European Arms Production and the War in Ukraine: A March 2024 Update

Paris – The top executive of Dassault Aviation, builder of the Rafale fighter jet, gave March 6 a guarded welcome to the European Commission’s call for a clear and collective strategy to build an arms industry in Europe in response to the Russian invasion of Ukraine.

“I am delighted that Europe is aware,” executive chairman Eric Trappier said in response to a question at a news conference on the company’s 2023 financial results.

“Between the awareness and the reality of building a defense industry in Europe, it will take a few years…a few decades,” he said, when asked about the commission’s call for pooled procurement of European-built arms by the 27 member states of the European Union.

“Bravo for the awareness,” he said, adding that the European policy drive should not be hidebound by rules.

“My recommendation for Europe is that it should be simple, not complex… not caught up in norms,” he said. In a war economy, weapons should be the center of attention, not norms.

“I am delighted at the call to awareness,” he said.

The senior executive was speaking a day after the executive arm of the E.U. unveiled its proposed European Defence Industrial Strategy (EDIS), backed by an initial budget of €1.5 billion ($1.6 billion) for 2025-2027.

That policy drive seeks to foster a pooled purchase of weapons built by companies within the E.U., and includes a welcome to Ukrainian companies to supply arms, even though Ukraine is not an E.U. member state.

“Two years ago, Russia’s unjustified, on-going war of aggression against Ukraine marked the return of high-intensity conflict on our continent,” the Commission said in a March 5 statement. “The European Defence Industrial Strategy sets a clear, long-term vision to achieve defence industrial readiness in the European Union.”

The Commission’s use of a photo of a Boeing F-18 Hornet fighter jet in the official presentation was seen as slightly deflating its call for greater procurement of European arms rather than a reliance on U.S.-built systems.

It will be up to the E.U. member states and the European Parliament to decide whether the industrial strategy will be adopted.

An attempt to shift arms industry policy follows lively debate over European strategic autonomy, while seeking a response to Russian president Vladimir Putin’s attempt to seize Ukraine, and the upcoming U.S. election, which pits former president Donald Trump against the present White House incumbent Joe Biden.

French President Emmanuel Macron called March 5 for allies of Ukraine to avoid being “a coward,” with a critical time approaching. The French head of state was visiting Prague and was speaking of the Russian invasion of Ukraine.

More European

“The cry is to ‘invest more, better, together and European,’” Nick Witney, senior policy fellow of the European Council on Foreign Relations, a think tank, said on the announcement of the proposed industrial strategy.

That proposed strategy shift would be underpinned by funds from the European Defence Industry Programme (EDIP), but €1.5 billion over three years “is no bonanza,” he said.

The Commission’s bid to boost European weapons calls on procurement of at least 40 percent of military equipment in a pooled “collaborative manner” by 2030, calling for arms trade within the E.U to account for 35 percent in value of the whole market, and member states to spend half their arms procurement budgets within the E.U., he said.

That 50 percent of arms spending should rise to 60 percent in 2035, the Commission said in its statement on the proposed industrial strategy.

A financial drive underpins the Commission’s search for increased orders on the continent for European military kit.

“EDIS proposes new incentives to encourage collaboration on equipment support and calls for investment from the European Investment Bank to bring in private sector money,” Witney said. “Use of the windfall profits from Russian frozen assets is also suggested.

“Free money” will no doubt be welcome to the member states, he said. “But during consultation (on industrial strategy) major players signalled their nervousness about a Commission ‘power-grab.’”

There may also be less support for a proposed European version of U.S. Foreign Military Sales to support arms exports, and a joint defence programming and procurement based in Brussels, he said.

The Commission’s pursuit of stronger procurement of European weapons draws heavily on a report from a think tank, Institut des Relations Internationales et Stratégiques, website Politico reported.

Procurement of arms from outside the E.U. accounted for 78 percent of member states’ orders 2022-2023, with the U.S. accounting for 63 percent of those orders, said the policy report, titled The Impact of the Ukraine War on the European Defence Market, written by Jean-Pierre Maulny, deputy director of the French think tank.

Orders for U.S. military kit were mainly made through the government-to-government FMS channel, which was easier to handle than commercial contracts, and the preferred method by European nations, the report said. Among E.U. nations, Germany is the main provider, with some half of the sales.

The report was published September 2023.

Dassault net profit rises

Dassault reported 2023 adjusted net profit of €886 million, up from €830 million in the previous year, with the former making an adjusted net profit margin 18.5 percent of adjusted sales of €4.8 billion, down from €6.9 billion.

The rise in net profit stemmed from gains in financial products due to higher interest rates,  and its 25 percent stake in Thales, an electronics company.

Adjusted operating profit fell to €349 million from €572 million, with an operating profit margin of 7.3 percent of sales.

Orders last year fell to €8.2 billion from €20.9 billion, with the 2022 orders boosted by the United Arab Emirates’s signing for 80 Rafales.

The total order book rose to €38.5 billion from €35 billion, while cash holding fell to €7.3 billion from €9.5 billion. The company forecast 2024 sales to rise to some €6 billion.

The EDIS strategy is outlined below.

DEFIS_EDIS_factsheet