Business and Finance

Debating the Future of the German Arms Industry, Again

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This article was originally published by SIPRI on 7 November 2014. It is published as part of a collaborative partnership between SIPRI and Economists for Peace and Security (EPS).

As German industry is not at the top technological level in a number of areas of arms production—particularly in aerospace and electronics—preferential treatment for German companies has often led to German participation in co-production projects with companies from other countries. In terms of arms exports, while the 2000 policy guidelines on German arms exports (PDF) state that export decisions should be based on security policy rather than economic considerations, the latter continues to loom large in German arms export-licensing policy.

Political Developments in Germany

In the campaign for the German federal elections in September 2013, arms export policy was one of the contentious issues, with the Social Democratic Party (SPD), the largest of the opposition parties, promising to be more restrictive than the governing parties led by the Christian-Democratic Union (CDU). However, the elections resulted in a coalition government between the SPD and the CDU. The coalition treaty (PDF) contained rather vague language on arms export policy, repeating phrases agreed on by earlier government coalitions.

Nevertheless, the leader of the SPD, Sigmar Gabriel, became Minister of Economics and therefore in charge of licensing arms exports. He promised to restrict the sale of arms. Recently released data indicates that there have indeed been some changes, particularly with respect to the licensing of small arms and armoured vehicles. The most spectacular decision was Gabriel’s vow to stop the export of Leopard II tanks to Saudi Arabia. At the same time, other exports to critical countries (including Saudi Arabia) have been permitted. Overall, the more restrictive course has not led to marked decreases in German arms exports, but the industry fears that more may come.

The Persistence of Procurement Problems

The debate about the efficiency of Germany arms procurement policies is potentially even more damaging to the German arms industry. Like other Western countries, Germany has long been afflicted with problems in arms procurement. Many projects have run over time and over budget. Striking examples include the PAH-2 anti-tank helicopter, a first copy of which was delivered to the Bundeswehr in 2003 but which only became operational nine years later, and the K-130 Corvette programme, which was delayed by seven years.

Attempts by previous German defence ministers to reform the system did not substantially improve the situation. Germany’s first female Defence Minister, Ursula von der Leyen, who took office in December 2013, could not tolerate this sorry state of affairs, changing ministry personnel hiring the consulting company KPMG to conduct a review of nine major arms-procurement projects. KPMG’s reviewers came to fairly devastating conclusions, finding many structural problems and cases of incompetency in the procurement bureaucracy. In their assessment (which has not been made publicly available) the arms industry was often in a position to cajole the procurement bureaucracy to accept terms which were beneficial for the company but not the government.

Of course, acknowledgement of asymmetry in arms procurement relations between companies and procurement authorities is nothing new. Whenever arms producers are in a monopoly situation due to political protection and privileges, procurement bureaucracies are disadvantaged. In Germany, as in many other countries, procurement authorities have to use domestic suppliers—and for major weapon systems, in fact, there is often only one supplier.  Nevertheless, von der Leyen seems to be determined to use the report to break or at least reduce the arms industries’ stranglehold on German procurement. Significantly, an internal document prepared under her leadership found that only a small part of the German arms industry—namely, companies producing technologies for networked operations, cryptography and sensor systems for reconnaissance—was indispensable.

Possible Solutions Based on International Competition

The debate in Germany has also highlighted arms-procurement dilemmas in other countries. Opening up domestic procurement to international competition might lead to unwelcome results from a national point of view. Most high-tech weapons would likely be bought from companies based in the United States, simply because the US budget for military research and development dwarfs any other country’s efforts. At the same time, employment in the German arms industry would plummet with the loss of domestic procurement, unless exports could be substantially increased. This in turn might only be possible by aggressively pushing exports to other countries, including China—which is currently subject to a European Union (EU) arms embargo.

Two models have been proposed. The first, promoted by the European Commission, is to have open competition at the EU level The second, favoured by the US Government in the past, involves free trade among North Atlantic Treaty Organization (NATO) member states. Other arguments speak in favour of more open competition. In such a scenario, production runs of particular weapon systems would likely be larger, reducing costs. At least for some of the major German arms producers, more business with allied countries might reduce the pressure to export to problematic countries.

The EU’s Common European Security and Defence Policy has as its declared aim a European defence market. Moving towards a European market is also is the favoured option among procurement experts in Germany, primarily because of the fear that an open NATO market might therefore result in US monopolies. However, if Germany opens its markets but others do not, than Germany is likely to lose jobs and technological capabilities which other EU member states will gain. The United Kingdom experienced this in the 1980s and early 1990s under the neoliberal administration of Prime Minister Margaret Thatcher. Later attempts to agree on more competition, for instance by the European Defence Agency in Brussels, demonstrate how difficult it is to overcome this particular ‘prisoners’ dilemma’.

Good arguments speak for opening up competition to the European level. But such change is difficult to implement. Freeing procurement from restrictions based on national preference, and substantially reducing arms exports, are linked to many industrial and political interests at the national and international levels. In Germany, both von der Leyen and Gabriel are forceful personalities currently working to undercut each other. A more efficient procurement process, and stronger arms export restrictions, remain possible but a move in such a direction would require a major political effort by a united German Government.

Michael Brzoska is the director of the The Institute for Peace Research and Security Policy at the University of Hamburg.

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