Documents considered by the Committee on 22 March 2017 Contents

11European Defence Action Plan

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; further information requested; drawn to the attention of the Defence Committee

Document details

Communication from the Commission: European Defence Action Plan

Legal base

Department

Ministry of Defence

Document Number

(38351), 15160/16, COM(16) 950

Summary and Committee’s conclusions

11.1In November 2016, the EU’s High Representative for Foreign Affairs (Federica Mogherini) presented a policy document outlining initiatives to ensure the EU’s defence industrial base can meet the EU’s Member States’ “current and future security needs”.54 This “European Defence Action Plan” (EDAP) has three pillars to address Member States’ needs with respect to the development and purchase of defence technologies:

11.2In her Explanatory Memorandum,55 the Minister for Defence Procurement (Harriett Baldwin) states that the Government considers the Action Plan to be “predominantly positive for Member State capabilities … and the UK defence industry”. She goes on to express a note of caution with respect to the Capability Window, saying the Government was not convinced of its “added value and remit”, or how it would be funded.

11.3In our view, the Action Plan contains a number of high-level policy ideas which might assist Member State governments to develop their defensive capabilities more effectively. However, two significant elements of the Action Plan—the Capability Window of the European Defence Fund and the scope of European Investment Bank lending to the defence industry—lack the necessary detail for us to come to an informed conclusion on their implications.

11.4The Action Plan also has clear relevance for the process of the UK’s exit from the EU. The future of UK-EU defence cooperation will be major element of the Article 50 negotiations. With respect to EU support for the defence industrial base, the Government will have to decide whether to seek access for UK businesses to military procurement markets in other Member States and whether our defence industry should be able to tap into EU sources of funding, including the “Research Window” of the Defence Fund (see paragraphs 11.29 to 11.32 for more details).

11.5We do not expect the Minister to prejudge now what the outcome of the Article 50 negotiations on these matters will be. However, we look forward to receiving information from the Minister after the start of the withdrawal process on Government aspirations for the shape and scope of post-Brexit defence cooperation between the UK and EU.

11.6Finally, we would ask the Minister to clarify her remark in the Explanatory Memorandum that the European Defence Fund should “not disadvantage the UK Defence industry once we have left the EU”. We would be grateful to know what aspects of the Fund the Government believes pose a risk, and whether it will seek continued participation in the Fund after Brexit.

11.7As any proposals resulting from the European Defence Action Plan should be subject to their own scrutiny in due course, we are content to clear the document from scrutiny. We also draw it to the attention of the Defence Committee to assist it in its inquiry into Defence Acquisition and Procurement.

Full details of the documents

Communication from the Commission: European Defence Action Plan: (38351), 15160/16, COM(16) 950.

Background

11.8In December 2013, the European Council kicked off a process of strategic reflection on the achievements of, and challenges facing, the EU’s Common Security and Defence Policy (CSDP).56 It asked the European Commission to produce an assessment report on global challenges to the EU, which was presented by the High Representative for Foreign Affairs (Federica Mogherini) to the European Council in June 2015.57 On the back of this report, the EU Heads of State and Government invited Mogherini to produce a strategy on foreign and security policy by June 2016. The Minister for Europe (Sir Alan Duncan) explained that the Strategy was born out of a growing concern amongst a number of Member States that the EU lacked strategic direction in its external action, especially faced with evolving challenges.58

11.9The resulting Global Strategy for Foreign and Security Policy was published in July 2016 and presented to the European Council in December.59 It set out the EU’s priorities in its foreign policy, including moves towards voluntary integration of Member States’ national defence capabilities (see paragraph 11.16), creating greater coherence between the different elements of the EU’s external policy and implementation of the UN’s Sustainable Development Goals.60 With respect to defence, the High Representative argued that the EU’s defence industrial base could benefit from EU support by “encourag[ing] greater investments and skills across Member States through cooperative research and development, training, exercises and procurement programmes”.

The European Defence Action Plan

11.10The High Representative’s policy proposals to support the EU’s defence industry, and by extension Member States’ military services, were worked out further in the European Defence Action Plan (EDAP), published by the European Commission in November 2016. The purpose of initiatives outlined in the document is to ensure that the EU has a defence industrial base that can meet its “current and future security needs”. The Action Plan does not foresee any new legislative proposals.

11.11The High Representative explicitly recognised that investment in defence remains, under the EU Treaties, “the prerogative and responsibility of the Member States”. She added that the Action Plan is meant to “complement, leverage and consolidate” collaborative efforts to develop defensive capabilities, while recognising that it “must not be a substitute for low levels of Member States’ defence investments”. The premise of the Action Plan is that further initiatives at EU-level could provide added value by improving the competitiveness of the EU’s single market for defence products and services, incentivising cross-border defence cooperation and reducing duplications of public procurement of defence products and services.

11.12To achieve the above, the Defence Action Plan has three pillars to address Member States’ needs with respect to the development and purchase of defence technologies:

The European Defence Fund

11.13The Action Plan outlines the Commission’s proposals for the creation of a European Defence Fund (EDF). While presented as a single initiative, it would in fact consist of two distinct elements: the Fund would finance both collaborative defence research projects (the “Research Window”), as well as the joint development and purchase of defence capabilities (the “Capability Window”).

11.14The EDF’s “Research Window” would fund cross-border research projects in innovative defence technologies such as electronics, meta-materials, encrypted software or robotics. It is the Commission’s response to falling investment in defence research in the EU, which has decreased by 27 per cent between 2006 and 2013. The Council and the European Parliament have already approved €25 million (£21 million)61 to fund a pilot project on defence research under the 2017 budget,62 and this budget allocation could grow to a total of €90 million (£77 million) by 2019. Under the EU’s post-2020 multiannual financial framework, the Commission intends to table a specific legislative proposal to create a dedicated EU defence research programme with an estimated budget of €500 million (£426 million) per year.

11.15The contours of the “Capability Window” are much less well-defined than those of the Research Window. The Commission explains that it is meant to be a “financial tool allowing participating Member States to purchase certain assets together to reduce their costs”. The Capability Window would address obstacles that hamper the joint development and purchase of defensive technology by multiple Member States, which the Commission has identified principally as a lack of coordination at EU-level of both the planning and financing of such cross-border projects.

11.16The Action Plan clearly reiterates that any defence capabilities developed under the Capability Window would remain in the ownership of the participating Member States. However, we note that EU Defence Ministers have recently begun considering the possibility of “Permanent Structured Cooperation” (PESCO), the voluntary integration of defence capabilities between a sub-set of willing EU Member States.63 At their meeting on 14 November 2016, Ministers agreed to “explore [its] potential” and asked the High Representative for Foreign Affairs to “provide elements and options for reflection as soon as possible”.64 At this stage it is unclear how PESCO would operate in practice, how it might interact with the European Defence Fund and what structures would be created at EU-level to manage any integrated defence capability.

11.17According to the Commission, joint investment under the Capability Window framework could eventually total €5 billion (£4.3 billion) annually, although it will examine its potential in more detail over the course of 2017. In her Explanatory Memorandum, the Minister for Defence Procurement (Harriett Baldwin) notes that the Government is not convinced this element of the Defence Fund adds value, given defence capability projects already underway in the European Defence Agency and NATO. She adds that “a number of other Member States” also remain sceptical of the proposal. The Minister also notes that it is “unclear where the €5 billion per annum quoted will come from”.

Investment in defence supply chains

11.18The second component of the EDAP consists of initiatives to help European suppliers to the defence industry access sources of finance to help them grow. The Commission wants to work with the Member States to foster investments in the industry, in particular start-ups and smaller businesses that lead on the development of innovative technologies that may be seen as too risky by financial institutions to qualify for investment.

11.19At first instance, the Commission wants to increase the defence industry’s uptake of funding from the European Structural & Investment Funds (ESIFs).65 The Action Plan explains that Member States can already use their allocation under the ESIFs to support defence industry suppliers, provided that the financial support meets the criteria of the Fund in question (such as stimulating economic development or increasing employment). The Commission wants to engage with the Member States to increase ESIF investment in the defence sector further.

11.20A second source of additional EU investment in the defence sector is the European Investment Bank (EIB). The EIB is the EU’s development bank, which invests in projects seen to contribute to growth and employment in the EU. Its shareholders are the 28 Member States, who have provided it with subscribed capital of €233.2 billion (£198.9 billion), of which the UK contributed €37.6 billion (£32 billion).66 In 2015 alone, the EIB invested approximately €16 billion (£13.6 billion) in the UK.67

11.21In its Action Plan, the Commission notes that the EIB can already invest in the development of “dual use” technologies, with a view to subsequent commercialisation in civilian applications. However, at present it cannot engage in lending activity related to the development of ammunition, weapons or military equipment.68 The Commission appears to want to loosen these lending criteria to make it easier for the defence industry to obtain EIB loans or guarantees.69 The Action Plan does not provide further detail on how the criteria might be “adapted”, beyond the fact that any changes would be “within the limitations of the Treaties and subject to the necessary decisions by the relevant EIB bodies”.

Single Market for defence products and services

11.22The final pillar of the Action Plan is to “strengthen the Single Market for defence”. The Commission says it aims to strengthen the conditions for an “open and competitive defence market in Europe” to help companies operate across borders, and to help Member States get best value for money in their defence procurement.

11.23To this end, the Commission will continue to engage with Member States to ensure the “effective application” of two existing Directives which are relevant in this area:

11.24In addition, the Commission also wants to facilitate cross-border participation in defence procurement, support the development of industry standards and promote the contribution of sectoral policies, such as EU space programmes, to common security and defence priorities.

Our assessment

11.25The European Defence Action Plan contains a number of high-level policy ideas to provide support to Europe’s defence industry, which in turn could assist Member State governments in developing their defensive capabilities more effectively. However, two significant elements of the Action Plan—the Capability Window and the loosening of the European Investment Bank lending criteria—lack the necessary detail for us to come to an informed conclusion on their implications.

11.26With respect to the Capability Window, it is not clear from the Commission document how this aspect of the European Defence Fund will be established, what its legal basis will be and what form it will take. We have asked the Minister to confirm whether the Capability Window is expected to be an intergovernmental platform; whether it is expected to be established via a formal legislative proposal; and what responsibilities might be allocated to the European Commission or the European Defence Agency to oversee its functioning.

11.27Similarly, the Commission’s proposal to “adapt” the European Investment Bank’s lending criteria are not fleshed out in the Action Plan. It is not clear in what way the Bank’s list of “excluded activities” would be altered to permit investment in the defence industry.

Implications of Brexit

11.28Defence cooperation between the UK and the EU will be major element of the UK’s forthcoming negotiations on its withdrawal from the European Union. The contents of the Action Plan should therefore also be assessed from the viewpoint of the UK as a non-EU Member State. The UK’s exit from the EU has a number of clear implications:

The Government’s view

11.29The Minister for Defence Procurement (Harriett Baldwin) submitted an Explanatory Memorandum on the European Defence Action Plan on 21 February 2017. After summarising the Commission paper, she notes that the Government considers the content of the EDAP to be “predominantly positive for Member State capabilities, the EDTIB [European Defence Technological and Industrial Base] and the UK defence industry”. She adds:

“The Research Window in particular offers the potential to support member states defence capabilities and stimulate cross-border innovation. More generally, the EDAP emphasis that defence remains a matter of national sovereignty; that the ownership of capabilities will remain with the Member States; and that the EDAP is not a replacement for national defence investment.”

11.30However, the Minister goes on to express a note of caution:

“We do have some concerns over the added value and remit of the Capability Window element of the Defence Fund in particular. It is unclear where the €5 billion per annum quoted will come from; while the relationship of the Capability Window with similar capability activity in the European Defence Agency and NATO has yet to be defined. A number of other Member States also remain sceptical of the added value of the Capability Window.”

11.31The Minister concludes with the Government’s objectives in the implementation of the Action Plan, saying its “primary objectives” are to ensure that:

11.32By themselves, these consequences of Brexit need not have any significant negative effects for the UK defence industry, and all could be addressed during the Article 50 negotiations or by domestic policy initiatives prior to Brexit. However, none of these aspects are considered in any detail in the Minister’s Explanatory Memorandum. The Minister’s only mention of Brexit is made with respect to the European Defence Fund, where she says:

“[The] UK’s primary objectives on the Defence Fund will be to ensure … that any capabilities developed should be made available to all institutions such as NATO, the EU and the UN, and that the Fund does not disadvantage the UK Defence industry once we have left the EU.”

11.33This intriguing remark is not elucidated further.

11.34More broadly, there is as yet little clarity about the Government’s preferences for defence cooperation with the EU after Brexit. Although it will clearly be a priority area for both sides given the alignment of EU and UK foreign affairs priorities and the UK’s extensive military capabilities, it is unclear what political and legal structures the Government envisages will replace the UK’s direct participation in the Common Security and Defence Policy.77 We look forward to receiving more information from the Minister on this issue once the Article 50 negotiations are underway.

11.35We have asked the Minister to clarify whether the Government agrees, in principle, with the Commission’s proposal; when she expects the EIB to present the conclusions of its reflections on this matter; and what specific adaptations are foreseen.

Previous Committee Reports

None on the European Defence Action Plan. For our Report on the EU’s Global Strategy on Foreign and Security Policy, see: Eleventh Report HC 71-vix (2016–17) chapter 19 (14 September 2016) and Ninth Report HC 71-vii (2016–17) chapter 7 (20 July 2016).


54 COM(2016) 950, “European Defence Action Plan“ (30 November 2016).

55 Explanatory Memorandum submitted by the Ministry of Defence (21 February 2017).

56 European Council conclusions (19–20 December 2013).

57 The assessment report on the CSDP is available on the European Commission website.

58 Explanatory Memorandum submitted by the Foreign and Commonwealth Office (13 July 2016).

60 For more information on the EU’s implementation of the Sustainable Development Goals, please refer to our Report of 25 January 2017 on the “New European Consensus on Development”.

61 €1 = £0.85305 as at 3 March 2017.

62 European Union’s general budget for the financial year 2017, budget line 02 04 77 03.

63 See Article 46(2) of the Treaty on European Union.

65 The ESIFs include the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund.

66 See Protocol 5 to the EU Treaties on the Statute of the European Investment Bank.

69 The European Commission nominates one of the EIB’s 29 Directors. The others represent each of the Member States.

70 Directive 2009/81/EC on procedures for the award of defence and security contracts.

71 A 2016 European Commission report showed that the application of the Defence Procurement Directive has been uneven: Germany and France are the largest users (22% and 21% of all contracts awarded respectively), but the UK placed 57% of all contracts awarded, by value. The Commission estimates that only 8.5 per cent of defence procurement expenditure is covered by the Directive.

72 Directive 2009/43/EC on transfers of defence-related products.

73 The Directives are transposed into UK law by means of the Defence and Security Public Contracts Regulations 2011 and the Export Control (Amendment) (No.2) Order 2012 respectively.

74 European Commission, “Horizon 2020: Associated Countries“ (January 2017).

75 On 17 January 2017, the Prime Minister said that “There may be some specific European programmes in which we might want to participate [after Brexit]. If so, and this will be for us to decide, it is reasonable that we should make an appropriate contribution”.

76 In August 2016, the Chancellor (Phillip Hammond) announced that “all structural and investment fund projects signed before the Autumn Statement [23 November 2016] will be fully funded” will be guaranteed by the Government after Brexit. In October 2016, the Treasury added that projects in receipt of EU funding which were signed after the Autumn Statement could also benefit from that guarantee on a case-by-case basis, provided they are “good value for money” and “in line with domestic strategic priorities”.

77 In its February 2017 White Paper on Brexit, the Government said: “We want to use our tools and privileged position in international affairs to continue to work with the EU on foreign policy security and defence. … [We] will continue to play a leading role alongside EU partners in buttressing and promoting European security and influence around the world”.




24 March 2017