The much anticipated “Draghi-report” published earlier this month has by now made its way into most parliaments, cabinet offices and boardrooms. The almost 400 pages of analysis and recommendations provide a stark warning for the EU to clean up its economic and industrial act.
The conclusions from the main report (section A) have already been covered in op-eds, policy briefs and essays, but section B of the report, which contains sector-specific in-depth analyses, still contains valuable nuggets of information.
Many of the sectors mentioned in the report are direct research areas of The Hague Centre for Strategic Studies. In this Draghi Report Series, we decided to ask our experts for their views on specific sections of this high-profile report.
For the fifth article in our Draghi Report Series, HCSS director of research Tim Sweijs and director of the security programme Frank Bekkers give their take on the report’s section on Defence.
– Which policy recommendations do you think are the strongest, and why?
Tim Sweijs: The Draghi report highlights the current fragmentation of the EU defence industry. The reality is that Europe needs scale. Aggregating the defence needs of individual Member States would help consolidate supply chains and encourage production specialization within the EU. This could be accomplished through either an EU-led purchasing program or multi-country government-to-government agreements, particularly in areas requiring significant infrastructure and technological investments.
Another important recommendation is the development of a medium-term EU Defence Industrial Policy. This policy should promote industrial cooperation, strengthen European supply chains, and foster the specialization of industrial clusters within Europe, while also encouraging the participation of SMEs, including those from civilian sectors, in defence supply chains.
Frank Bekkers: Overall, the Draghi Report is not surprising, but thorough and honest in its assessments. The policy recommendations are recognizable, and sensible.
Apart from the recommendations 2 (demand pooling), 3 (EU Defence Industrial Policy) and 4 (EU-level funding) highlighted in the report itself, one of the recommendations that stands out is number 8: the integration of civil technology and its innovation cycles. The innovative power of (mostly) Small and Medium-sized Enterprises (SMEs) should be used to foster innovation in the defence sector, but these companies do not see themselves as defence companies. The defence market is a closed market: there are many entry barriers. As a result, there is too little cross-pollination between civil and defence companies in domains such as space and drones. Moreover, competition in the defence industry is extremely low. Traditionally, in many defence sectors, the business landscape consists of a single customer and a single supplier. This prevents competitive pressure and the need to innovate and deliver the best price-quality ratio.
– Is there anything missing in the policy recommendations? What would you add?
Frank Bekkers: There are some inherent tensions in the defence industry dynamics that could have been mentioned more explicitly because they need to be addressed explicitly. Firstly, you want rapid innovation, but fast innovation cycles can also prevent achieving economies of scale. The second area of tension is the choice between product innovation and stockpiling. Any functional defence system must have adequate stockpiling of ready-to-use weapons and ammunition. This means there is always a level of outdatedness in your equipment. The third area of tension is the lag between rapid innovation and the embedding of these innovations in the defence organizations. You can design technology quickly, but the question remains if the defence organization itself can adapt fast enough. One of the principal solution directions should be modularization: in design, in production, in organizational introduction and embedding. This would be easier for supply chains, and for organizational adaptability.
Tim Sweijs: The report could have emphasized more strongly the importance of Small and Medium Enterprises (SMEs) and the need to Europe for SME scale ups: lots of innovation is happening there. Unfortunately, in the EU too many barriers exist for the successful growth and scale up of such companies. The EU is very bad at promoting knowledge excellence and bring to market cutting edge technologies through dedicated funding. Also missing is the European equivalent of the US Advanced Research Projects Agency to develop beyond the horizon technologies: where is the European DARPA? Another critical gap, not mentioned, is the EU’s falling behind in creating Foundational Models so essential for new generative AI applications. It risks being overly dependent on third country suppliers of such technologies with potentially profound economic and security ramifications.
– Which figure or data point in the report did you find most insightful, and why?
Tim Sweijs: Firstly, a significant portion of EU defence spending is directed outside the bloc, with 78% of all defence procurement expenditure going abroad, of which 63% was directed to the US. Between 2021 and 2022, US Foreign Military Sales to Europe rose by 89%, but European companies still face legal barriers to accessing the US market.
Secondly, EU defence research and development (R&D) spending remains low compared to the US. In 2022, EU Member States collectively invested EUR 9.5 billion in defence R&D, including EUR 3.5 billion in defence research and technology (R&T). An additional EUR 1.2 billion came from the European Defence Fund (EDF) for collaborative R&D, bringing the total to about EUR 10.7 billion. This pales in comparison to the USD 140 billion the US Department of Defence allocated for R&D, testing, and evaluation in its 2023 budget. The US has prioritized R&D and R&T spending since 2014 and continues to do so, with the largest budget increases going to these areas in 2023.
Lastly, collaborative defence research efforts within Europe are minimal. Collaborative defence R&T in the EU amounted to EUR 237 million in 2022, representing just 7.2% of total defence R&T, which is well below the 20% benchmark set by Member States.
Frank Bekkers: Figure 1 (defence spending over time) paints a clear picture of the historical defence spending, against which current defence spending numbers are quite low. We are in a comparable period of threat as during the Cold War, but back then we comfortably spent 3.5 percent of our GDP on defence. Historically, the 2 percent NATO norm is comparatively low. Defence is the insurance premium a country pays to keep safe. And, given the risks we are currently facing, that premium increases. For instance, Draghi advises that we must keep spare defence capacity, so to be able to scale up quickly in times of crisis and war. Such a policy has a substantial price tag.
– How do you view the feasibility of these plans in a European context?
Frank Bekkers: Important for the successful implementation of any EU defence strategy is that the large countries with large defence industries must act more generously towards other member states. They must include smaller countries’ defence companies in the supply chain. This applies to countries such as France, Germany and Italy. France, for instance, supports defence consolidation in Europe, but would like to do so under French leadership. Indeed, in many defence sectors, French system integrators could act as hubs, but certainly not in all sectors, not as monopolists, and with a supply chain of European-wide best-in-class and innovative companies. Many of Draghi’s proposals are intended to enforce that. Draghi’s recommendations are aimed at top-down policies. But if the leading member countries and key companies do not want to cooperate bottom up, it will not work. The ‘national champions’ must willingly go along with such a strategy.
Tim Sweijs: Overall, the successful implementation of these policies is politically problematic because of reasons of sovereignty, especially in such a sensitive area as defence policy. In the long run, it might be doable. I fully agree with Frank here: it would be necessary to involve Germany, France, Italy and Poland to create European champions, while creating buy in from other nations and their industries by building clusters of excellence based on national strengths. This way everyone, also the smaller nations, benefit from the creation of knowledge and production clusters around these European champions.
Stay tuned for the next issue of the Draghi Report Series by HCSS, where we invite experts to discuss other sectorial policies in Mario Draghi’s report “The future of European competitiveness”.
Read the previous installments here:
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