European Union Strategic Compass - Reflections on Defence Investments
The publication of Strategic Compass contributes, in part, to correct this situation, defining an evolutionary framework that aims the balance of forces between all EU Member States, based on joint innovation and Research & Development, through collaborative projects submitted to European programs available, based on SME ecosystem. In defense investment, the European Union is not restricted to the European Defense Fund and extends funding to other European programs, that support technological and digital innovation projects. Furthermore, it assertively and explicitly challenges the European Investment Bank to rethink the analysis and financing of these projects. Finally, it extends this mission to private, banking or fund capital. In short, given the scarcity of public capital to finance defense economy, there is a set of regulatory constraints that limit the attractiveness and operation of financial agents (banks, para-banking societies, venture capital, investment funds, pension funds and other financial companies) in financing this sector and this type of operations. However, the financing of defense investment by private capital remains a taboo, as it is not accepted by broad military, political and financial sectors.
This new philosophy of defense financing has several obstacles or challenges, some of which could, from a visionary and strategic point of view, establish themselves as opportunities for evolution. Two stand out.
The first stems from a set of European rules and regulations associated with sustainable finance. These rules guide capital flows to support the energy and digital/technological transition, in connection with prudential risk management through the application of ESG (Environmental, Social, Governance) criteria to financing. The pressure on financial sector forces it to safeguard investment parameters protected, still, by generic assumptions that tend to reduce the defense economy to an arms market based on war, violent conflict and based in so-called "controversial weapons", comparing defense investments to gambling, alcoholic beverages and fossil energy, with the consequent funding limitations.
However, some European institutions are already in negotiations to keep this limitation only for the “controversial weapons” subsector. The result of these negotiations will certainly be valid for other banks operating in the European Union, opening a window of opportunity for projects and companies linked to defense economy, to be financed directly by banks. It is even possible, to go further, to extend this financing model in contracts with the Member States themselves, thus making possible to reinforce investment in defense to the level of desired GDP percentage.
The second concerns to the decision-making structure for investments in this sector, which is highly departmentalized and bureaucratized, leading to the fact that support is often destined for well-known companies in the sector, creating a barrier to entry that is difficult to overcome. It is a matter of philosophy and mentalities, that urgently need to be changed.
One of the basis of Goal 16 on UN 2030 Agenda, called "peace objective", recognizes that "there can be no sustainable development without peace and there can be no peace without sustainable development". Recovering and placing the defense economy on a more sustainable spectrum will open up avenues for repositioning, understanding and harmonization with civil society, the private sector in general and banking in particular. For all this, a broad funding structure and a communication agenda with the most relevant stakeholders on the sector are essential. It is, therefore, important to replace old concepts, redefine and separate activities (subsectors) from defense and security and build or update knowledge about this industry and the value it brings, as well as reformulate mentalities, allowing the private sector to be able, in a complementary and controlled way, to support EU Member States in their concerns and in the daily agenda for the defense and security of citizens, families and companies. More than a will, this path is today a necessity for a greater benefit and a common future.
Authors:
José Alberto Pereira (Eurodefense Portugal | zeper1@gmail.com)
Paula Feliciano Viegas (Eurodefense Portugal | mz2909@gmail.com)
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