Transatlantic Defense Cooperation: Implications for U.S. and UK Industry

In a seminal decision last month, the European Union invited the United States as well as Canada and Norway to participate in its exclusive defense cooperation mechanism, PESCO—for the first time since the program was launched over three years ago. PESCO, which stands for Permanent Structured Cooperation, is an EU policy to coordinate—and fund—defense capability projects among the participating EU member states. This alert highlights important implications for the U.S. and UK industries from current trends in transatlantic defense.

With a European Defence Fund (EDF) budget of €7.9 billion over the 2021-2027 timeframe, the EU has become an important player in the defense industry, particularly at the research and development phase. For instance, while overall European defense spending is around €186 billion, only €1.7 billion is allocated to defense research and technology. By comparison, the current U.S. defense budget request calls for $112 billion for research, development, test and evaluation, as part of an overall $715 billion package.

The EU’s unprecedented decision follows years of U.S. engagement seeking access to PESCO and the EDF, and a recent commitment by both sides to the “fullest possible involvement of the United States in EU defense initiatives.” It may also herald further transatlantic defense cooperation—signaled by the New Atlantic Charter launched yesterday by President Biden and Prime Minister Johnson—as leaders gather over the next several days at the G-7, NATO and U.S.-EU summits.

The United States, Canada, and Norway will participate in PESCO’s largest project, Military Mobility, which seeks to enable swift and seamless movement of military personnel and materiel throughout the EU through better rail, road, air, and sea infrastructure and regulations. Currently, certain tunnels might be too small and bridges too weak to accommodate the transport of equipment such as tanks. Or the bureaucratic paperwork might be too complicated across certain countries. To deal with these problems, the EU has earmarked €1.7 billion, or about 20 percent of the EDF.

In addition to Military Mobility, there are 45 other PESCO projects, ranging from the Eurodrone to cybersecurity and space surveillance. They cover seven areas: training and facilities; land, formations, and systems; maritime; air systems; enabling structures; cyber; and space. Each project requires at least three entities from at least three member states. The European Defence Agency (EDA) provides administrative support to participating EU member states in developing and running the projects through PESCO. And the European Commission’s Directorate-General for Defence Industry and Space (DG Defis) allocates funding from the EDF; it reports to the Commissioner for Internal Market, Thierry Breton.

One open question is whether this new form of transatlantic cooperation in PESCO remains the exception or becomes the norm. Like on many other EU policies, there are at least as many views as there are member states.

One perspective, often identified with France, is that the EU should seek strategic autonomy in national security and support its own defense industries. This view carves out an exception for military mobility, as it addresses the transportability of non-EU troops within NATO (such as from the U.S., Canada, and Norway). But it would seek exclusive European control over other PESCO projects, with the ultimate aim of potentially leading to a European army.

Another perspective, sometimes aired in Germany and other member states, is that European security is inseparable from transatlantic security and can only be achieved through close cooperation between America and Europe, including within the defense industries. For instance, one senior official at the European Commission raised the possibility of an AWACS-successor platform as a potential flagship project for transatlantic innovation in defense (to enable better air surveillance and control).

Some are skeptical of EU defense efforts altogether, given the existence of NATO and the risks of overlap, duplication, and potential competition between the two institutions. At times, this reticence is conflated with overall reluctance toward greater defense spending in lieu of other public objectives. Indeed, the current EDF budget was reduced by nearly 40 percent from the initial amount proposed by the European Commission, in light of post-Covid fiscal constraints.

In addition to the new transatlantic cooperation through PESCO+, there is a long tradition of joint defense efforts within NATO. In particular, NATO has sought to remain the strongest military alliance in history by maintaining its technological edge through defense innovation. It has adopted a comprehensive approach on emerging and disruptive technologies across several key areas such as space, data, Artificial Intelligence, autonomy, hypersonic systems, new missile technologies, quantum technologies and biotechnologies. And it has coordinated extensive work on innovation across the alliance.

Yet, NATO as an institution does not yet have the financial leverage akin to the EU’s European Defence Fund. One potential option to fill this gap would be establishing an investment fund like the U.S. Defense Innovation Unit (DIU) to help jump-start promising defense technologies. Alternatively, even without additional public resources, NATO could help drive innovation initiatives among allies with their increased defense spending. For instance, the UK launched in 2016 its own Defence Innovation Fund of around £800 million over a 10-year period to accelerate technological development.

*           *           *

The G-7, NATO, and U.S.-EU summits may yield additional initiatives and ideas on defense cooperation, as part of the overall transatlantic partnership on global health, economic recovery, and coordination on trade and tech policy. One area in particular may be Artificial Intelligence, which the EU has specifically exempted from its new regulatory framework in cases of “AI systems developed or used exclusively for military purposes.” Defense innovation efforts could occur within the new PESCO+ format, through NATO, or other arrangements among transatlantic partners. And some of these engagements may also intersect with the new EU-U.S. Trade and Technology Council.

The team at Covington is well placed to advise you on these policy developments, and how to navigate the thicket of institutions, players, and trends in this area.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Public Policy and Aerospace, Defense, and National Security practice.