In the field of defense, will France really have the means to enter a new world where tensions and geopolitical crises will multiply? Crises which are also extremely brutal and lethal (Gaza, Ukraine, etc.) while being both increasingly technological (AI) and digital (informational attacks and cyberattacks)? Despite the unprecedented effort announced as part of the current military programming law passed in 2023 (413 billion euros over seven years compared to 295 billion euros for the previous LPM), can France really keep its strategic autonomy, further boosted by nuclear deterrence, facing the wall of debt (3,200 billion euros in 2024, or 800 billion more than in 2019)? Will it ultimately have the resources to follow the technological race (AI, quantum, hypervelocity, etc.) essential to remain in the league of the great powers when the cost of the debt will rise to 57 billion euros in 2024, i.e. the payment appropriations for the Defense mission of the LPM planned for 2027 within the framework of the LPM (56.9 billion euros)?
If General de Gaulle was able to build the foundations of France’s strategic autonomy in defense and energy in particular, it is certainly thanks to his visionary spirit but also because the level of social spending was still very reasonable. But since the end of the 1950s, social protection spending has increased significantly, from 14.3% of GDP in 1959 to 24.5% in 1981, then to 29.6% in 2006 and to more than 30%. since 2010 (32.2% in 2022). Over the decades, the trajectory of social spending and that of investments (defense, energy, space and technology, etc.) have inexorably crossed. The architect State gradually transformed into a Welfare State.
But today, while the State should invest much more to guarantee the protection and security of the French in the face of completely uninhibited power states, it will soon arise, certainly from 2025, the question of cutting credits from the LPM. Rumors of freezes and deep freezes have already flourished in recent weeks. It is true that Bercy’s pruning shears, which have let defense spending slide for almost ten years (2015), have been resharpened. Thus, Bercy, which has already found 10 billion in savings at the start of 2024, would like to double the stake by the end of the year. Finally, the 2025 finance bill will undoubtedly need 20 to 25 billion in savings to be completed. Will the Ministry of the Armed Forces be disarmed in a world that is rearming, or even over-arming?
Exports, towards a dark future?
The economic model of the French defense industry is largely based on the export of its equipment, with the exception of key nuclear deterrence equipment (nuclear boiler room, missiles, etc.). Without arms sales abroad, which are only permitted (or not) with the authorization of the French state, the French industry is incapable of living off orders from the Ministry of the Armed Forces alone. Too little to support design offices and assembly lines. Clearly, without exports, which make it possible to amortize research (R&T and R&D) and to extend the series, there is no longer any strategic autonomy for France. Or the State will have to print money at full speed. Over the last ten years, exports of “Made in France” weapons systems have been doing well, even very well. Over the last ten years (2013-2022), France has never sold so much arms internationally. Paris signed contracts worth nearly 114 billion euros over this period, including 26.9 billion euros in 2022. An average of more than 11 billion per year.
The short-term outlook remains rather good with potential sales of Rafale (India, Serbia, etc.) and submarines (Netherlands, Indonesia, Poland, etc.). But they are increasingly based on the success of Dassault Aviation’s Rafale, which brings with it more than 400 French suppliers, including three of the major players in the arms industry: the electronics manufacturer Thales, the engine manufacturer Safran and the missile manufacturer MBDA. If in 2022, France shattered its record for arms export sales, it is obviously thanks to the historic mega-contract signed in the United Arab Emirates (UAE). That is 80 Rafales for a pharaonic amount of 16 billion euros, including 2 billion for the missiles. This is also the case for major contracts signed by Naval Group (surface and submarine vessels). A year without a Rafale and frigate (or submarine) contract? Sales figures for French military equipment then fell to a level of between 4 and 6 billion euros.
But then why worry? On the one hand, because Rafale sales, even if Dassault Aviation still has solid prospects, are approaching their peak in the medium term. In the longer term, the Rafale’s successor will in principle be the NGF (Next Generation Fighter) as part of the SCAF (Future Air Combat System) program, developed and designed in cooperation with Germany and Spain. Exports of this aircraft will be legitimately subject to the goodwill and versatility of Berlin, as the British bitterly observed with the Saudi serial of the Eurofighter. Finally, annual order intake is also based on a hitherto regular base, made up of contracts worth less than 200 million euros (4.1 billion in 2021). It corresponds to activities for maintaining operational condition, training or modernization which result from major contracts awarded as well as equipment less emblematic than the Rafale or the FDI frigates. And these markets are increasingly subject to competition, particularly low-cost competition offered by emerging exporters. As a result, this base could gradually crumble. Combined with budgetary austerity, the drop in exports would have a terrible jaws effect.
What if taxonomy wasn’t dead?
The war in Ukraine – and thereforethe return of war to Europe – pulled the rug out from under a basic trend (in Europe only) which pushed financial institutions to take into account ethical criteria – often grouped under the generic term environmental criteriaronmental, social and governance (ESG) – in their investment decisions. The defense industry was even considered by some in Brussels to be equal to pornography, the tobacco industry… The European institutions within the framework of the “green taxonomy”, “social taxonomy” and of “European ecolabel” have for a time intended to exclude the defense of investments considered sustainable. Without the war in Ukraine, the defense sector could in principle have been excluded from investments deemed acceptable.
Certain investment funds still prohibit any participation in companies which carry out all or part of their activity in the defense sector. “ESG rating agencies play a particularly detrimental role in defense financing in this regard. Thus, certain agencies do not hesitate to put on the “red list” any company, including civilian, which would be involved in projects linked to nuclear deterrence.explained deputies Jean-Charles Larsonneur and Jean-Louis Thiériot in their recent report “The defense industry, provider of strategic autonomy in Europe? ». According to a recent study by the European Commission, European SMEs active in the defense sector are experiencing major difficulties in accessing financing. During the 2021-2022 period, two thirds of the companies consulted by the Commission refrained from seeking equity financing and almost 50% of them refrained from seeking debt financing, compared to an average of 6.6% for all EU SMEs during the same period.
