“We must be willing to invest in our freedom”

Now that military protection of Europe by the United States no longer seems a foregone conclusion, the EU is proving to be capable of steps that until recently were thought impossible. The European Commission wants to free up as much as 800 million euros for defense, to be invested in European companies. What direction is this sector actually moving in? We put this question to retired Lieutenant General Ton van Loon.

Pension funds can play a role in those extra investments in defense. For example, pension fund ABP is willing to discuss this further, under clear conditions. How do you view this?
Van Loon: “First of all, I think institutional investors of all types should realize that you shouldn’t necessarily reject investing in defense. ‘We don’t invest in guns because guns are bad,’ is something that people were saying for some time. Let’s stop that immediately. Plus, we must realize that you can possibly make a lot of money investing in defense right now. But, of course, an institutional investor has to look at the very long term.”

Can you explain that?

“What we are currently doing in defense is, first of all, ‘fixing’ what we have destroyed over decades through unwise budget cuts. Building up tank battalions and the like are short-term emergency fixes. But as an institutional investor, you have to start looking at what industry has a long-term effect on what is happening in Europe, and in what form. For Europe, in the long term that means standing on its own two feet. We have to start thinking much more about how we can remain competitive as an economy. What steps should we take to do that? The defense industry is one such area where we now see that if Europe wants to innovate, it can. Two years ago, no one in Europe was making drones. Now we produce thousands a week. A good example is VDL NedCar in Limburg (NL), which, after MINIs, is now going to produce drones for defense. Rheinmetall already has two factories in Ukraine and is expanding that to four. So, the capacity and especially the brainpower for the defense industry is there.”  

What should the government do to encourage companies that focus on that long term? Place orders for the long term, as is often said?

“The big players in the defense industry are not at all afraid that those orders will not come. They mainly fear the sluggish process of arriving at the decision to submit those orders. In fact, producing weapons is not even allowed at all if you don’t have an order. So, you will have to come up with a system - at the European level, I think personally - where you can develop production capacity even before orders are placed. Take ammunition, for example. I am not at all in favor of producing huge mountains of it. Because you have to store it somewhere, and if a war doesn’t happen, it will still be there in ten years and you will have to clean it up. Instead, you have to make sure you have the production capacity and keep developing it. But then governments have to cooperate and, above all, invest. The time when a procurement project took twenty years is over. Because in Ukraine, you can see how incredibly fast things are developing now.”

Other than drones, are there other product categories or sectors that can be identified that fit that long-term perspective?

“As an institutional investor, you should not invest in a very specific direction, but in security in a broad sense. After all, by investing in defense, you also drive innovative industry, and vice versa. Our military only really discovered in the war in Ukraine that we have entered the digital age. That took quite a while, because most of us have been there a long time. The young people who are now joining the army were born in the digital age. We are only now really beginning to realize how terribly important the digital system is. The F-35 can be such a good aircraft, but even that aircraft has to operate in the electromagnetic spectrum. And if that spectrum is controlled by the adversary, even the best weapon cannot function properly. We will see more and more different weapons. In addition to drones, also more and more intelligent munitions, for now certainly alongside the more traditional weapon systems such as aircraft, tanks and frigates. But one thing is certain: without control of that digital environment, that electromagnetic spectrum, it doesn’t work or at least doesn’t work well." 

So telecommunications is also an example of a sector with good long-term prospects?

“It is. This area is one of Europe’s greatest vulnerabilities. Is it okay that a lot of our cell phones are either Chinese or American? And Huawei servers have been purchased everywhere for years. The port of Hamburg ran on them entirely. Does that really make sense? The answer is no, so they are changing that now. But it also means that you need a European vision and a company - or group of companies - that is independently capable of revitalizing the backbone of the communications system. That’s crucial, and the exact same thing applies to defense.

A situation where Elon Musk can extort Europe by turning off the Starlink system is something we can never and will never accept. That means that Europe would then have to shoot some four thousand low-orbit satellites into space. We have the Ariane rockets and also the industry to make those satellites. But if we were to need them faster, that defense industry might have to start working in shifts. So, I think there is quite a bit of money to be made in telecommunications in the long run, for an investor. If you invest in anything linked to IRIS² (an EU-planned multi-orbit constellation of Internet satellites expected to be ready for use by mid-2031, ed.), I don't think that’s wrong for an investor at all.”

And how about infrastructure?

"Yes, definitely. There is also such a thing as 'military mobility'. For example, if we now have a modern tank in Rotterdam, it is not so easy to bring it to Ukraine, because it is too big and too wide for existing rail networks and too heavy for bridges and roads. Investments in that area also help the regular economy. It goes even further. In a country like Israel, security is constantly being considered, and much is built in such a way that you can use extra capacity in the event of damage, for example for energy. We have to look at those kinds of things too. You also keep an enemy away by ensuring that he can do little to disrupt your society.

And perhaps much more important than money. It’s nice that I get a pension, but it won’t be of any use to me if Russia takes over here. So, you also have to be prepared to invest in something much more fundamental: our freedom. I was therefore pleased to read that Harmen van Wijnen of ABP also seems to think the same, or at least recently suggested that the 'S' of 'security' should perhaps be added as an extra letter to ESG.”

Photo: From 1 November 2006 to 1 May 2007, Van Loon was commander of the Regional Command South of the ISAF in southern Afghanistan.

This article is not intended as investment advice.