Industrial Aspects of European Security and Defence Policy

Erkki Liikanen

Europe’s defence industry is at a turning point. Not only because of the evolving concept of global security, but also as a result of recent developments within Europe itself, including the actions proposed by the European Commission in its Communication of 11 March 2003 which aims to strengthen the competitiveness and technological base of this industry which has traditionally been excluded from many of the benefits of European policies. 2003 also saw the adoption of the first European Joint Security Strategy and above all, the decision in Thessaloniki to create a European Defence Agency. All these measures will have a very significant impact on defence related industries.
Despite the disappointment of failure to agree on a new constitution last December, EU leaders made progress on a mutual defence clause and arrangements for structured co-operation in defence. The European Joint Security Strategy reflects the existence of new security threats requiring a mixture of intelligence, police, judicial, military and other means. Those new challenges will imply a considerable evolution of European defence procurement, within the limited but still considerable budgets available. As was noted in the Joint Security Strategy “As a Union of 25 members, spending more than 160 billion Euros on defence, we should be able to sustain several operations simultaneously”.
Since the Maastricht Treaty opened the way to the progressive framing of a European armaments policy within the CFSP, industrial issues have grown in importance. In the Cologne Declaration of 4 June 1999 on strengthening the common European policy on security and defence, the European Council clearly addressed the challenge, concluding: “We recognise the need to undertake sustained efforts to strengthen the defence industrial and technological base, which we want to be competitive and dynamic. We are determined to foster the restructuring of the European defence industries amongst those States involved. With industry we will therefore work towards closer and more efficient defence industry collaboration. We will seek further progress in the harmonisation of military requirements and the planning and procurement of arms, as Member States consider appropriate.”

Capacities in Key Areas

Securing a competitive technological and industrial base is essential to achieve the objectives of the CFSP in an affordable manner and to provide European capabilities in key areas such as air transport, intelligence gathering and command and control. Both the Helsinki Headline Goal of identifying the requirements for humanitarian and peacemaking ‘Petersberg’ tasks, and the European Capabilities Action Plan (ECAP) process are gaining more weight and strength every day. Not only did the Thessaloniki Council of June 2003 create a Defence Agency, it also addressed the issue of how military assets and capabilities could be used to assist in protecting civilian populations against the consequences of terrorist attacks, including those using chemical, biological, radiological and nuclear (CBRN) weapons. Consolidation is thus starting on the demand side.
On the industrial side, maintaining a European defence industrial base able to support the ESDP will depend on successful national and intra-European consolidation of industry as well as, to some extent, transatlantic partnerships between companies. It will benefit collective defence by strengthening Europe’s contribution to NATO and will push both European and American companies to deliver appropriate, interoperable and cost-effective capabilities. But we should remain aware of important imbalances between the two sides of the Atlantic in defence matters.
Taken together, EU Member States spend less than half the amount the US spends on defence. The US budgeted $ 400 billion for defence spending in 2004, compared to a cumulative budget of some 160 billion Euros for all EU Member States together. For many years, defence investment in Europe has been significantly smaller than in the US in procurement and in research and development. Indeed the gap is still growing in R&D. The discrepancy between the European and American defence budgets is and will remain considerable. However the fragmentation and duplication in Europe could be reduced. At the same time, the recent acquisitions of parts of the European defence industry by competitors have highlighted the delicate issue of maintaining a strategic industrial base.
The production of defence equipment is, like any industrial activity, subject to pressure from economic factors. However, in Europe, defence businesses do not benefit from the same environment as their civil counterparts, which encourages the process of adapting to economic change. European Union Member States traditionally depended upon and could each afford to sustain, a dedicated domestic industrial base for the development, production and provision of their defence equipment and services. Besides, Member States have invoked Article 296 of the Treaty to exclude defence products from European rules, resulting in the absence of a single European market for defence products. In doing so they maintained a fragmentation of EU defence markets which handicaps the competitiveness of defence related industries and threatens their future viability. European industry suffers from the lack of a single market for defence equipment, especially when compared with the large national market of its US competitor. For example, in Europe there are three or four times as many arms producers as in the US, for a combined market roughly half the size.

Restructuring Process in Europe

Following years of consolidation in the United States where the number of prime defence contractors has now been reduced to four, a restructuring process has begun in Europe. In 1999, we witnessed mergers creating the two largest defence companies within Europe, which now rank third and fifth worldwide. DASA, Aerospatiale-Matra, and CASA merged to form the European Aeronautic Defence and Space company (“EADS”), and British Aerospace took over the defence activities of GEC-Marconi to become “BAe Systems”. Below the level of the major holding companies, a network of joint ventures, alliances and other forms of collaboration within the European defence-related industries is gradually changing the shape of every business segment: Astrium (space), Matra BAe Dynamics (missiles), Thomson Marconi (sonar), Alvis-Hägglungs (armoured vehicles), etc. Nevertheless, markets are still fragmented along national lines and the remaining number of European defence companies is still much greater, in a much smaller combined market, than in the US. As an illustration of this, four tank programmes co-exist in Europe and the ammunition sector has around 30 companies of various sizes. The naval shipbuilding sector in Europe is still characterised by national champions each with a constellation of smaller specialised yards. Although their financial situation is often fragile, they still dominate export markets as the five US yards concentrate on the highly specific submarines, aircraft-carriers, and other ship types needed for domestic contracts.
There has also been a major evolution towards a broader, less defence-intensive industrial base, which is becoming increasingly international in character. Yesterday’s defence industries are, with few exceptions, reconstituting themselves into global, privatised, more commercially-oriented industries with both civil and military activities. These firms are increasingly focusing on the integration of commercially developed advanced technology to produce military capabilities. European defence industries compete on a global market. The current fragmented legal and regulatory framework places limits on the ability of companies to adapt and pushes them towards strategies and alliances which in the longer term could put the Union in a disadvantageous position. Failure to safeguard a competitive defence industrial base and the consequent loss of autonomous design and innovation capabilities, would limit available choice and lead to higher procurement costs in the long run. The necessary creation of a European defence equipment market is therefore at the heart of the new Communication on European defence industrial and market issues, “Towards an EU Defence Equipment Policy”, which the Commission adopted in March 2003. That Communication and its proposals were welcomed by Member States “as a valuable contribution towards creating the necessary conditions for strengthening the industrial and market situation of European businesses which are directly or indirectly connected with the defence equipment market”. As far as specific proposals are concerned, the Commission Communication calls for measures in a number of areas to promote the emergence of a European defence equipment market:
Standardisation: to allow companies to invest with a broader perspective, the Commission is working with the European Committee for Standardisation (CEN). A first operational handbook, which could be used for armaments procurement in the EU, should be released by 2005.
Monitoring of defence related industries: stakeholders need a clearer picture of the industrial and economic landscape of defence in Europe. In close collaboration with the Member States, the Commission expects to launch a monitoring activity on defence-related industries in 2004.
Intra-community transfers: this is a matter of introducing procedures that allow defence-related goods and components to circulate more rapidly – a necessity for the modern, efficient management of enterprises.
Procurement rules: harmonised procurement rules for defence equipment would increase market efficiency. A Green Paper including a reflection on the scope of Article 296 of the Treaty is planned to be issued in 2004 as a basis for discussion with stakeholders.
Research: The dynamism of research and development is a major determinant of the future of the industry. The fragmentation of research, the gap with the Lisbon objective of bringing R&D in Europe to 3% of GDP and the new security threats led the Commission to launch a preparatory action in the field of security-related research. A budget of € 65 million has been proposed for 2004 - 2006.
Developing an EU defence equipment policy will be a long-term process involving many different stakeholders. The Commission believes that the above measures can encourage industrial restructuring and consolidation, promote the establishment of a European defence equipment market, enhance the competitiveness of European industry, and achieve broader socio-economic objectives. For a number of years the Commission has also supported and encouraged the creation of a defence agency in order to help achieve a true European defence equipment market. The creation of a European Armaments Agency already featured in the European Convention’s proposed constitution and in practice the process began with agreements outside EU structures which developed during the last three years among a number of Member States (France, Germany, United Kingdom, Italy, Spain and Sweden): the LoI or Framework Agreement to facilitate industrial restructuring and OCCAR (Organisation Conjointe de Coopération en matière d'Armement or Joint Armament Co-operation Organisation). The Thessaloniki European Council tasked the appropriate bodies of the Council to undertake the necessary actions towards creating, in the course of 2004, an intergovernmental agency in the field of defence capabilities development, research, acquisition and armaments.

Creating a better Position to compete

We are still in the initial process of the creation of this important intergovernmental Defence Agency, in which the Commission is actively involved. The maintaining and developing of the European defence industrial and technological base will be greatly assisted by implementing the European defence equipment market through Commission actions and through the future defence agency. Our researchers and companies need the right environment to foster the industrial and technological capabilities and to put Europe’s industries in a better position to compete with their American counterparts on a more equal footing. Europe needs a dynamic industry to support the innovative solutions required for our security strategy. Europe needs a competitive industry to provide the military capabilities needed for conflict prevention, humanitarian and peacekeeping or peacemaking missions and the fight against terrorism. Europe needs a strong industry to create a zone of security around Europe, to help the emergence of a more stable and equitable international order and to have at its disposal the means to effectively counter current and future threats.

Erkki Liikanen is the EU Commissioner for Enterprise and Information Society.

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