ROME – A multi-million euro defense fund launched by the European Union to nurture the continent’s defense industry may cripple Italian firms, a senior official has warned.

As it seeks to strengthen and integrate Europe’s fragmented defense sector, the EU announced the launch in June of a 500 million euro injection of funds in 2019 and 2020 for the development of new equipment.

The funding, which would double to one billion euros annually from 2020, would be available for programs involving a minimum of three companies based in a minimum of two EU member states — thus encouraging cross border cooperation and even mergers.

The aim is to get countries to launch European programs, ending wasteful duplication which has led to member states fielding 17 different battle tanks, as well as 29 different frigates and destroyers according to the EU.

But Guido Crosetto, the head of Italy’s defense and aerospace industrial association AIAD, has warned that Italian firms could be denied handouts from the EU fund if Brussels favors larger German and French companies, leaving the Italian companies weaker and easy prey for takeovers.

“The fund foresees a rationalization of the number of products in the EU, and therefore a rationalization of the companies that make up the market,” he told Defense News.

“Unless there is a huge increase in state funding for Italian firms, they risk disappearing as better funded companies in France and Germany benefit from the fund.”

Italy’s defense procurement spending stands at 4.69 billion euros this year, a slight drop on the 4.72 billion euros spent last year.

Crosetto outlined his concerns to the Italian parliament’s defense commission this week, where he warned that applying for EU funding would require a shake-up in Italy’s defense-related bureaucracy.

Crosetto’s concerns were echoed by the defense commission of the Italian senate, which issued a report this month listing other problems with the fund.

The commission said that by requiring a minimum of two partner countries per funded program, bilateral deals would be encouraged — a likely allusion to French-German deals. Better to insist on a minimum of three countries per program, the Senate commission said.

The commission also quibbled the EU’s plan to give funds to companies which would spend the money within the physical boundaries of the EU.

The EU states in its planning document that “the infrastructure, facilities, assets and resources used by the beneficiaries and subcontractors in actions funded under the Programme, shall not be located on the territory of non-Member States.”

Such a measure, the commission argued, would exclude EU companies which have activity outside the EU.

The suggestion appeared to be related to Italy’s defense giant Leonardo, which has sizable activity in the U.K., a country which is negotiating to leave the European Union.

Thirdly, the commission took objection to the requirement that beneficiaries shall be undertakings established in the Union, in which Member States and/or nationals of Member States own more than 50% of the undertaking.”

Such a measure could exclude Leonardo, in which the Italian state’s holding is only 30.2 percent, although it exercises effective control over the company.

Tom Kington is the Italy correspondent for Defense News.

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