How should Europe respond to sovereign investors in its defence sector? By Clara Marina O’Donnell
★ A small number of sovereign investors, sometimes originating from countries with nondemocratic governments, are buying shares in Europe’s aerospace and defence sector. Such investors can provide useful capital. But they could also leak sensitive information or interrupt the supply of military equipment to European armed forces. ★ Some EU governments have responded by calling for tougher controls on foreign investment in their defence industries. But other member-states have become less averse to state-owned enterprises and sovereign wealth funds in the aftermath of the global financial crisis. ★ EU countries should not reject sovereign investments in their aerospace and defence industries in principle. Instead, governments should rely on investigative committees to assess the risks of sovereign and other foreign investments. And in the long term, EU member-states should coordinate their efforts to monitor, and if necessary block, bids by foreign investors.
The global economic crisis has transformed the debate in Europe about sovereign wealth funds (SWFs) and state-owned enterprises (SOEs). Until recently, European governments and public opinion mainly worried that SWFs or SOEs were vehicles that could allow undemocratic states to gain control of valuable financial and industrial assets in the West. The US, Germany and Australia tightened their controls over foreign investments. France set up its own SWF with an explicit mandate to protect domestic enterprises against unwanted takeovers from abroad. As the global financial crisis unfolded in 2008, however, some European governments started to see sovereign investors in a more positive light, welcoming them as a source of badly-needed capital. At the height of the crisis, some SWFs bought billion-dollar stakes in the likes of UBS, Barclays and Credit Suisse. In 2010, the Greek government was encouraging Chinese SWFs to buy government bonds to alleviate its economic troubles. Sovereign funds, for their part, incurred heavy losses during the financial crisis, which encouraged many to revisit their investment strategies. After focusing on
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western banks, some groups started to diversify their assets and invest in anything from farmland to manufacturing companies. Such diversification strategies could conceivably lead to a stronger interest in European aerospace and defence firms. That industry is less cyclical than other sectors of the economy and can provide substantial financial returns – although forthcoming cuts in defence budgets across Europe are likely to make some defence manufacturers less attractive investments. Sovereign funds could also be interested in European aerospace companies because of the possibilities for accessing advanced technology through joint ventures with such firms. Governments that own SWFs are increasingly keen to use their funds to develop their national industries and diversify their economies.
Small but controversial players Groups with ties to governments from the Gulf, the former Soviet Union and emerging Asia have become increasingly important global investors. To date, however, sovereign investments in aerospace and defence are still relatively rare. Of the $3 trillion in
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