Why does European rearmament need European competition?

Europe must rearm quickly, and capitals don’t have time to worry about tenders and competition – such calls will be heard at the Munich Security Conference. Rapid European rearmament is indeed necessary, but fast procurement without meaningful competition will fail to bring fast and large deliveries of weapons and taxpayers will overpay for defence. 

The economics are simple: reduced trust in the United States government has increased the market power of European defence companies as US weapons have become relatively less trusted politically. But increased market power creates incentives for national champions to underinvest in production capacity and increase profits with higher prices. After all, dominant suppliers do not risk losing orders. 

There is evidence supporting this: artillery shell ammunition is a market with relatively high competition as shells are a standardised product with multiple European producers and multiple governments as customers. Substantial investments in production capacity have reduced prices by half within less than two years. Meanwhile, tanks or infantry fighting vehicles are characterised by low European competition as countries often buy from domestic champions. Here, such price declines have not been observed though orders have gone up substantially. An extreme example is a German €21 billion order for clothing and protective vests from a national champion without any open tender – heavily critiqued by Germany’s court of auditors for its lack of competition. The result: absurdly high prices for standard equipment that could be procured more cheaply if a competitive European market was leveraged. 

Including smaller-scale enterprises and start-ups in military procurement is one way to challenge the dominance of national champions – a topic of a forthcoming publication. Going beyond national borders and buying in a European defence market would also increase competition. In an era of redefined transatlantic relations, deeper European defence market integration becomes a necessity.

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