The European defence sector is already protected by heavy regulations, so the call from some governments to tighten policy further is unnecessary.
EU need not take cover over foreign investment
A small number of sovereign investors, sometimes from non-democratic states, are buying shares in European aerospace and defence companies.
Some EU governments have responded by calling for tougher controls on foreign investment in these industries. But there is no need for alarm. The European defence sector is sufficiently protected by the heavy - and at times excessive - regulations in place.
In the long term, if EU member states integrate their defence industries further they should co-ordinate their efforts to regulate foreign investments in this sector, including those by sovereign investors.
Sovereign wealth funds (SWFs) and state-owned enterprises (SOEs) with ties to governments from the Gulf, the former Soviet Union and emerging Asia have become increasingly powerful global investors. SWFs alone are estimated to manage close to US$4 trillion (Dh14.69tn) of assets globally.
Sovereign groups have focused their investments in Europe predominantly in the financial sector and remain limited players within the aerospace and defence industry. But some sovereign investors have held small stakes in the industry for years, including the Government of Singapore Investment Corporation.
More recently, the number of sovereign groups interested in European aerospace and defence companies has grown.
Attracted by the prospect of solid financial returns and access to advanced technology, various SWFs and SOEs acquire small European aerospace firms, invest in some of Europe's largest groups and set up a multitude of joint ventures.
In 2006, the sovereign fund Dubai International Capital (DIC) bought Doncasters, a British company that supplies aircraft parts among other things.
The same year, Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, bought about 30 per cent of Piaggio Aero, an Italian civil aircraft maker. And a consortium of SWFs from Dubai and Abu Dhabi took over the German firm SR Technics Group, a leading independent aircraft maintenance provider.
In 2007, DIC became one of the largest direct shareholders in Europe's biggest aerospace company, EADS - the European Aeronautic Defence and Space Company - when it bought just over 3 per cent.
That same year, the Qatar Investment Authority (QIA) expressed a desire to acquire a 10 per cent stake of the company. DIC and QIA have also been significant investors in EADS's largest shareholders, Lagardere and Daimler.
In 2006, Russia's VTB Bank bought more than 5 per cent of EADS and people close to the Kremlin publicly expressed an interest in doubling that share. And in the summer of last year, rumours abounded that a Libyan SWF was interested in buying up to 10 per cent of the Italian defence conglomerate Finmeccanica.
The various joint ventures sovereign groups have developed with large European aerospace and defence manufacturers have been created mainly within the civilian field. Mubadala has partnerships with EADS, Finmeccanica and Rolls-Royce.
The Russian defence firm IRKUT has joint ventures with EADS and Rolls-Royce, while several Russian groups, including Oboronprom Corporation, co-operate with Finmeccanica in building helicopters, jets and components for the railway sector.
The Italian company also has various partnerships with government-owned groups in Libya.
SWFs can be useful sources of capital for defence companies, especially now fiscal pressure is forcing governments across Europe to cut defence budgets.
But sovereign investors, like other investors, could leak information about sensitive military equipment produced by a defence company.
SWFs could also threaten the security of supply for a nation's armed forces.
A sovereign investor controlling a defence manufacturer could stop the company from producing some military equipment for commercial or political considerations.
After the controversial investment by the Russian bank in EADS in 2006, such concerns led to calls in Berlin for stronger protection against foreign investors. The German government even considered introducing golden shares - able to outvote all others - in the European aerospace group.
Sovereign groups have focused their European investments in the financial sector and are limited players in aerospace and defence industries.
But for the moment, European governments do not need additional legal safeguards to protect their defence industries against sovereign investors.
The specific mechanisms in place vary across EU member states but all European countries with large defence industries can already prevent investments considered detrimental to their national security - be it through golden shares, ceilings on foreign shareholdings or ministerial committees that oversee foreign bids, similar to the US committee on foreign investment.
If anything, some European governments maintain excessive controls on foreign investment, unnecessarily restricting the ability of their defence companies to access capital.
In France, one of the most closed countries to foreign ownership in Europe, not only is the state a significant shareholder in several large defence companies but it also resorts extensively to golden shares, strict shareholding agreements and ministerial committees to regulate foreign investments.
In addition, in the unlikely event that an unwelcome investor managed to take control of a defence company despite government controls, the state could make it impossible for the company to operate. It could refuse to grant export licences to the company or buy the military equipment it produced.
European states have often discouraged acquisitions within their defence industries by other European defence manufacturers - mostly to the benefit of their national producers.
In light of such a cautious attitude, it is highly unlikely that a hostile investor from Russia or the Middle East would succeed where companies based in neighbouring EU countries had failed.
So while remaining vigilant, governments and defence firms should be open to sovereign investments in principle.
But while national rules are sufficient to control foreign investments in today's European defence industry they will be less effective once governments take further steps to integrate their defence markets.
For years, EU member-states have acknowledged that their fragmented national industrial bases are too small to sustain and they have committed to liberalise their markets. So far, governments have been slow to deliver on that objective.
But as the cost of defence equipment spirals upwards and budgets continue to shrink, the pressure on member states to open defence markets will grow.
If pan-European supply chains develop, EU countries will become increasingly reliant on defence companies based in other member states to provide them with parts or finished military equipment. The German army might rely on radios produced by a company in Sweden and deployed German troops could be put at risk if the owners of a Swedish defence company decided to stop producing such equipment.
When EU member states move to an integrated European defence market, they should introduce a co-ordinated system to monitor foreign investment in the defence sector across the EU.
European governments should create a common investigative committee that would oversee foreign bids and block any that could pose a risk to the security interests of any EU member state. The membership of the committee ought to include representatives from the different EU countries with large defence industries.
Such a system would increase transparency and simplify procedures for investors. It would also help to give EU member states stronger guarantees on their security of supply.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform
* Yale Centre for the Study of Globalisation