Convenient, but controversial: Why the European Defence Fund should not be expanded as the Commission becomes geopolitical

In the wake of the Russian military invasion of Ukraine, the European Council called for the EU to play a larger role in coordinating Member States’ military and defence policies. This call falls within a period in which the Commission is actively striving to become, in the words of President von der Leyen, ‘a geopolitical Commission’. Arguably the most significant development in this regard has been the launch of the European Defence Fund (EDF) in 2021. Logically, since it is already up and running, the EDF is viewed as a policy instrument which could potentially facilitate a further expansion of the EU’s role in directing defence policy, and a practical mechanism for dealing with inflated defence budgets. Most prominently, the Commission itself suggested in May this year that it will ‘consider strengthening [the EDF’s] budget.’ This blogpost argues that the specific features of the Fund, which are the result of a rather controversial history, make the EDF unsuitable for further expansion, and raises more fundamental questions about the Commission’s ability to function in the area of defence without being overly reliant on the European arms industry.

The EDF as a historical breakthrough

The EDF has been described by commentators as a ‘game changer’ and an ‘unprecedented shift’, because for the first time in the EU’s history, significant funding in the area of defence flows directly from the Union budget, which the Commission administers. The Fund distributes around €8 billion to collaborative projects on research and development of new weapons (technologies) over the coming seven years. These projects include bolstering resources for electronic warfare and cyber resilience, more traditional air and naval combat products and a special dedication to ‘disruptive technologies’ that aim at radically new initiatives. What makes the policy so significant, is that the EDF represents a supranationalisation of a policy area – defence – that was long considered a stronghold of intergovernmental decision-making.

After the failure of the project for a European Defence Community (EDC) in the 1950s, the Treaty of Rome of 1957 did not confer competences on the Commission in the area of defence. For decades, the Member States were cautious to go beyond the traditional intergovernmental mode of decision-making in this sensitive area. Nevertheless, the Commission has kept the long-term ambition to play a larger role in the area of defence. The first landmark in realising this ambition was the establishment of the European Security Research Programme (ESRP), a €1.4 billion project that funded research for goods which the Commission considered to be ‘dual-use’, meaning they could pursue both civilian and defence-related purposes. A second attempt to gradually obtain a more prominent role in the area of defence were the proposals for two (eventually adopted) Directives in 2009. With Directive 2009/81/EC, the Commission attempted to change the logic of arms procurement from a protectionist to an EU-wide competitive one, by opening up tender procedures and regulating the supply chain, while the adoption of Directive 2009/43/EC aimed at liberalising the trade of arms within Europe by harmonising defence transfer licensing.

Still, these two developments cannot be viewed as a proper supranationalisation of the area of defence. The ESRP remained a limited programme and was not entirely focused on military matters, while the Commission was not eager to start infringement procedures against Member States that violated the 2009 Directives, due to the sensitivity of the subject matter. The fact that only a decade later, the legislative process which formally started with the Commission’s proposal for the European Defence Fund in 2017 went rather smooth, is therefore all the more remarkable.

The Commission’s reliance on the arms industry in drafting the EDF

Although the EDF has as one of its explicit objectives the promotion of ‘strategic autonomy’ of the Union (recital 5 EDF Regulation), the legal bases for this novel policy are found in the realm of industrial policy and research (Articles 173(3), 182(4), 183, and 188 TFEU). Commentators have argued that this is a typical illustration of neofunctionalism’s hypothesis of ‘spill-over’, which describes how EU institutions use already existing competences to creep into previously untouched policy domains.

Unsurprisingly, one of the problems facing the Commission in this pursuit has been the lack of in-house expertise regarding defence and military matters among Commission staff. After all, the Commission was never a major player in regulating the defence industry. Researcher Calle Håkansson was told by a Commission official in an anonymous interview that to overcome this knowledge gap, the industry was seen as a ‘key partner’. Moreover, industry support could legitimise the policy to the outside world, as it also did in the run-up to the ESRP and in drafting the 2009 Directives.

In the drafting phase of the EDF, a peculiar ‘Group of Personalities on Defence Research’ was formed by then-Commissioner for Internal Market and Services, Bieńkowska, which delivered an influential report on the benefits and details of an EDF-style policy. The Group was not officially registered as an ‘expert group’ – despite the fact that in the acknowledgments, the report is attributed to the work of ‘a group of experts’. Consequently, the regular rules governing such groups, which in particular set transparency requirements, were not applied, leading to a reprimand by the Ombudsman years later. The Group of Personalities consisted of sixteen members, seven of which were representatives of major players in the European defence industry. The fact that these company representatives were not sharing their expertise without any self-interest, is illustrated by the fact that companies which participated in the Group were also involved in nine out of the ten largest projects funded under the framework of the EDF’s warm-up programmes – the Preparatory Action on Defence Research and the European Defence Industrial Development Programme. Besides the Group of Personalities, more traditional forms of lobbying were employed by the industry as well: before the Commission’s proposal for the EDF, 184 registered meetings between industry representatives and the Commission took place, while the lobbying budgets of these companies to influence EU decision-making almost doubled in the period leading up to the Commission’s proposal for the EDF. This heavy influence of the arms industry was harshly criticised by civil society.

Problematic features of the EDF

It has been rightly suggested that the EDF is not merely a lobby achievement of the industry, but can, at least to a large degree, be explained by internal actions within the Commission, consistent with the pattern in the historical record described above. The narrative that painted a future in which the EU, and the Commission in particular, would play a significant role in defence, can be traced back to the 1976 Tindemans report, and has received several impulses over the years. It would therefore be too strong to claim that the EDF would never have existed were it not for the validation and knowledge that came from the Group of Personalities, or for the capture by the industry lobby. However, it seems undeniable that the influence of the arms industry did prove effective in shaping the specific features of the Fund. These features show a considerable bias in favour of the industry’s interests, which underscores the problematic power dynamics between the Commission and the industry that this blogpost aims to address.

The most prominent of such features is the amount of funding that now flows almost directly to the industry: the EDF passes on around €8 billion in seven years, while the original proposal from the Commission even envisioned spending around €13 billion on collaborative projects. The considerable cut was due to the prioritisation of spending to deal with the sudden Covid-crisis. The remaining amount, however, is still significant when compared, for example, to the mere €1.4 billion spent on the ESRP.

A second feature of the EDF which favours the industry, is that ownership of the intellectual property rights (IPR) of successful R&D projects remains with the beneficiaries of the Fund (Articles 20(1) and 23(1) EDF Regulation). Neither the Union nor the Member States thus own the fruits of the funded R&D. The principle of open science, which underlies the EU’s regular research programme Horizon Europe, is also not mentioned in the context of the EDF.

Furthermore, many research actions under the EDF can reach a funding level of up to 100%, meaning all costs beneficiaries make related to the research are paid for by the Union. Development actions are capped at 80%, but can be topped up to 100% as well, for example if the project relates to PESCO (Article 13 EDF Regulation). The compensation of indirect costs, such as expenses for management, office rent and security, is set at a flat rate of 25%, which derogates from the standard 7% set out in the Financial Regulation (Article 15 EDF Regulation). This choice for a more lenient rate is legitimised by referencing specific features of the defence market, which is supposedly less flexible than the civilian sector in recovering indirect costs when demand for military products is low (recital 27 EDF Regulation). A noticeable contribution is only expected in the prototyping phase, where a maximum of 20% funding applies ‘to ensure the credibility of the [beneficiaries’] commitment’ (recital 25 EDF Regulation). Beneficiaries will therefore not be asked to invest much of their own resources and are compensated generously for the costs made throughout the research and development actions.

Finally, the selection of projects that will be funded after the calls for specific funds are finished, will be performed by ‘independent experts’. These experts will, at least in part, come from the private sector, with the EDF Regulation specifying that ‘business associations or enterprises of the defence sector’ are among the institutions that will be called upon (Article 26(2)). In contrast to experts evaluating applications under Horizon Europe, the names of the EDF experts are not made public. This raises obvious concerns over potential conflicts of interests (and a lack of transparency, more generally).

In short, the Union pays out high amounts, at generous rates, twice in the chain of production (in the research and in the development phase) to projects that are picked by experts with possible (undisclosed) ties to the industry. On top of that, Member States interested in procurement do not own any of the IPR and thus have to pay the price the (mostly) private beneficiaries set, in order for Member States to actually benefit from the gained insights and end-products.

The report from the Group of Personalities addressed all of the abovementioned features. It explicitly included a proposal for spending €3.5 billion on the development window alone (p. 27). Academics have argued that the mainstreaming of high amounts of funding, especially compared to previous programmes such as the ESRP, is the most effective element of the report. The funding rates up to 100% and the flat fee for indirect costs are also mentioned in the report (p. 26). The Group of Personalities in addition proposed to establish a formal advisory body in which the defence industry ought to be involved (p. 66-67). This suggestion was not implemented, but further solidified the idea that defence industry experts should be included in the governance of the Fund. Finally, while the report adopted qualified language on intellectual property rights, the lobby group AeroSpace and Defence Industries Association of Europe (ASD) has pushed for the eventual outcome of granting full intellectual property rights to the beneficiaries of the EDF. Combined with the numerous more secretive meetings the industry had with Commission officials before the Commission’s proposal for the EDF was finalised, it is difficult not to conclude that the industry has lobbied effectively to shape crucial details of the EDF’s structure in line with its own interests and profits.

Conclusion

Ever since the Commission’s ambition to have a foot in the door in the area of defence has become more concrete, Commission officials have not shied away from embracing the arms industry, as is repeatedly reported at different times by critical civil society observers such as Slijper (2005), Hayes (2009), and Vranken (2017). Perhaps the recently established Directorate-General for Defence Industry and Space (DG DEFIS) in the Commission can develop itself into a hub for defence expertise that can be said to be reasonably independent. However, given the little transparency that is provided in the area of defence in general, it will take time to earn public confidence in this DG as well.

While the political debate on whether it is appropriate and necessary for Member States and the EU to spend more on defence needs to take place first, an equally important question arises of how any such potential increase in funding should be spent. This blogpost argues that further expansion of the EDF is not the way to go. Especially during a period of record-high inflation, a programme of public spending that funds at unusually generous rates, while gaining none of the intellectual property rights of successful projects, combined with the additional risks of conflicts of interest in the determination which projects are selected, seems like an unnecessarily expensive giveaway to the arms industry.

If European leaders insist on more cooperation in the area of defence, further expanding the Member State-driven PESCO projects might look more promising, while granting more competences to the intergovernmental European Defence Agency can also be considered. Another more complex option could be to renegotiate the terms and conditions for an EDF-style policy, to make the programme more cost-effective. In any case, given the high financial and military stakes, the convenience of relying on a supranational policy instrument which already is in full swing (the EDF) should not be the decisive factor in determining how to move forward.