Small group of big arms producers profit most of EU defence funding

“It is clear that with the war in Ukraine defence matters have risen to the top of the political agenda. People will want to know exactly what the EU is doing in this area – how money is being spent, what kind of projects are foreseen, how policy is changing”, Emily O’Reilly, the European Ombudsman said in an interview with Investigate Europe. 

So, how is the money being spent? We at Investigate Europe have also been questioning this and have analysed the European Union’s defence development financing. 

Our investigation showed that the funding scheme by the European Defence Industrial Development Programme (EDIDP) is dominated by five companies: Airbus, Leonardo, Thales, Dassault Aviation and Indra Sistemas. These companies are involved in more than half of the funded projects (worth 75 per cent of the total awarded funding by EDIDP), including the most expensive ones. The corporations are part-owned by European states but also co-owned by American funds. At the same time these American funds are shareholders in US military companies. Experts interviewed by IE are concerned about this market concentration.

EU money went mostly to just a few companies, co-owned by four members states  

The European Defence Industrial Development Programme (EDIDP) is defined “an industrial programme of the EU supporting the competitiveness and innovation capacity of the Union’s defence industry” with a budget of €500 million over two years (2019 and 2020). Its main goals are to foster cooperation while developing defence and to support competitiveness within the European defence industry. 

The rules are clear: “Only collaborative projects, involving at least three eligible entities from at least three Member States may receive funding.” But in reality the funding was shared mostly among a few countries and a small group of big companies. 

Data analysis by IE shows that most of the money is being spent on projects that involve big companies from only four countries: France, Spain, Italy and Germany. These are the same countries that jointly proposed the “Permanent Structured Cooperation” (PESCO) in 2017 – a structure in which EU countries aim at a closer cooperation in defence and security policies. 

Of the 41 EDIDP-funded projects, French companies participated in 33, Spanish in 32, Italian in 25 and German in 20. But if we take a closer look at where the funding went, we can see that these four states are also the main shareholders of a small group of military companies that got most of the funding. 

Out of 302 companies that received funding from EDIDP, five companies stand out: Airbus, Thales, Leonardo, Indra Sistemas and Dassault Aviation. These five companies, in different combinations and together with other corporations, are involved in 23 of 41 projects, worth €363 million. These are 75% of the total amount of funding awarded by EDIDP (€480 million). There is no public data about how much of these €363 million each of those five companies will receive. 

Let’s take a closer look at the companies and their involvement: Thales (25,6% owned by the French state) is participating in 17 out of 41 EDIDP projects with €230 million of EU contribution. Airbus (a consortium of French, German and Spanish state funding) is participating in 12 projects with €222 million of EU contribution. Leonardo (where the Italian state holds 30% of the shares) is participating in 15 projects with €301 million of EU contribution. The Spanish company Indra Sistemas is participating in 13 projects with €205 million of EU contribution. Dassault won one project directly, but the most expensive one – the Eurodrone – supported by the EU with €98 million.

One could think these companies would be each others fiercest competitors. But the European military industry is like a Russian doll. Airbus owns part of Dassault, that owns part of Thales, that owns parts of other companies (such as Edisoft in Portugal or Naval Group in France). Together with Leonardo (that owns part of Hensoldt in Germany) Thales owns parts of  Telespazio and Elettronica. And these are just some examples of how the companies that received EU funding are intertwined.

And that’s not all, these five mentioned companies are not just winners according to the number of projects they got – they also won the biggest projects with the highest amount of money. Projects such as Eurodrone (official name MALE RPAS) is worth €290 million, of which the EU contribution is more than €98 million. This project has received the most EU funding so far and it is a joint project won by Airbus (France, Germany and Spain), Dassault (France) and Leonardo (Italy). It is a project that after decades is still in the “study and design” phase and has so far not attracted much interest beyond the member states that are developing it.

Smaller competitors are angry, experts are concerned
As one of the goals for the EU defence development, the EU Commission stated: “To support and leverage cross-border cooperation between undertakings, including small and medium-sized enterprises (SMEs) and middle capitalisation companies (mid-caps), throughout the Union”. 

The rules for the applications also state: “Only collaborative projects, involving at least three eligible entities from at least three Member States, may receive funding”. But there’s no protection in the rules against cross-border ownership of SMEs by the big companies. The same company can own three “entities” in several different member-states. And while there are, in fact, many SME’s involved in the joint proposals, they are getting just a fraction of the funding the big players get.

IE contacted some of the small companies that have been awarded funding but they only agreed to talk with us for background. They shared strong criticism about the weight given to the giant companies in the calls, and about their power in a market that has only states as clients. 

Martin Schmalz is a German economist and associate professor of Finance at Oxford. When we shared with him the structure of these companies that dominate the EU’s military market, Scholz expressed concern: “If you look at the market capitalisation of these companies, you don’t get the impression that they sell their products at cost. More than the weakening of competition, I would be concerned about lobbying: if there are such strong private interests in more defence spending, it may distort policy and public debate.”

Matt Stoller, director of research at the American Economic Liberties Project and a fellow at the Open Markets Institute, is also critical about this concentration in the European defence market. “Generally speaking, the more consolidated the defence sector, the less innovation and worse pricing there is for governments”, he told IE. ”The biggest risk for defence spending is corruption, since lobbying over huge sums of money has such a high return. If there is a small club of insiders, whether through overlapping ownership stakes or common ownership or just not having very many contractors, then the risk goes up.”

Arms producers over-represented in EU Commission expert groups?

Defence companies have had a strong presence in groups shaping the Commission’s defence policy from the beginning: In 2015, the European Commission created a “Group of Personalities on Defence Research” (GoP) to provide strategic input on European security and defence policy. This GoP had 16 members. Seven of them represented the military industry (Airbus Group, BAE Systems, Finmeccanica – former name of Leonardo -, MBDA, Saab, Indra and ASD). Two members represented private research institutes performing military research (TNO and Fraunhofer-Gesellschaft). Civil society was not represented, nor was academia.

The conclusions of the GoP’s report urged the EU to “strengthen Europe’s overall military posture” and to fund this with €3.5 billion into military research. This recommendation was literally copied into the European Defence Action Plan published by the Commission in November 2016.

American funds as shareholders in both EU and US defence companies 

The top five European military companies that receive the lion’s share of this new EU funding are not only part owned by the state, they also have among their shareholders a list of American investment funds. And here the situation is even more complex. IE’s research shows that all these funds are also shareholders in rival US companies in the arms industry: Boeing, Lockheed Martin, Raytheon Technologies, General Dynamics and Northrop Grumman.

BlackRock for example owns percentages of Airbus, as well as Leonardo, Thales, and Indra Sistemas and Dassault. In the US rival companies, the same fund owns percentages of Boeing, Lockheed Martin, Raytheon, Northop and General Dynamics. And with other US investment funds like Capital and Vanguard, the situation is similar – they all own percentages of the several European arms companies as well as of their US competitors. (For more details see graphs)

Matt Stoller considers this is also to be a “significant problem”. For the American economist “common ownership creates incentives for higher prices, less innovation, and lower output.”

This “common ownership” problem happens when most of the companies of the same sector are partly owned by the same shareholders. The clear risk of trust, or anti-competition, goes up if all the competitors receive the same strategic guidance from their owners. 

But Stoller can’t be totally sure if that’s the strategy of the American funds in Europe’s military industry. “Index funds like Blackrock and Vanguard probably do not target the military sector specifically but are broadly buying corporate equities. It still is a significant problem that distant funds control a significant chunk of all firms in a specific line of business.” 

The same precaution leads Martin Schmalz to say that his “intuition” is that “national interests are much more important than the influence (or lack of influence) of certain shareholders”. Nevertheless, this raises the risk. “The recent consolidation in the industry, now combined with common ownership, raises fears that the already weak competition will be further weakened.”

IE asked commissioner Margrethe Vestager’s office about this risk. We did not receive any official answer. Commission sources explained that although they are aware that “certain defence markets are highly concentrated” they can only act if “there is evidence of anticompetitive conduct”.

Other Commissioners say they are not concerned about a potential influence of shareholders. “I have no worries about that”, Thierry Breton, the Commissioner for the Internal Market, who is responsible for the European Defence Fund, answered to our question in a press conference. “I have always taught my students the difference between shareholding and the responsibilities of a company and of management. In Europe we often mix the two.”

BlackRock assured us that “military policy issues have never been part of our advocacy engagement with EU stakeholders.” The big American fund manager that holds shares in all top five European military companies answered IE’s questions explaining that they “do not provide direction on how to manage their business, which is the responsibility of company boards and management”. 

Even if the EU officials and BlackRock assure that there is no problem regarding competition rules, Laëtitia Sédou, from the European Network Against Arms Trade (ENAAT) is worried. “We are opening a Pandora’s box, Europe is becoming a cash cow, a source of funding without constraints.”

IE sent questions to all above mentioned funds and companies. Only Blackrock did respond on the record. The five arms producers Thales, Leonardo, Airbus, Indra Sistemas and Dassault Aviation did not respond in time for this publication.