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More €uros for European Capabilities Budgetary discipline and/or defence expenditure

<i>I. The problem(s)</i>
· It is known all too well that Europe has a defence budget problem. Both the quantity and the quality of its defence spending are largely insufficient to provide for the capabilities the EU needs to fulfil its declared ambitions.
· In quantitative terms, military spending in the EU has decreased constantly over the last decade and there are no signs of any fundamental change. No matter how one calculates where actual defence expenditure lies (or hides) in State budgets, it is a hard fact that only Britain maintains a level and quality of defence spending worthy of the name. The main reasons for this are well known, from the rigidity of fiscal policies (further increased by EMU) to the social and demographic structure of European societies, to the deeper-seated reluctance of governments to invest in military capabilities in the absence of any tangible threat. Neither the many wars of Yugoslav succession of the past decade nor 11 September have changed that picture, although nearly everybody (public opinion in particular) seems to agree on the need to do 'more' and to do so together, as Europeans.
· The main problem, however, lies with the quality of European defence spending, i.e. with the way EU member states allocate their limited resources. To start with, defence procurement is fragmented and nationally focused, thus dispersing financial resources that could be better used for the common good and also duplicating assets across the Union. The existing cooperative programmes - such as Eurofighter, Meteor or A400M - are all ad hoc and purely intergovernmental, creating extra costs and delays. Secondly, the overall level of investment (especially on equipment and R &amp; D) is largely insufficient if measured against the shortfalls that the member states have agreed to address together. Thirdly, it is also spread very unevenly across EU countries, even among the six signatories to the 'Letter of Intent' (LoI). Neither do they use comparable budgetary invoicing or have compatible procurement cycles, which further complicates policy coordination and convergence.
<br /><i>II. The possible solution(s)</i>
· Any solution, therefore, should cover both quantitative and qualitative aspects and take advantage of the pressure to increase defence budgets in order to enforce structural reforms.
· On the one hand, all the main military actors inside the EU (bar Britain, of course) presently risk missing the budgetary targets for Monetary Union. As a result, Germany, Italy, and to a lesser extent France, hardly seem in any condition to increase their defence spending without some specially tailored incentive, i.e. some flexibility in the interpretation of the EMU criteria.
· On the other hand, this should by no means entail opening the Pandora's box of exceptions and/or revisions to the Stability and Growth Pact that governs the euro. Moreover, vested interests and 'pork barrel' politics are already well established in the defence field, so that just spending more - even if allowed in general terms - would not necessarily translate into spending better or getting better value for our euros.
· In fact, the hardest challenge is not to find some extra billions for defence but to overcome the current fragmentation of Europe's armaments sector. From the taxpayer's viewpoint, it would be outrageous to increase defence budgets - rather than, say, spending on public services - as long as the duplication of industrial capacities, equipment, procurement agencies and defence-related regulations across the Union persists and creates such a waste of already scarce resources. Given the general shortage of public money, the lack of a common procurement system and of a homogeneous defence economic 'space' (even though some progress is being made on common external trade and dual-use goods) is a luxury that defies political and economic sense.
· As a result, the only incentive that could have an impact on the development of common capabilities and could be compatible with the essence of the Stability and Growth Pact would be temporarily to 'sterilise' costs for cooperative projects that serve as vehicles for reforming current procurement practice. This also implies changing the strictly intergovernmental approach that has characterised the system to date.
<br />· The best solution would certainly be the creation of common assets comparable to NATO's AWACS aircraft, combining the variable geometry of their funding and management structure with the acquisition of a supranational strategic capability (e.g. in lift, air-to-air refuelling, and satellite surveillance). In fact, ordering only one version of a given item for all EU member states would, almost by definition, lower procurement costs and pave the way to new management methods. Besides, the availability of such common capabilities would also reduce the costs of operations in the medium term and facilitate a more 'systemic' approach to ESDP.
· The AWACS logic, however, could be applied only to entirely new common projects of strategic relevance: satellite surveillance, for instance, and/or air-to-air refuelling. At present, in fact, most complex weapon systems in Europe are first developed and built in cooperation, then enter into service in national armed forces. For strategic assets in particular, there would probably be limited consensus on procuring and managing them as EU-own(ed) ones. However, even these programmes could benefit from a special incentive if they a) involve a pre-set minimum number of EU partners, b) are relevant for the Headline Goal Force to become fully operational, and c) are organised in an innovative way, i.e. at least managed by OCCAR and/or benefit from an LoI Global Project Licence.
· Furthermore, certain capabilities - e.g. naval and air lift - could be financed and 'pooled' in a few common bases with a system of &quot;dual answerability&quot;: national and European where they already exist, and primarily European (but available to all member states on request and under certain conditions) when developed in common from the start.
· In this context, the creation of a European Controlling Agency - endowed with much greater powers than the present European Capabilities Action Plan (ECAP) monitoring mechanism - to check the cost-effectiveness of cooperative projects is well worth considering. The controlling agency's assessment and implementation of its recommendations could then become key criteria for the granting of such temporary accounting 'bonuses' - a decision that would in any case require the approval of Ecofin/Eurogroup and should be adopted by the European Council in the first place.
· In the same vein, member states could decide to apply to defence spending the logic recently applied to development aid, by calling on those who fall behind swiftly to attain the EU average on, say, ESDP-related R &amp; D (provided common/compatible indicators are agreed upon). By doing so, the EU average would automatically increase over a pre-established timeframe, which would have a remarkable impact. Here, again, it would be advisable to 'sterilise' such annual increases rather than simply counting on peer pressure and best practice. Such 'sterilisation', however, should be strictly limited to common/cooperative projects, in order gradually to overcome the current fragmentation of European R &amp; D spending.
<br /><i>III. The method(s)</i>
· Such modest derogations or temporary exemptions would be hardly applicable in other EU policy fields (even if so, their European logic could only be beneficial) and would therefore hardly become a precedent for, say, social expenditure or agricultural transfers. They would have minimal negative impact on public deficits but a significant and positive one on common capabilities. It is also worth remembering that a first call for a limited and qualified overhaul of the current accounting and fiscal rules has already been made by the EU Defence Ministers with the recent proposal to 'spread out' the costs of current joint procurement projects over many years, in order to soften their impact on national budgets at the moment of actual acquisition, and to protect investments from the uncertainties of budgetary cycles.
· The idea of targeted and temporary 'bonuses' follows the same principle. It is essential, however, that such special incentives be aimed at filling immediate capability gaps and fostering the establishment of a common procurement system and a more homogeneous defence market. These two goals should then be linked to the development of a common policy for defence-related industries. Europe, in other words, should a) define what industrial and technological capabilities it needs/wants to maintain, b) develop a long-term action plan with this aim, c) implement it on a step-by-step, progressive basis.
· Given the financial and strategic importance of such an endeavour, what seems politically indispensable is an 'armaments St. Malo' (not necessarily with the same national actors, and preferably with more) to kick-start the process, followed by close political supervision during the implementation phase. Institutionally speaking, 'enhanced cooperation' may prove a useful framework, provided the relevant provisions in the Nice Treaty - which currently exclude 'matters having military or defence implications' - are modified accordingly. In this specific policy area (pillar 'one-and-a-half', so to speak), it would also be sensible to establish an ad hoc clause capable of taking adequately into account the peculiar role of the Commission as a market regulator.
· One thing is clear though: the more European citizens/taxpayers feel that their euros are being spent in an intelligent and effective way, the more they will accept spending more of them on security and defence.