Rishi Sunak wants to put the UK defense industry on a “war footing”. The British prime minister’s promise to increase defense spending to 2.5 percent of GDP in response to the war in Ukraine and other threats is welcome news for companies like BAE Systems and the legion of other organizations that make up Europe’s largest defense sector.
Even before Sunak’s intervention, their order books were bulging as governments around the world increased spending. Shares in BAE Systems, Britain’s leading contractor, have risen 40 percent in the past 12 months – well ahead of the broader British index.
However, hopes for progress on an important front are likely to be dashed. The EU is also looking to strengthen defense budgets and industrial resilience, but Brexit means British industry could be left out. European Commission President Ursula von der Leyen told an industry conference this year that it was important to “spend more, spend better, spend European” as part of the bloc’s first-ever defense industrial strategy. The initiative is subject to proposals from Member States. It remains to be seen exactly how the rules will work in practice, but alarm bells are already ringing among British executives.
“It is good that the Commission wants to talk about the defense industry, but there are concerns about setting broad policy objectives under the new strategy,” one said.
The strategy aims to source at least 50 percent of its budget from European defense suppliers by 2030 and 60 percent of its budget by 2035. The aim is to strengthen the bloc’s resilience in part by reversing the trend of member states buying foreign-made equipment. Although US weapons are the main target here, British industry will also be hit. UK companies can only participate on the same third country basis as other non-EU members.
In the four years since Britain left the EU, British industry has already been effectively excluded from certain activities such as the almost €8 billion European Defense Fund – companies from third countries can only benefit from funding if they meet certain conditions and operate on EU soil. But there are concerns that the policy intent of the strategy will be broader and exclude British companies from new programs.
“Ukraine has shown that industrial capacity is a significant part of a country’s national security,” said Kevin Craven, chief executive of ADS, the British industrial and trade group. “The point is that there is an opportunity cost for the UK defense industry if it is unable to participate in the EU’s future defense industrial strategy.”
A particular concern is that existing industrial partnerships could be stifled. BAE generates more than 40 percent of its annual revenue in the U.S., but the company remains a major player in Europe, partly through collaboration programs. It is one of the main shareholders of MBDA, the European world rocket champion. Many smaller British companies in the supply chain are also involved.
Brussels insiders say that while there is a lot of sympathy for British industry, the rules for third country companies are clear. They also point out that the EU-UK defense and security relationship was excluded from the 2020 Brexit negotiations at the UK’s insistence.
But long-time defense observers argue that there will also be costs for the bloc if it unilaterally rules out British industry involvement. According to the International Institute for Strategic Studies, before Brexit, the UK had around 20 percent of all military capabilities within the EU. Several European companies, including Airbus and Leonardo, also have large operations in the UK. There is some uncertainty about how these might be addressed within the new EU defense strategy.
A senior British industrial manager says: “This is about the health of Europe’s defense industrial base. What we want to avoid is mutually assured disruption.”
Russia’s invasion of Ukraine has proven to be a turning point for European security and the European defense industry. The war has led to close cooperation between the EU and the UK in their efforts to support Ukrainian forces. There is some optimism that closer industrial cooperation could still be possible if both sides can agree on a defense and security pact. If policymakers in both camps can accept that defense is more about Europe’s geography than political boundaries, the door may not remain closed to British industry forever.