“Guaranteeing that the European defence industry serves the European Security and Defence Policy (ESDP) as well as possible” is the aim of the “strategy for a stronger and more competitive European defence industry” that the European Commission presented a year ago. Of course, this industry presents “particular characteristics” and its “unique relationship with governments” requires specific treatment. But a lot can still be done “to fully free up its potential," underlines the EU’s executive arm. The defence package included a strategic communication and two draft directives, one on ‘simplifying the terms and conditions of transfers of defence-related products within the Community’ and the other on ‘the coordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security’. These two texts are currently being discussed by EU legislators.

ONE COMMUNICATION

In its communication, the Commission is very cautious. It takes care to define what is a 'strategic activity' and a 'national interest', for which, according to Article 296 of the Treaty, member states maintain a stranglehold and postpones this issue to a study at a later date. Similarly, it postpones the need to have a joint approach on the protection of investments of 'national interest'. It also calls on member states to invest more in research and development and work for “more transparency” in the management of state aid to defence industries.

More precisely, the communication calls for compensation arrangements to be gradually eliminated. These arrangements allow a member state to receive industrial compensation (manufacture of part of the equipment sold), be that military or civil (equipment, roads) when it is buying defence equipment goods. Much used by the US and some member states (eg the UK), the Commission believes that they can cause distortions to the EU’s internal market because only member states with major industries can afford to do it. Even Germany, says a source close to the dossier, does not have a large enough industry to afford such compensation.

The Commission therefore hopes to facilitate the opening of external markets to European companies. The US is mentioned in particular but India and China are also implicitly targeted. The US market is currently very closed, in particular because of the International Traffic in Arms Regulations (ITAR), which ban the development of civil or military products based on a US technology, even an old one.

TRANSFERS

Based on Article 95 (single market), adoptable by qualified majority in co-decision with the European Parliament, the directive on transfers is designed to harmonise the legislative framework applicable to what are most commonly called export licences for security and defence weapons and equipment goods within the EU only (exporting outside the EU is not covered). The Commission has opted for a very supple and very flexible framework, leaving member states considerable margin for manoeuvre.

Three types of licences are being proposed, from the most open to the most closed: general, global and individual.

• The general licence is meant for the least sensitive products, sold to certified companies or European armies (examples: electricity generators, night vision goggles, various components). The list of products open for this licence will be freely set at the national level by each member state, based on joint and existing lists (in particular the Wassenaar Convention) with the possibility of including products with similar objectives that are not on these lists. Each national list will have to be made public and notified to the Commission. The Commission hopes that member states will put the same products, at least in part, on their 27 national lists, to facilitate the standardisation of the market.

• The global licence concerns more sensitive goods. It will be handed out by a member state on demand from a company for one or several products, one or several recipients, tightly defined. The member state will define the conditions for handing out this licence in a fairly free manner. It is worth noting that some countries (eg France) have already put in place such a licence while others (eg Spain and Hungary) have not. The Commission’s aim here is to offer a general framework.

• The individual licence is reserved for very sensitive products, meant for export from one body (public or private) to another within the EU, justified by the member state in terms of national interest (Article 296 of the EC Treaty).

In addition, the Commission backed the cooperation that has already begun by the six biggest producers of defence equipment goods (UK, France, Germany, Italy, Spain and Sweden), known by the acronym LOI (letter of intent), which use a voluntary code of cooperation for transfers.

A system of recognition of certification is being put in place, designed to ensure the member state of origin that the company receiving the equipment is trustworthy. It will be up to the receiving member state to ensure that companies are certified, on the basis of ten or so common criteria (for example: the reputation of the company, previous authorisations, industrial activity concerned, the presence of an identified responsible party, a written commitment by the company to respect certain rules, transfer verification procedures). This system will be accompanied by a safeguard clause: the member state of origin will be able to stop the transfer, if it has a doubt, after consulting the recipient member state.

When it re-exports a good outside the EU, the receiving company has the responsibility of proving to the third party that it has no restriction from the member state of origin for this re-export.

Member states will be given three years to implement the directive: 18 months to transpose it into national law and another 18 to adapt the application of all their rules. A review clause is envisaged five years later.

PUBLIC TENDERS

The draft directive is designed to open up defence markets to some competition. Given the sensitivity of these markets, the adjudicating power nevertheless retains certain powers. It can use the negotiated procedure with publication in advance as a standard procedure. It can also demand from bidders specific clauses for security of information (to guarantee the confidentiality of sensitive information) and for security of supply (to guarantee delivery in the required time in the event of a crisis).

The principles of the treaty, in particular transparency, non-discrimination and openness, will have to be implemented in security and defence markets. Use of Article 296 will be limited to really exceptional cases, as the Treaty and the European Court of Justice stipulate.

Currently, defence markets theoretically come under the field of application of rules for public tenders, set by Directive 2004/18. But that is subject to two exceptions – Article 14 of the directive allows for these rules to be sidestepped and Article 296 of the EC Treaty envisages a general exception for public tenders for “reasons of national security”. In practice, the Commission has noted, member states “systematically invoke these two articles to remove the large majority of military tenders from Community law, even for sensitive non-military security products," whose economic importance is growing. The EU Court of Justice has not accepted such a general exception.

Figures

The European defence industry has an annual turnover of over 55 billion euro. It represents around 30% of world production and employs over 300,000 people. Defence budgets have been cut by around half since the end of the Cold War and, with budgets as tight as they are, are unlikely to increase.

Between 2000 and 2004, only 13% of defence equipment contracts of the EU15 were published in the EU’s Official Journal, the figures varying between 2% (Germany) and 24% (France).

Background

Article 296(1) of the Treaty

a. No member state shall be obliged to supply information the disclosure of which it considers contrary to the essential interests of its security

b. Any member state may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.