09 May 2024

FT's Pfeifer: Why Britain’s defence industry may regret Brexit

Rishi Sunak wants to put Britain’s defence industry on a “war footing”. The UK prime minister’s pledge to increase defence spending to 2.5 per cent 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 organisations that make up Europe’s largest defence sector.

Even before Sunak’s intervention, their order books were bulging as governments around the world stepped up spending. Shares in BAE Systems, Britain’s leading contractor, have surged 40 per cent over the past 12 months — far ahead of the broader UK index. Hopes of an advance on one key front, however, look likely to be frustrated.

The EU is similarly rushing to bolster defence budgets and industrial resilience, but Brexit means Britain’s industry could be excluded. Ursula von der Leyen, European Commission president, told an industry conference this year that as part of the bloc’s first ever defence industrial strategy it was important to “spend more, spend better, spend European”. The initiative is subject to suggestions from member states.

It remains to be seen exactly how the rules will work in practice, but it has already set alarm bells ringing among UK executives. “It’s a good thing that the commission wants to talk about the defence industry, but there is concern about the setting of broad political targets as part of the new strategy,” said one. The strategy has set a target to procure at least 50 per cent of its budget from EU-based defence suppliers by 2030 and 60 per cent by 2035. The ambition is to boost 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, it will also hit UK industry. British companies will only be able to participate on the same third-country basis as other non-EU members.

In the four years since Britain’s departure from the EU, the UK industry has in effect already been shut out of certain activities such as the nearly €8bn European Defence Fund — third-country companies can only benefit from funding if they meet certain conditions and operate on EU soil. But the worry is that the strategy’s political intent will be more far-reaching and exclude UK companies from new programmes....

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