“.