A Competitive European Defence Technological and Industrial Base
(Source: European Union; issued Feb. 1, 2007)
Speech by Günter Verheugen,
Vice-President of the European Commission responsible for Enterprise and Industry,
At the European Defence Agency Conference;
Brussels, 31 January 2006



Ladies and Gentlemen,

There can be no doubt about the importance of the DTIB for us all. The European Union must be a strong and reliable partner in the world in order to achieve the growth, prosperity and security its citizens expect. And a competitive European defence technological and industrial base is a crucial prerequisite.

The Current Situation is not sustainable

However the reality of today’s situation is sobering. No doubt that we have a number of world class companies and facilities in Europe. But we are far from having the strong, globally competitive technological and industrial base that we need to fulfil our ambitions and preserve our options for the future.

That is because the DTIB in Europe 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. And it means a lack of competition, an inability to exploit economies of scale and above all, poor value for money for European taxpayers.

The gravity of the current situation was highlighted in the study on “The Cost of Non-Europe in the Area of Security and Defence” presented last September by Karl von Wogau, which stressed the fact that the problem lies not in the level of spending but in the cost of non-Europe. Different national regulations, licensing procedures, export control lists, 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. By adding other examples, one reaches a total of 89 weapons programmes in the EU compared to only 27 in the US.

If we continue along the current path, the present fragmented industrial bases in Europe will not be 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 and, strategically even more importantly, of R&T facilities outside Europe.

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

The time has come to create a truly European DTIB, one which is more than the sum of the separate national industries.

The prime responsibility to change lies with the Member States.

In the first place the responsibility to act falls on governments in their roles as customers, regulators, and promoters of their defence industries.

They alone can decisively shape the DTIB by pooling demand in new programmes. If they do so, industry will adapt.

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.

I now note with measured optimism that last September, a consensus emerged among EDA participating Member States on the sort of DTIB that would meet EU goals both for overall competitiveness and security and defence objectives: an EDTIB involving less duplication, more specialisation and more mutual dependence.

The Agency has already made valuable progress in developing the Code of Conduct for defence procurement and the Code of Best Practice for the supply chain.

It is also pursuing a vital reflection on the key technologies that we need to master within Europe and where they can be found today.

This reflection is accompanied by work to identify the acceptable inter-dependency levels among MS taking account of issues such as security of supply, technology transfer or SME involvement in the supply chain.

But the Agency has to progress even faster towards leadership over a real pooling of efforts in the areas of research, technology and procurement. This is necessary if it is to fulfil its potential to put an end to the splintering of national resources and thereby promote the necessary restructuring towards a European DTIB.


The Commission can and will contribute

However, the Commission also has a responsibility to act where it can to accompany the efforts of the Member States and the EDA.

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. Only for security research, for instance, funds will increase within the 7th Framework Programme by more than 13 times from 15 to 200 millions euros per year.

The civil security research programme and the military EDA programme can also address similar or complementary technologies. Through a non-bureaucratic cooperation mechanism with the EDA we can avoid duplications and identify synergies.

This has been shown in the area of software defined radio (SDR) where the Commission security R&T, the EDA military R&T as well as Member-States' co-operative action are dovetailing to ensure a maximum efficiency of respective investments.

I am sure that this experience could constitute a replicable model in other fields, such as unmanned aerial vehicles (UAVs) or network-enabled capabilities (NECs), for instance. Both drones (UAVs) as well as information and communication systems are technology areas where civil, security and military applications are developed from neighbouring R&D activities.

To set up a European Defence Equipment Market, decision makers must have accurate data on the economic situation 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 that respect, I am grateful to my fellow speaker Mr Svensson for his help in assuring the full cooperation of the member companies and associations of ASD (the AeroSpace and Defence Industries Association of Europe).

But, next autumn, the Commission will come forward with a more comprehensive defence package. This will include a Communication analysing developments since 2003 and giving an overview of future challenges as well as 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 and to facilitate the development of the DTIB in practice.


The Defence Procurement Directive

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

It has been preceded last December by our Interpretative Communication on the application of Article 296 of the Treaty, which gives guidance to national authorities for their assessment of whether defence procurement contracts can be exempted from Community rules or not. Member States should therefore keep in mind the principles laid down in the Interpretative Communication when they decide on whether to apply Community rules or Article 296.

Such guidance can also help to strengthen the legitimacy and efficiency of the EDA Code of Conduct, which has greatly helped our preparations. Indeed, 20% of all new defence contracts are now advertised on the Agency’s electronic bulletin board.

However, the Directive will not only help to coordinate national procurement procedures. At the same time, it will offer defence specific and more flexible rules than the existing Public Procurement Directive and thus make it easier for Member States to resort less to Article 296 of the Treaty. It will bring greater transparency and openness to defence equipment markets.

This Directive would apply to arms, munitions, war material and related services, for which Member States do not invoke an exemption from EU rules under Article 296.

The field of application would be distinct from that of the ‘civil’ Directive while protecting and qualifying the ability to invoke Article 296. But it would also allow Member States to apply the Directive on a voluntary basis to contracts which could in principle, be covered by the Article 296 exemption.


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 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 Regulation on Intra-EU Transfers of Defence Goods

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 of the regulation we are preparing is therefore to reduce this artificial administrative red tape. It will facilitate procedures for export, transit and import licences in the Member States in order:

- to increase security of supply and
- to foster industrial cooperation, and also reduce hurdles faced by SME’s across borders.

It is time to recognise that a transfer to another Member State of the Community should not be regarded in the same way as exports to third countries.

The only risk in transfers of defence related products to other member States would be an undesired re-exportation to third countries.

Our initiative is therefore limited to intra-community transfers while exports to third countries will continue to be covered by existing export licence systems.

The simplification is achieved by replacing individual licensing of each transfer by a general European licence which allows the transfer of a broad range of products to a broad range of recipients within the Community and is valid for a specified number of years.

The Commission is aware that some Member States are working towards changing the status quo with their own initiative to facilitate transfers on a more limited basis. If that process can be accelerated it could prove to be a valuable first step towards a new EU framework.


Concluding remarks

Building a European DTIB has many facets. Much of the practical, daily work is undertaken by the EDA. Commission initiatives can also act as a catalyst in the process. But a lot will depend on the political will of the Member States.

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 DTIB survive if Europe continues to postpone reforms which are generally accepted as unavoidable.

I am therefore very grateful to the EDA and to my friend, Javier Solana, for organising today’s event which will allow us collectively to identify the progress we have made and the steps that still remain ahead of us.


RELATED DOCUMENTS:

- Solana's Speech

- Svenson's Speech

- Characteristics of a Strong Future DTIB

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