Europe needs a single market for its defence industry

Commissioner Verheugen: a competitive defence industry is crucial for Europe.

A competitive defence industry is a crucial prerequisite to make Europe a strong and reliable partner in the world, in order to achieve growth, prosperity and security.

The reality of the situation today is sobering. While we have a number of world class companies and facilities in Europe, we are far from having the strong, globally competitive technological and industrial base that we need to fulfill our ambitions and preserve our options for the future.

This is because the defence industry is shaped by national decisions and policies with regard to programmes, procurement, and industrial alliances. There is costly and unnecessary duplication in research & technology as well as in the development and production of equipment.

All of which means a lack of competition, an inability to exploit economies of scale and above all, poor value for money for European taxpayers.

The problem lies not in the overall level of spending, but in the cost of different national regulations, licensing procedures, export control lists and lack of information sharing. These all lead to duplication and high prices.

In the EU there are 4 different main battle tanks and 23 national programmes for armoured fighting vehicles. In total there are 89 weapons programmes in the EU compared to 27 in the US.

The present fragmented industrial base in Europe is not sustainable. This will be the true heritage of duplication on a national level and the lack of a European defence equipment market.

European citizens will continue to pay too much for their defence and security. Moreover, national budgetary constraints could even lead to a relocation of production to facilities outside Europe.

The time has come for policy makers to take action and build a defence industry with the means to become more competitive and guarantee to supply affordable high-performance, security systems, military equipment and civil crisis management capabilities to its European customers.

The prime responsibility to change lies with the member states in their roles as customers, regulators, and promoters of their defence industry. They alone can decisively shape a pan European defence sector by pooling demand in new programmes.

Both the creation in 2004 of the European Defence Agency (EDA) and its rapid development since then, confirm that the EU is the right framework to enhance European armaments cooperation and to develop defence capabilities in the field of crisis management.

Last September, a consensus emerged among EDA participating member states on the sort of industry that would meet EU goals both for overall competitiveness and security and defence objectives and the agency has made progress in developing the Code of Conduct for defence procurement and the Code of Best Practice for the supply chain.

It is also studying the key technologies that we need to master within Europe and where they can be found today. This is accompanied by work to identify acceptable levels of inter-dependency among member states, taking account of issues such as security of supply, technology transfer or SME involvement in the supply chain.

But the Agency needs to progress even over pooling of efforts in research, technology and procurement.

The Commission can and will contribute

Under Framework Programme 7, R&D spending at EU level on many security and defence-related technology areas will increase. This is the case for security, space, aeronautics, IT and materials. In the case of security research, for instance, funds will increase within the 7th Framework Programme by more than 13 times from €15 million to €200 millions per year.

The civil and military programme can also address similar or complementary technologies, as demonstrated in the area of software defined radio. I am sure that this experience could constitute a replicable model in other fields, such as unmanned aerial vehicles or network-enabled capabilities.

To set up a European Defence Equipment Market, decision makers need accurate data on the economic standing of defence industries at EU level. This is why the Commission has launched a project to map the Defence Technological and Industrial Base.

This is a difficult exercise and we need the cooperation of authorities and industry to succeed.

In the autumn, the Commission will come forward with a more comprehensive defence package. This will include two concrete initiatives on defence-related procurement and intra-EU transfers of defence equipment.

The aim is to bring some of the benefits of the single market to the defence sector.

The Defence Procurement Directive

The specific defence procurement directive should be seen as part of a global initiative aimed at opening up defence markets and fostering the competitiveness of Europe, by introducing more transparency and competition, and enhancing the efficiency of public spending.

The directive will not only help to coordinate national procurement procedures, it will also bring greater transparency and openness to defence equipment markets.

The precise scope of the directive is still open. In today’s threat environment, the dividing line between external and internal security is becoming blurred, and non-military security can be as sensitive as national defence. Moreover, military and non-military security applications increasingly draw on the same technology base and there is an intense technology transfer between the two sectors.

What we need is an instrument that offers a high degree of flexibility, guarantees the right level of transparency and improves market access for non-national suppliers, and SME’s in particular.

But to be fully operational, the Directive needs the support of standardisation and an appropriate transfer regime for intra-EU circulation.

The visible and invisible costs of obstacles to intra-community transfers amount to several billions of euros. They are in fact treated as exports, not as transfers.

Moreover, according to a study carried out for the Commission, out of around 12,000 applications per year for intra-EU transfers, the present controls only led to negative decisions in 15 cases in 2003 and in none at all in 2004 and in 2005.

The purpose is to reduce this administrative red tape. It is time to recognise that a transfer to another member state should not be regarded in the same way as exports to third countries.

As with all reforms, the risk is that everyone agrees in principle on the necessity to do ‘something’, but gets cold feet when it comes to the crunch, fearing threats to vested interests and old habits. The question is: For how long can the defence industry survive if Europe continues to postpone reforms which are generally accepted as unavoidable?