Is it a bribe? Blackmail? Or the future of European defence?

In 1985, the UK struck its biggest-ever export agreement, selling weapons and fighter jets worth £40 billion to Saudi-Arabia. As part of this deal, the British firm BAE Systems would channel investment and joint ventures back to Saudi-Arabia, including £1 billion to Saudi's prince Bandar bin Sultan himself. This kind of arrangement is known as a defence offset: money a foreign military supplier promises to invest in the buyer's economy as a condition of the sale. Imagine buying a car and having the dealer throw in a free trailer or even something with nothing to do with the car at all, like offering to pay off part of your mortgage. Europe is the world's largest receiver of defence offsets, receiving an estimated €160 billion of the €340 billion total paid in offsets worldwide between 2021 and 2025. Though not very visible, these offset deals may represent as much as half of all global defence trade, according to offsets expert Ron Matthews. If invested right, Europe could also use these deals to grow its own independent defence capabilities. How offsets work Offsets are usually handled under the public radar to avoid drawing attention from the public or competitors, who could use the information to undercut the deal. They can take place either directly – when investment from the company is tied to the defence equipment in the deal (co-production, training the local workforce, technology transfer) – or they can be indirect, which means almost anything. Think of a company like Italy’s Leonardo that wants to do business in Japan, so it invests in Japanese universities to curry favour for the deal over other potential defence companies. This leads to the second concern: defence offsets are often associated with corruption. In a 2010 report, Transparency International argued that because offsets sidestep the anti-corruption controls built into normal defence procurement, they carry hidden costs and heightened risk of bribery. Deals involving £1 billion payments to princes do sound sketchy. But some experts see the deals as neither a bribe nor blackmail: “the customer can always walk away, and so can the supplier,” Ron Matthews, a professor at Cranfield School of Management, told us. “In a competitive market there's always an alternative source of supply.” Matthews also argues the corruption case is overstated: ”The overwhelming majority of the cases cited by Transparency International as being examples of corruption in offset are actually corruption in a different thing: procurement.” The legality of Europe’s use of offsets is a bit murky. The EU has opposed offsets for decades as anti-competitive and market-distorting, and its key instrument – the 2009 Defence Procurement Directive – made them largely unlawful without ever directly referencing them. “Indirect offsets pretty much immediately disappeared. It became illegal, if you like,” Matthews said. The direct kind, however, survived, but only when a government could show it needed them for national security. The Commission has tried to enforced these rules against infringements by the Netherlands and Denmark, but both lead to the Commission “eventually capitulating” according to Jonata Anicetti, fellow at the Brussels School of Governance. A goodie but a baddie Why are European nations so hungry for defence offsets despite issues with their legality and reputation? “There is a change of approach in the EU,” Anicetti told us, and it isn't because the bloc has changed its mind on offsets. Europe is in deep need of weapons in light of Russia's full-scale invasion of Ukraine. And while Europe doesn't have all of the technology for modern war – like ballistic air defence or drones – offsets can buy foreign weapons while investing in its own society or cushioning a deal. Defence offsets could also help Europe achieve an independent defence industry, for example by using them to transfer the ability to make American weapons to Europe over time. But that has yet to be seen. “If you're simply assembling systems that have been produced in the supplier country,” Matthews warns, “you're not really contributing very much to skilled jobs in Europe, to capacity and capability creation, or anything else,” he said. “The value added, the skills, the research and development will continue to be located in the overseas defence industry.” Indeed, Anicetti said, “many times technology transfer leads to nothing.” Large defence companies protect their intellectual property, and the governments behind them don't want to hand rivals the means to catch up. “You're not going to get the likes of Lockheed Martin, BAE Systems, Thales giving away their technological inheritance,” Matthews said, as doing so would risk “creating a competitor” down the line. How to overcome the US regulatory beast Anicetti is “quite skeptical” that Europe can leverage offsets into genuine defence sovereignty. Doing so would mean leveraging its entire market size as a unified customer of these multinational defence companies, and for now, “Europe’s still very fragmented.” US export controls, specifically, the International Traffic in Arms Regulations (ITAR), lets Washington keep control over any system containing key American components. Some US firms now market ”ITAR-free” products to Europe, but whether that ever lets Europe truly modify its own weapons, Anicetti said, is an open question. Both experts however point to a path where offsets can work for Europe: Moving away from what Matthews calls “transactional” offsets – where investments do little more than dump low-skill assembly work into a local economy and benefit no one long-term – and towards “long-term, strategic industrial cooperation”: joint ventures, shared equity, and genuine technology transfer that builds capability rather than renting it. If Europe builds a stronger defence union and starts showing up as one, its weight as one of the world's largest markets can help convince partners to build this kind of cooperation. The real prize could be offsets invested into dual-use frontier tech – AI, cyber, space, 3D printing used for both civilian and military purposes – where military and commercial innovation feed each other. Done right, Matthews argues, both sectors can grow at once: “if you follow a smart offset policy, then I believe it's feasible.” This path would see Europe going beyond simply making an extra buck from defence deals while perpetuating its American dependence, to instead invest in long-term European strategic autonomy and innovation. Alexander Kulessa contributed to this article.