•it à 
£ -ft COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 24.1.1996 
COM(96) 10 final 
COMMUNICATION FROM THE COMMISSION 
THE CHALLENGES FACING THE EUROPEAN DEFENCE-RELATED 
INDUSTRY, A CONTRIBUTION FOR ACTION 
AT EUROPEAN LEVEL 

Contents 
1. Introduction 
2. The challenges 
2.1. Economie and industrial challenges 
2.1.1. Industrial structure and trends 
2.1.2. Restructuring and competitiveness 
2.1.3. Market fragmentation and barriers to cross-border industrial 
integration 
2.1.4. Technological synergies between civil and defence activities 
2.2. Political and security challenges 
2.2.1. The European security and defence identity 
2.2.2. The Intergovernmental Conference 
3. The players and means of action 
3.1. The European Union: promoting the synergies between its various means 
of action 
3.1.1 Instruments available within the EC framework 
3.1.2 Instruments available under the common foreign and security policy 
3.2. Closer cooperation between the WEU and EU 
3.2.1 Relations between the EU and WEU 
3.2.2 European Armaments Agency 
4. Contribution of the Community instruments and activities 
4.1. Internal market and technological base 
4.1.1 Public procurement 
4.1.2 Intra-Community trade 
4.1.3 Research and technological development activities 
4.1.4 Standardization and technical harmonization 
4.1.5 Competition policy 
4.1.6 Structural Funds 
4.2. The external dimension 
4.2.1 Export policy 
4.2.2 Export controls on dual-use goods and technologies 
4.2.3 Import duties on military equipment 
4.2.4 Commercial relations with third countries 
5. Conclusions 
Annex 
Statistical tables 
List of European mergers in defence-related industry 
1. Introduction 
The defence-related industries are facing an economic and political context which is 
changing completely and calls for responses going beyond the national level. 
The end of the cold war, considerably reducing the security risk to Europe, has made it 
possible to cut military budgets and step up the moves to convert the industries 
concerned. The need for the defence-related industries to scale down their activities 
substantially has had a signilicant direct impact, both on employment in this sector which 
has fallen by 37% from 1.6 million to I million since 19X4, particularly hitting certain 
regions, and also on the manufacturing base and innovation capacity of European 
industry as a whole. Over this period the economic problems have persisted, if not 
worsened; they stem not only from the cuts in military expenditure but also from the 
fiercer international competition and, above all, from the anachronic fragmentation of the 
defence markets in Europe. 
A change of attitude in favour of action by the Union is therefore emerging. On the one 
hand, the crisis in the industry has prompted industrialists and industrial policymakers in 
the Member States to encourage the Union, particularly the Commission, to assume its 
responsibilities. On the other, the measures taken on the Western European Union 
(WEU) and on the second pillar of the Maastricht Treaty have opened up paths for 
establishing a European armaments policy. In particular, on 30 June 1995 an informal 
group of EU/WEU experts produced a report setting out options, suggestions and 
recommendations for such a European armaments policy. In July 1995, Coreper set up an 
ad hoc interdisciplinary working party to identify areas for action by the Union. To this 
end, it will have to make recommendations on the follow-up within the Community 
framework or under the common foreign and security policy (CFSP) and, should the need 
arise, suggest specific measures without prejudice to the Commission's powers under the 
Treaty establishing the European Community. This communication is a contribution to 
this work. 
The causes of the difficulties facing the defence-related industries are partly economic 
and partly political. Consequently, both these aspects must be taken into account when 
analysing the problems specific to these industries and when formulating possible 
European action. 
However, although a global approach to this subject is clearly important, the 
establishment of a European security and defence identity is nevertheless a long-term 
process. On the other hand, the state of health of the defence-related industries is such 
that unless action is taken in time, there is a danger that whole sectors of the economy 
involved in defence-related activities could disappear, with further massive job losses, 
particularly considering the fiercer international competition. 
This urgently calls for an appropriate European response. 
Moreover, the introduction of mechanisms based on economic efficiency, particularly in 
procurement policies, will allow more rational use of budgetary resources, yielding very 
substantial savings.This will entail significant savings for the tax payer.According to a 
study these savings cm\d vary between 5 to 11 billio» ECUS a year. 
Setting out from this need for action, this communication places the emphasis on action 
based on the existing Community instruments and, hence, concerning fields in which the 
European Community has powers and experience of its own. These means of action 
could possibly be used in combination with the CFSP. Consequently, they could be 
implemented in the short term as an initial response to the problems facing the defence-
related industries and as a first contribution towards the process of building a European 
security and defence identity. 
The approach followed by the Commission is based on the principles set out in its 
communication on "An industrial competitiveness policy for the European Union" (COM 
(94)319, 14 September 1994). 
2. The challenges 
In the years ahead the European Union must meet a series of challenges with a view to 
establishing a European security and defence identity and maintaining a competitive 
technology and industrial base. The survival of these industries depends on this capacity 
to put in place a consistent strategy to respond to these challenges. 
2.1. Economic and industrial challenges 
2.1.1. Industrial structure and trends 
The annual output of defence equipment in the European Union is currently worth an 
estimated ECU 50 billion which is about 3 percent of total industrial output. It is 
somewhat less than half the US defence industrial output. A growing number of defence-
related technologies, components and services have both civilian and military 
applications. This development has made it increasingly difficult to define the boundaries 
of "defence-related industry" and has made the isolation of defence from civil industry 
increasingly untenable. The mix between civilian and defence-oriented activities varies 
from company to company and from industry to industry. In the European aerospace 
industry, for instance, defence activities account for about 40 percent of turnover. 
The development and production of defence equipment currently directly occupy about 
600 000 people in the EU. Another 400 000 jobs are generated indirectly in supplier and 
service industries. 
About 70 percent of defence sales come from the aerospace and electronics industries. 
However, much of the value-added behind the weapon systems and other defence 
equipment originates in companies which supply components and subsystems and which 
are in many cases SMEs. 
About 90% of the EU total production of defence equipment is concentrated in some 
Member States: France, the United Kingdom, Germany, Italy and Sweden. 
A substantial part of the European defence industry is public or quasi-public, most 
notably in France, Italy and Spain (although the degree of state control varies). 
The domestic demand for European defence equipment has been falling since 1987 when 
most EU Member States started to reduce their defence budgets. Total military 
expenditure fell by 5.3 percent in real terms between 1985 and 1994 as indicated in Table 
1 in the annex, whereas the procurement of major weapons fell by 28.5 percent in real 
terms in the same period as indicated by Chart 1 in the annex. However, EU imports of 
major conventional weapons from third countries have not declined correspondingly. 
I he declining demand, particularly from developing countries, has practically halved the 
global arms market over the last decade according to SIPR1 statistics.' European industry 
has maintained a share of one fifth of the world export market of major conventional 
weapons between the 1984-1988 period and 1993, but the absolute amount has been 
halved in real terms as indicated by Chart 2 in the annex. Compared to the United States, 
however, the European Union has been losing ground. 
2.1.2. Restructuring and competitiveness 
Industrial restructuring is expected to continue with significant capacity reductions 
though many companies have already taken far-reaching steps. 
Restructuring 
Conversion of military into civilian-oriented production "at factory level" is not 
considered a feasible strategy by most companies. Apart from the huge investment costs 
and difficulties of access for newcomers to established civilian markets, conversion is 
hindered by the difference between, on the one side, production of defence goods which 
is driven by technology and government specifications and, on the other side, civilian 
markets which are mainly driven by price with marketing playing a major role. However, 
conversion in the sense of redeploying a company's R&D base from defence-oriented 
work to a technically related field has proved practicable for a number of companies with 
established non-defence activities. 
Some of the overall capacity reduction has occurred through outright liquidation of 
defence-oriented activities in companies which have chosen either to concentrate on what 
they define as their core activities or to expand the civilian sides of their businesses. 
More often, however, the rationalization of the European defence industrial base has 
involved some form of inter-company arrangement. Mergers and take-overs have so far 
mainly taken place within national borders since the obstacles to cross-border 
acquisitions in the field of defence are still considerable. In the EU examples of national 
Th« arms trade statistics compiled and published by SIPRI (Stockholm International Peace 
Research Institute) are partly estimated since the official data do not provide a comprehensive 
picture. 
consolidation of defence-related industries through mergers are numerous.2 Cross-border 
acquisitions, like GIAT Industrie's take-over of the Belgian small-arms producer FN 
Herstal in 1991, remain exceptional. 
In recent years the consolidation of the defence-related industry has advanced much faster 
in the United States than in Europe, following some "mega mergers" and take-overs, the 
average size, as measured by arms sales, of the ten largest US defence-related companies 
is now twice that of the ten largest El J defence-related companies.1 
Most of the consolidation which has reduced overheads costs, excess manufacturing and 
engineering capacity has taken place within national borders. The economic gains from 
further national consolidation are diminishing and appear now to be much smaller than 
the potential gains from cross-border industrial integration. 
Competitiveness 
In assessing the overall international competitiveness of the European defence-related 
industry, export performance, company profitability and technological capabilities might 
provide some indications about the competitive position of the industry and its 
constituent parts, but it only makes sense to speak about competitiveness for those 
companies and products which are actually exposed to international competition. 
Compared to the US industry, the EU industry has lost ground and is now exporting less 
than half as much as the US industry. Many of the shifts in relative export performances 
are linked to international political events, like the end of East-West confrontation, the 
Gulf War of 1990/91 and the break-up of the Soviet Union. Changes in national arms 
export policies, including export subsidies, have undoubtedly also played a role. In this 
context, the US industry had, thanks also to the political influence exercised to benefit it, 
started to improve its export performance vis-à-vis the EU industry under the relatively 
stable international political conditions of the 1980s. 
The abovementioned factors also suggest that part of the shift is due to changes in the 
underlying competitive positions, including the significant depreciation of the US dollar 
against European currencies since 1985, that put a heavy burden on the competitiveness 
- In the UK, a large part of the industry is now grouped around British Aerospace and GEC and 
further concentration has taken place (the take-over of VSEL - a Barrow-based submarine 
maker/shipbuilding company - by GEC). 
- In Germany Daimler Benz Aerospace plays a key role. 
- In Italy the scene is dominated by Finmeccanica. 
- In France the national consolidation is more evenly spread between the companies 
Illustrative examples of the US restructuring and consolidation process are : 
- Lockheed's acquisition of General Dynamics' fighter aircraft division in 1993 
- Northrop's takeover of Grumman in 1994 
- the agreed merger between Lockheed and Martin Marietta in 1994, followed by the acquisition of Loral 
in 1996 
- the recent talks between Boeing and McDonnel Douglas on a possible merger of their civil and defence 
activities (1995). 
of European defence-related companies. The (i7 summit in Halifax pointed out the risks 
that such fluctuations pose to sustainable, non-inflationary growth and the continued 
expansion of international trade, fhe EU and US are therefore encouraged to work more 
actively and address the imbalance of the US dollar versus EU currencies. The 
conclusions of the recent transatlantic business dialogue held in Seville stressed the 
importance of fostering better monetary stability. 
fhe strong competitive position of US industry vis-à-vis European industry is best 
illustrated with figures on defence equipment imports by individual EU Member States, 
i.e. inclusive of intra-EU trade: 75% of imported major conventional weapons came from 
the United States in the 1988-92 period. The worsening in the competitive position of the 
European defence-related industry results also from the bilateral EU-US trade balance for 
major conventional weapons that was 10/1 in favour of the United States in the 1988-92 
period (see Table 4 in the annex). 
But export performance cannot provide a complete picture of international 
competitiveness, particularly in a field where trade and procurement decisions are rarely 
taken on commercial and economic grounds alone. From a company perspective the 
important test of competitiveness is profitability. 
For the European defence-related companies the picture is mixed in this respect. Quite a 
few of the large arms-producing companies have lost money in recent years on their 
defence-oriented activities, some of them over a considerable number of years. Other 
companies have continued to operate profitably in the defence field and have been rather 
successful on export markets. 
Assessing European industry's technological strengths and weaknesses in the field of 
defence is also difficult and somewhat subjective. The US Department of Defence has 
tried to compare US and European capabilities regarding 20 so-called critical 
technologies. The DoD believes that European industry does not "significantly lead" the 
United States in any of the sectors but is "capable of making major contributions" in 
seven sectors.4 
On an overall industry level the aforementioned trade figures give a strong indication that 
the European defence-related industry has experienced a worsening of its competitive 
position vis-à-vis the US industry since the 1980s. For comparable equipment, produced 
with economies of scale, the US industry tends to have better price competitiveness than 
the European industry due to a domestic market more than twice the combined size of the 
markets in the EU Member States and about seven times the largest national European 
market. This structural advantage of the US industry increases with reductions in overall 
demand and with technological advances and also with the persistence in the 
fragmentation of the EU market. 
Machine intelligence and robotics, skmjIat>o« and modelling, wtapon system environment, air-
breathing propulsion, high-energy density materials, composite materofe, a*4 bioEfctaofegy. 
T%e 2Qo tots* tecJittofogws are listed in Tatte 5mA< AMMX. 
2.1.3. Market fragmentation and barriers to cross-border integration 
Market fragmentation 
Since competitive strength is related to the ability to exploit economies of scale, the 
competitive position of the European defence-related industry, as described above, can 
partly be explained by the fragmented stale of the European market for defence 
equipment. This fragmentation reflects the widespread and long-standing practice of 
Member States to favour national suppliers or, should these be lacking, suppliers from 
NATO countries, in their procurement of defence equipment. 
A real European market for defence equipment hardly exists as intra-European trade 
amounted only to 3-4% of total procurement of major conventional weapons by EU 
Member States in the 1988-92 period. However, for components and sub-systems the 
market is more international. 
Market fragmentation has generated a number of competitive disadvantages for the 
defence-related industry in the European Union: 
• It has prevented the full exploitation of economics of scale in the production of 
armaments. The limited size of national orders has made the economic viability 
of many projects dependent on uncertain export contracts. 
• The lack of serious competition for many domestic defence contracts has given rise to 
inefficiencies in the development and production of weapon systems. This is 
particularly the case when contracts are awarded on a cost-plus basis - a 
contract form which, however, is increasingly being phased out. 
• In international cooperative programmes, which are more and more necessary for 
technological and economic reasons, inefficient work-sharing and "juste retour" 
between countries and their respective "domestic suppliers" have contributed to 
overcapacities and caused additional costs and have not allowed the integration 
of national industries on the basis of comparative advantage. 
Cross-border industrial integration 
Various forms of cross-border industrial cooperation have existed for decades in the 
defence field: companies from different countries engage in project-specific collaboration 
and cooperative joint-ventures and, to a lesser extent, strategic alliances (including 
full-function joint subsidiaries). Collaborative armaments programmes are now the most 
common way of addressing the prohibitive costs of purely national approaches to the 
development and production of large complex weapon systems in Europe. The largest 
European collaborative armaments project is the Eurofighter 2000 in which the major 
aerospace companies from the UK, Germany, Italy and Spain participate. Another key 
cooperative venture is developing a new-technology European military transport aircraft 
for the 21st century within the EUROFLAG consortium. Five countries are currently 
participating in the Future Large Aircraft programme. 
Cross-border joint ventures are another form of industrial cooperation which has become 
more common in the European defence-related industry since the 1980s. Notable 
examples of strategic alliances are the relationship between Aérospatiale and 
Daimler-Benz Aerospace for the development, production and marketing of helicopters 
(Eurocopter)5 and the planned establishment of ESI (European Satellites Industry) and 
EMI (European Missiles Industry) in the field of missiles and satellites or the recent 
acquisition by Thomson of a 25% stake in the Spanish manufacturer of defence-related 
electronics Indra. 
Joint ventures are typically industry-led, but established with the consent of the 
governments of the home countries of the companies involved. They may be an effective 
mechanism for combining the diverse technological capabilities of different companies, 
but they are less efficient in bringing down development and production costs and in 
enhancing the overall operational performance of the products. International 
collaboration with the United States or other third countries is usually a consequence of 
"off-set" agreements in purchasing contracts with non-producer countries. 
Fhe ability of defence-related companies in the EU to rationalize and consolidate their 
businesses through mergers or sales across borders is restricted by at least five factors: 
• Cross-border restructuring of the defence-related industry requires, in most cases, the 
consent of governments. This is unlikely to be obtained when it is perceived 
that the national security of supply for crucial defence equipment would be 
compromised by cross-border rationalization which would reduce the national 
defence industrial base significantly or make it very specialized. 
• The relations between the government and defence-related companies differ 
considerably between Member States. In some countries a significant part of the 
industry is owned or controlled by the state, in others there is more distance 
between them. This disparity is a barrier to cross-border industrial integration 
which goes further than joint ventures. This situation not only creates 
distortions at the export level but also affects the development of intra-
European policies, particularly industrial cooperation. 
• The arms export policies, including arms export control policies, of Member States 
differ considerably. The attractiveness of a company as cooperation partner 
depends, among other things, on its ability to gain export licences from its 
home government. 
• Another obstacle is the difference in national requirements regarding defence 
equipment, including the timing of orders and the strategic concepts for which 
the equipment is required. Only a joint definition of operational requirements 
would completely abolish this hindrance to defence industrial integration. 
Euromissile was the first significant joint-venture-like cooperative arrangement in this field. It was set 
up in 1972 by Aérospatiale a»d MBB (now part of Deutsche Aerospace). 
• finally, there is a lack of transnational legal structures (such as the European Company 
Statute) and of recognition of transnational partnerships as eligible for funding 
under national research budgets. 
2.E4. Technological synergies between civil and defence activities 
The action by the European Union to facilitate integration of defence-related industrial 
activities will have to take account not only of the specific nature of the armaments sector 
but also of its essential and ever closer links with the civil sector (dual-use technologies, 
components, products and production installations) in order to encourage the 
development of technological and industrial synergies between these two sectors at 
European level. 
Traditionally it has been argued that defence R&D generates externalities in the form of 
innovations for the benefit of the civilian side of the economy (the "spin-off effect). 
Since the 1960s, however, the relationship between defence and civil activities has 
changed: the defence-related industry is increasingly relying on the technological 
dynamism of the civil sector by making more use of the technologies, components and 
products of civil origin (the "spin-in" effect). With defence R&D and production making 
up a smaller and smaller part of high technology activity, technological performance is 
coming to depend increasingly on firms' success in managing the interface between civil 
and defence technology. They have to become more adept at assimilating civil hardware 
and software into defence equipment, at organizing R&D programmes around dual-use 
technologies and at transmitting knowledge and expertise across the civil-defence divide. 
Defence-related companies which operate in both civil and defence markets have an 
interest and important role to play in exploiting civil-defence synergies. A growing 
number of them are doing so, overcoming the separation between their civil and defence 
activities; but still too often, such separation remains an impediment to synergies in 
companies which have entered into European strategic alliances for their civilian 
activities but not yet for their defence-related activities. Furthermore, inter-firm synergies 
need also to be encouraged within and across borders. 
The promotion of a dual-use approach has been, for several years, a major objective of 
US research and defence procurement policies, and is leading to a more integrated 
defence-civil technology and industrial base. The overall European defence R&D effort, 
which accounts for only one third of that in the US, is decreasing and comparatively more 
fragmented. It is therefore essential, if Europe is to preserve a technology base and a 
research capability (particularly its teams of researchers) which are competitive and 
sufficiently autonomous, that not only the efficiency of its defence R&D efforts is 
improved through more systematic cooperation and greater interdependency, but also that 
it derives maximum benefits from its civil R&D efforts through increased civil-defence 
synergies. 
Action is being taken, to different extents in different Member States, to promote 
technological synergies between civil and defence activities. This needs to be pursued 
and strengthened, including at the European level, to optimize the overall use of R&D 
resources and to facilitate the restructuring or diversification of defence-related 
industries. One good example of such convergence is space-related activities. One good 
example of such convergence are space-related activities. The space industry displays a 
great degree of common ground between military and civil applications. In that respect, 
the US industry has long benefited from defence programmes as a springboard into 
commercial applications in space. The desirable synergies, which are of great importance 
to Europe, will be identified in a forthcoming communication on space. 
2. 2. Political and security challenges 
2.2.1. The European security and defence identity 
* 
The changes in the international context and the strategic prospects opened up by the end 
of the cold war call for a review of all the leading players' security policies. A process of 
restructuring defence has started at both national and multilateral levels. In the long term, 
this process should ensure better use of security resources and a parallel massive 
reduction in defence budgets. 
Europe's security depends on western European countries' capacity to form a centre of 
stability and integration. On the one hand, the spread of economic well-being and the 
gradual admission into the European Union of all European countries which wish to join 
are key ingredients of stability through integration. On the other, the progress made by the 
Union towards establishing a fully Hedged common foreign and security policy is the 
second keystone for such a centre of stability. Deepening of the European Union, to 
include a defence policy in the long term, is therefore a priority. Close cooperation on 
armaments is a key factor in defence policy. The Union must not only implement a 
common foreign and security policy but also develop an armaments policy, all the more 
so since some of the Member States are amongst the largest producers, exporters and 
buyers of defence-related products. 
In this context, Community instruments, adjusted if need be, could be used in respect of 
the defence-related industries. These instruments could, in particular, be adapted in the 
light of the security needs and of the political guidelines to be defined within the 
framework of the CFSP. 
One positive development is that the end of the cold war has made it possible to cut 
defence budgets. However, in the long run the need for the defence-related industries 
substantially to scale down their activities, though the efforts for reconversion toward 
civil activities, had directs effects on unemployment losses especially in some 
regions.And if the required adjustments for the restructuring are not put in place, other 
consequences could manifest themselves in the long run in the form of impowerishment 
of the production base and the innovation capability of the european industry. 
Maintenance and reinforcement of the sufficiently autonomous, competitive industrial 
and technology base which Europe needs in order to implement its common defence 
policy inevitably entails integration of the defence-related industries. This rationalization 
will allow more efficient cooperation for both the development and the production of 
military hardware. European undertakings will become all the more efficient and 
11 
competitive il they develop synergies, cooperation and even restructuring on the single 
market. 
The EU must foster the development of its own base for the technologies and products 
essential for defence in Europe. Consequently, it must endeavour to secure comparable, 
effective access to markets in third countries, which would reduce the one-way 
dependence on the third countries. 
Completion of a European market in defence-related products should improve the 
efficiency of this sector and, consequently, cut costs for purchasers. Defence authorities' 
budgets will therefore benefit. However, they must ensure that the market offers them 
products in line with the duties assigned to their armed forces. 
Increasingly, Europe will have to develop its operational capacity to prevent and manage 
conflicts. As provided for in the WEU's June 1992 Petersberg Declaration, in addition to 
its contribution to common defence in accordance with the NATO and WEU Treaties the 
WEU's tasks consist of keeping and restoring the peace, evacuations and humanitarian 
aid operations. These call on the European and national organizations concerned to plan 
and develop the appropriate equipment. 
The long process of building a European security and defence identity has already begun. 
The Treaty on European Union and its annexed Declaration on Western European Union 
provide a means of taking account, at European level, of the political and security 
constraints which must shape all action on the defence-related industries. To this end, one 
important point to note is that the CFSP already provides a framework and instruments 
which could contribute to defining the context and priorities for such action. The WEU is 
developing its own resources with the objective of giving Europe's defence effective 
operational capacity. It is therefore essential to ensure a degree of parallelism between the 
EU's and the WEU's work. 
2.2.2 The Intergovernmental Conference 
The Intergovernmental Conference starting at the end of March 1996 will discuss, inter 
alia, developments concerning common security and defence policies, including the 
armaments aspects. Certainly, this does not necessarily mean waiting to implement the 
conclusions of the IGC before taking European action on the defence industry. On the 
contrary, it will be easier for the IGC to take decisions if the parties involved in the 
industry are cooperating already and the public authorities have already taken specific 
action for this sector at European level. In particular, it will be easier for the IGC to 
provide the means for a European armaments policy if an efficient industry meeting 
Europe's security needs has been maintained in the meantime. The Westendorp report 
which has received strong support among Member States, asserts that the Conference 
should consider how to encourage the development of European operational capabilities, 
how to promote closer European cooperation in the field of armaments and how to ensure 
greater coherence of action in the military field with the political, economic or 
humanitarian aspects of European crisis management. 
12 
3. The players and means of action 
3.1 The European Union: promotion of the synergies between its various 
means of action 
On the armaments market, supply and demand follow special rules dictated by the 
exclusive role of the public authorities, which are guided largely by security and foreign 
policy imperatives. This implies that armament issues could be discussed within the EU's 
CFSP bodies. However, the economic dimension of armament issues inevitably entails 
interaction with the EC Treaty. In this context, either the rules already in force, 
particularly on the single European market, must be taken as the basis for drafting rules 
specifically for the armaments sector or the existing rules must be applied, taking full 
account, however, of the specific nature of the sector. Completion of such a single market 
for armaments will create, in the perspective of the eventual framing of a common 
defence policy, interdependence between Member States for supplies of defence 
equipment. This will facilitate security of supply of such equipment between Member 
States under market conditions. 
Although a European market in defence-related products could be established by applying 
the relevant rules of the EC Treaty and of Title V of the Treaty on European Union, it 
must also be acknowledged that a single fiuropean market implies that it must have its 
own identity vis-à-vis third countries. This would be created by establishing specific rules 
concerning the customs union, commercial policy and access to public contracts. In 
particular, it must be stressed that with this defence-products market with its own identity 
the European Union would be in a better position to secure comparable, effective access 
for its products to markets in third countries under mutually advantage conditions. In this 
connection, once normal conditions have been restored within the Customs Union, 
transatlantic trade must be developed on the basis of reciprocal liberalization with the 
objective of strengthening transatlantic cooperation on armaments, including on export 
limits on "inhuman" weapons (antipersonnel mines). Establishment of such a balanced 
relationship also implies establishing mechanisms for evaluating the volume of trade and 
enforcing effective and comparable access to markets in practice, where necessary. 
3.1.1 Instruments available within the EC framework 
First, the Community authorities have a range of instruments concerning the industrial 
aspects of armaments. Second and above all, the Community framework offers the 
possibility of applying binding rules taking account of the specific nature of the sector 
and guaranteeing legal certainty for all involved and fair conditions throughout the 
Community market. 
In view of the importance of these instruments, this communication places the accent on 
the means of action available to the European Community which can be implemented in 
the short term. For this reason, a more detailed analysis of this potential is set out in 
Chapter 4, taking account of the specific nature of the sector. 
13 
These considerations will undoubtedly be an extremely important factor in ensuring that, 
in contrast to past practice, the Member States no longer interpret the exemptions 
authorized by Article 223 of the EC Treaty so broadly. In particular, hitherto Article 223 
of the EC Treaty has placed limits on the Community framework by allowing exemptions 
from the provisions of the Treaty for "the production of or trade in arms, munitions and 
war material". This exemption applies only under particular circumstances and 
conditions since the same article adds that the national measures on the subject must be 
"necessary for the protection of the essential interests of the security" of the Member 
State and must "not adversely affect the conditions of competition in the common market 
regarding products which are not intended for specifically military purposes." 
Article 225 lays down, in particular, procedures for the Court of Justice to monitor the 
national measures taken under Article 223. Moreover, Article 223 states that the national 
exemptions may apply solely to the products on the list to be established by the Council 
in 1958. This list was adopted by the Council on 15 April 1958 and has never been 
changed since. Consequently, Article 223 gives the Member States no exclusive general 
powers. Instead, it gives them the possibility of invoking an exemption to the discipline 
imposed by the Treaty under the conditions described above and under the supervision of 
the Courts. 
Hitherto, however, some Member States have interpreted this Article broadly and 
divergently, accentuating the fragmentation of the European defence market. Exemptions 
have been applied to a wider range of products without reference to the 1958 list. The 
Commission has never exercised its powers to take the initiative to amend the list of 
products. Moreover, many Member States have seen Article 223 as embodying a general 
principle that all areas concerning national security are not covered by the Treaties. The 
Commission has always contested this approach, an attitude confirmed by two recent 
Court of Justice judgments. In cases C-70/94 and C-83/94 the Court gave its ruling on 
the Community's exclusive powers under Article 1 13 of the Treaty and dual-use goods. 
In particular, it found that since full responsibility for commercial policy was transferred 
to the Community, national commercial policy measures are therefore permissible only if 
they are specifically authorized by the Community and that a product cannot fall outside 
the scope of the common commercial policy on the grounds that it is of a strategic nature. 
On this basis, Article 11 of Regulation (EEC) No 2603/69 establishing common rules for 
exports allows Member States to adopt national restrictive measures to avoid the "risk of 
a serious disturbance to foreign relations or to peaceful coexistence of nations which may 
affect the security of a Member State". Moreover "a measure ... whose effect is to 
prevent or restrict the export of certain products cannot be treated as falling outside the 
scope of the common commercial policy on the grounds that it has foreign policy and 
security objectives." 
3.1.2 Instruments available under the common foreign and security policy 
fhe Treaty on European Union created a new situation by introducing a common foreign 
and security policy (CFSP) which "shall include all questions related to the security of the 
Union, including the eventual drafting of a common defence policy, which might in time 
lead to a common defence". 
14 
Security is a general concept. It therefore also includes issues relating to armaments. At 
the same time the Maastricht Treaty introduced the concept of important interests which 
the Member States have in common. In particular, the Union is gradually implementing 
joint action in areas where the Member States have important interests in common. In the 
case of security, these important common interests were identified in preparation for the 
entry into force of the Treaty on European Union (sec the conclusions adopted by the 
European Council in Copenhagen on the preparatory work on security). This notion of 
common security interests will make it easier to decide the conditions for implementing 
the action necessary in the armaments sector within the framework of the CFSP. 
In the "Declaration on non-proliferation and arms exports" adopted by the European 
Council in June 1991 and supplemented in June 1992, the Heads of State and 
Government expressed the desire for a common approach leading to a harmonization of 
national policies on arms exports, based on the eight criteria agreed on arms export 
policies. 
At the Maastricht European Council they identified areas where common action could be 
taken as part of the future common foreign and security policy. These include the 
economic aspects of security, in particular control of the transfer of military technology to 
third countries and control of arms exports. 
In 1995 the EU took joint action, based on Article J.3 of the Treaty on European Union, 
inter alia on extension of the Non-proliferation Treaty and on anti-personnel mines. The 
latter, in particular, included a ban on exports of mines from the Union, based on 
humanitarian as well as foreign and security policy concerns. 
The existing legislation together with the objectives of the CFSP therefore lay the 
foundation for the EU to evolve a policy and action making the most appropriate use of 
the instruments available under the Community framework and under the CFSP to the 
benefit of the defence-related industries. 
The European Union has a single institutional framework which ensures the consistency 
and continuity of the activities carried out in order to attain its objectives while 
complying with and building on the existing Community legislation. In particular, the 
Union ensures the consistency of its external activities as a whole in the context of its 
external relations, security, economic and development policies. The Council and the 
Commission are responsible for ensuring this consistency. They ensure implementation 
of these policies, each acting in accordance with its respective powers (Article C of the 
Treaty on European Union). In an economic area without internal frontiers and with 
common security interests, consistency demands that the Union institutions implement 
policies ensuring greater combination of the powers of the institutions in connection with 
the various pillars of the Unkm. 
15 
3.2. Closer cooperation between the WEU and EU 
3.2.1 Relations between the EU and WEU 
In the Declaration on Western European Union, as annexed to the Treaty on European 
Union, the WEU Member States agreed on the need to develop a genuine European 
security and defence identity and a greater European responsibility on defence matters. 
The WEU would be developed as the defence component of the European Union and as a 
means to strengthen the European pillar of the Atlantic Alliance. 
At their meeting in Bonn in December 1992 the Ministers of Defence of the 13 countries 
then in the Independent European Programme Group (IEPG) set up in 1976 decided to 
transfer the Group's functions to the WEU, in accordance with the objectives set in 
Maastricht. 
The Western European Armaments Group (WEAG), formerly the IEPG, bringing 
together 13 countries, including 2 non-EU members, was thus set up and attached to the 
WEU as the body responsible for cooperation on armaments issues within the WEU. The 
objectives of the WEAG are to open up the national defence markets to competition, to 
reinforce Europe's technological and industrial base in the defence sector and to bring 
about closer cooperation on research and development. At the meeting of the WEU 
Council in Noordwijk on 14 November 1994, the Ministers of Defence from the WEAG 
countries noted the establishment of an armaments secretariat within the WEU. 
As its operational role develops the WEU/WEAG will probably take on activities in 
fields where the EU is active on the basis of the Community policies. Given that the EU 
and the WEU/WEAG have common political objectives, where their activities cover the 
same fields there are clear advantages to be gained from mutual information and closer 
cooperation, particularly in terms of efficiency, costs and consistency. 
Closer cooperation between the EU institutions and the WEAG would be facilitated by 
building bridges between the European institutions dealing with defence markets. Such 
synergies and bridges could be established rapidly and pragmatically on the basis of the 
Treaty of Rome or of Title V (for example, by extending the existing information and 
consultation procedures between the WEU and the Commission). 
3.2.2 European Armaments Agency 
The Declaration on Western European Union annexed to the Treaty on European Union 
provided for enhanced cooperation between the Member States concerned in the field of 
armaments with the aim of creating a European Armaments Agency. Despite the 
considerable progress made with defining the Agency's tasks and statutes, the 
groundwork has revealed that big differences still remain on the principles and priorities 
of the Agency's activities. 
16 
The WEAG's decision establishing the Agency has therefore been delayed. Against this 
background, the Commission should consider its possible contribution to establishing this 
Agency and to defining its tasks and carrying out its activities. 
In addition, France and Germany have decided to set up a joint armaments structure in 
1996 to allow more rational cooperation and contribute towards establishing an efficient 
and appropriate industrial and technological base. The Ministers of these two countries 
declared that this move is part oflhe process of establishing the common security policy 
provided for in the Maastricht Treaty and, in particular, marks a constructive step towards 
establishment of the European Armaments Agency. 
fhe Maastricht Treaty stipulates that the WEU "as the defence component of the 
European Union will formulate common European defence policy and carry forward its 
concrete implementation through the further development of its own operational role." 
To this end, for interoperability and cost reasons and in order to fulfil the common 
security objectives/tasks, increasingly the equipment requirements of the forces 
participating in the WEU will in turn become common. Definition by the WEU of 
European forces' operational requirements will mark a decisive step for European 
armaments policy. In particular, largely common demand for armaments from WEU 
states would put the EU in a position to define more closely the rules governing the 
internal market, imports and supplies of military equipment. Here too cooperation 
between the EU and the WEU is essential. 
4. Contribution of the Community instruments and activities of relevance to the 
defence-related industry 
4.1. Internal market and technological base 
4.1.1 Public procurement 
The Commission is convinced that important benefits could be derived by the defence 
community from applying procurement procedures largely inspired by those applied in 
the EU's civil sector. 
It recognizes that the specific character of the defence sector, which involves essential 
national security interests, which may vary among Member States, may require some 
adjustments to the procedures which are enshrined in the Community's procurement 
directives. However, it is important that the main features of those rules are applied as 
uniformally as possible. 
Indeed, the procurement regime, which exists in the Community is based mainly on the 
following principles: a generally applicable non-discrimination and equal treatment 
principle, competitive tendering, open and transparent procedures based on objective 
selection and award criteria and an enforcement structure consisting of legal remedies for 
aggrieved suppliers and an independent enforcement authority which has investigative 
powers and can seek corrective measures. 
17 
According to a study carried out in 1992 for the Commission into the "Cost of non-
Europe in Defence Procurement '"', de fence procurement amounted, in 1990 in the EU to 
about 65 to 70 billion ECU a year. Efficient purchasing in this sector could result in 
savings of between 5 to 11 billion ECU per year thereby avoiding the substantial 
duplication of industrial capabilities in aircraft, helicopters, missiles, tanks and warships 
in the sector. 
These principles have been further developed by the Council in six directives which lay 
down detailed provisions on procurement of goods, services and public works by public 
authorities and utilities and minimum requirements as to legal remedies. These detailed 
rules only apply above certain monetary thresholds. It is important to keep in mind, 
however, that the abovementioned principles apply to all contracts, regardless of their 
value. Applying a similar legal environment to the defence sector would enable Member 
States to take full advantage of the savings delivered by efficient procurement pro­
cedures, while being reassured that their partners abide by the same rules and are 
submitted to the same discipline. 
Although the main core of the Community's procurement regime should therefore be 
applied to the defence sector as well, certain adjustments need to be made in order to take 
into account the specificity of that sector. The main issues in this regard are the need to 
ensure the confidentiality of information "the disclosure of which Member States 
consider contrary to their essential security interests", and the need to maintain 
guaranteed sources of supply. 
The Community's procurement directives provide for three different types of purchasing 
procedures, i.e. open, restricted or negotiated. Although utilities can freely choose 
between these three alternatives, public authorities should normally opt for open 
procedures, unless there are important justifications to use one of the others. The 
Commission could well imagine that for certain strictly limited defence purchases, public 
authorities will consider bids only from companies which have been selected beforehand 
on the basis of objective criteria as willing and able to maintain the confidentiality of 
sensitive information. It is important to ensure, of course, that this selection process is 
not used as a disguised means of arbitrarily eliminating certain suppliers. 
With regard to the necessity to maintain guaranteed sources of supply, especially in times 
of international tension or war, the Commission feels that the current regime offers 
sufficient possibilities to take this element into account. First of all the purchasing entity 
could select suppliers on the basis of their ability to ensure supply under virtually all 
circumstances. Furthermore they could conclude multilateral contracts, i.e. contracts 
concluded with several suppliers for one type of product or service. In such a case a 
hierarchical order would be established between the various suppliers. If supplier one is 
not able to provide the product within a given time-period the product would be 
purchased from the next company in line and so on. 
6 In 1990 defence procurement amounted in the EU to about 65 to 70 billion ECU per year within which 
expenditure on Article 223 items was estimated at ECU 40 billion. 
18 
If a Member State feels that its needs can be fully met by a offer from a non-EU company 
which makes the best offer for that Member State's money there does not seem to be a 
compelling reason for the Community to require this Member Stale to select an offer 
which satisfies its needs less well for the sole reason that it is presented by a Community 
supplier. This does not mean, of course, that the third-country supplier will be able to 
claim any rights to even being considered as a possible supplier. At this stage, the 
Commission considers that it would be preferable only to apply these rights, including 
legal remedies, to Community suppliers. 
The Commission intends further to explore these ideas, as well as others which may be 
presented, with the other institutions and with representatives of the Member States, 
taking into due account the objective of enhancing in a dynamic way the competitiveness 
of the European defence-related industry. If this leads to legislative measures, it is 
obvious that these will have to be binding on all Member States. 
However, in order to allow Member States some flexibility in extreme eases involving 
national security, a safeguard clause should be included in those measures. This clause 
could be used on condition that other Member States and the Commission are informed 
immediately after the decision to procure without following the common rules. 
Sufficiently detailed reasons should be given. 
4.1.2 Intra-Community trade 
The internal market does not only constitute a trade area favouring greater 
competitiveness, but also provides the environment for stronger cooperation amongst 
European industries. By facilitating intra-Community trade, the completion of a 
"European defence market" should facilitate both cooperation and integration in the 
European defence-related industry. 
Regarding the BU framework, the gradual opening of intra-European borders requires a 
minimum standard of competition policy and in the long term harmonized export rules. 
Furthermore, it implies especially, whenever possible, the simplification and 
rationalization of controls on intra-Community trade carried out by States. In view of this 
objective and in order to coordinate the methods of control and ensure more transparent 
results, certain Community instruments should be put in place, based on administrative 
cooperation. 
The need to simplify the national control procedures concerning the movement of 
defence products applies even more when the trade concerned by these controls takes 
place within the framework of industrial cooperation agreements. However, the principle 
of mutual recognition recognized in the framework of the EC Treaty could be used as a 
basis for technical specifications used for the construction of defence-related products, 
cither in an intergovernmental framework, or through a Commission initiative. 
19 
At the end of the day, trade within Europe will not only contribute to eliminating 
distortions of competition, but also facilitate industrial cooperation and integration, whilst 
still assuring the necessary provisions for the national security of Member States. 
4.1.3 Research and technological development (RTD) activities 
Although they are focused on civil objectives, Community research programmes, like 
civil research activities at national level, are increasingly of interest for the defence 
technology base because of (1) the overlapping and converging technology needs of the 
civil and defence sectors in a wide range of areas (dual-use technologies) and (2) the 
leading role taken by the civilian markets in the development of a growing number of 
these dual-use technologies. 
As the competitiveness of the Community industry is a primary objective of Community 
RTD policy, Community programmes support research in a wide range of dual-use 
technological areas (production technologies, advanced materials, information 
technologies, communications technologies, telematics, aeronautics, energy storage and 
conversion, etc.). 
It has been estimated that technological areas of potential dual-use interest account for as 
much as one third (i.e. about 1 billion ECU per year) of the overall Community research 
budget. It is therefore not surprising that a number of companies and research 
organizations known to be active in the defence sector participate in Community 
programmes and that some Member States are encouraging them to do so. Some of these 
companies are also being consulted in the framework of the Commission's Task Forces to 
improve the links between research and industry (e.g. aeronautics). 
Community RTD programmes can contribute to the technology base of the defence-
related industry in several ways : (1) by strengthening the overall European research 
infrastructure and scientific base; (2) by supporting R&D projects leading, after further 
development, to commercial products, processes, standards or improved quality 
assurance which can also be used in the defence sector; (3) by supporting R&D projects 
on generic technologies which can lead, after further development, to either civil or 
defence-specific applications. Furthermore, Community programmes can also support 
research by defence related organizations to develop civil applications of their defence 
technologies. 
With the growing importance of trans-European R&D cooperation in both civil and 
defence sectors, it is now appropriate to consider how, and to what extent increased civil-
defence synergies can be promoted at the European level with the aim of optimizing the 
overall use of R&D efforts. 
The Commission considers that, while maintaining the civil orientation of Community 
research programmes, appropriate steps to start addressing these issues should be : 
- to establish cooperation links between EC and WEAG research programmes to avoid 
duplications, to ensure complementarity, and to facilitate optimal use of research 
results; 
20 
to identify, in cooperation with the WEAG and industry, key dual-use technological 
areas where European capabilities are weak or not sufficiently autonomous and should 
be strengthened; 
to determine, on the basis of the experience and knowledge from the above action, 
whether, how and to what extent dual-use considerations should be taken into account 
in the preparation of the future Community programmes (Fifth Framework 
Programme). 
4.1.4 Standardization and technical harmonization 
Standardization has been transformed in recent years from a marginal policy area to one 
which is attracting priority attention within European industry as a means of reducing 
costs and promoting industrial competitiveness. It is recognized to be of strategic 
importance for the efficiency of the internal market. 
Union-wide standardization policies are relevant to the defence-related industry in such 
key areas as information technology, telecommunications, power supply, laser 
technology, new materials, aerospace and quality systems and conformity assessment. In 
many of these areas, civil standardization activity is proceeding faster than similar work 
organized for purely military purposes and civil standards are becoming more widely 
used in defence procurement. 
Hence, further convergence of civil and military use of standardization, in order to 
maximize economic benefits and to minimize duplication of effort and the waste of 
scarce technical expertise, should be one of the main objectives of EU policy in respect of 
the defence-related industry. 
Greater use by the military of the existing standardization mechanisms and company 
accreditation at international and European level will combine the advantages of lower 
costs of procurement, greater competition in supply and, in some cases, shorter lead-times 
in the development of standards. 
Although the scope for the use of civil standardization will remain limited or even non­
existent in some security-sensitive areas, such as weaponry, in other areas standardization 
can provide a common basis from which additional, non-standard, requirements may be 
developed by the military, if necessary. Unnecessary overlap between civil and military 
standardization work should be avoided for reasons of industrial efficiency and budgetary 
savings. 
In order to promote civil/military convergence in this field, the Commission considers 
that the following steps would be helpful: 
21 
• the conclusion of ccxrperative arrangements between the European standardization 
organizations and NATO standardization experts in order to identify areas of 
common interest of overlap in their current activity, perhaps by means of a joint 
report; 
• identification by the defence authorities within the EU of standardization work already 
planned in the civil field that could also be of interest to the military, with the 
possibility of Community support, where appropriate, by standardization 
mandates; 
• the establishment of a system for regular information exchange between NATO with 
the European standardization bodies in order to minimize the risk of duplication 
of work in the future. 
Examples of such initiatives which have already been launched include developments in 
the field of CALS (Continuous Acquisition and Life cycle Support) where cooperation 
between civil and military structures is about to be implemented. 
Recent discussions between the European Commission and the European aeronautics 
industry have taken place to bring about closer integration between military and civil 
standards. 
NATO has also shown interest by setting up a new standardization organization (NSO). 
These initiatives would not affect the continued commitment of the Community to 
ensure that European standardization is based on international standards wherever 
possible. 
4.1.5 Competition policy 
In the light of the emergence of a Community market for the defence industry, resulting 
from common defence programmes, from European alliances and from necessary 
restructuring, there is a place for the Community competition policy. It can facilitate, 
thanks to a clear framework and quick decisions, the concentrations and cooperations 
between companies which do not call into question effective competition. Moreover, 
rigorous control of State aids will make it possible to distinguish between aid necessary 
for restructuring, since it accelerates change, encourages research, development and 
innovation and reduces the social consequences of reorganization, and aid used for 
defensive reasons that certain Member States might be inclined to use to avoid the 
necessary structural changes and transfer the production and employment adjustment 
costs onto other Member States. The control of aid should also provide a means to make 
sure, in a more effective manner than today, that aid granted to the defence-related 
industry is not also used by certain companies to subsidize civil production. 
In a sector such as the defence-related industry, the introduction of effective competition 
should therefore result in considerable productivity gains, in the form of cost reductions 
and increased innovation which could only improve the industry's exporting capacity. 
22 
The Commission considers that the legal basis for the Community's competition policy 
could be used and provide an adequate framework for competition matters relating to the 
European defence-related industry. 
However, the application of competition law to the defence-related industry must take 
into consideration the specific features of this industry. It must also be consistent with the 
objectives of other Community policies, be receptive to information and comments from 
Member States' Ministries of Defence (MODs) in their capacity as main clients of the 
defence-related industry and allow Member States to take appropriate measures in order 
to protect national security in addition to those measures which might be taken by the 
Commission to maintain and develop effective competition. Competition policy in the 
defence-related industry should be implemented progressively, in fields such as State 
aids, agreements and concerted practices since, up to the present date, the Commission 
has adopted a careful approach to exercising its competence in these fields. Finally, it is 
evident that the Commission will take into consideration, in the operation of its 
competition policy for the defence-related industry, the manner in which in particular 
governments of third countries which produce armaments formulate and apply 
competition law to their own industry. 
So far the Commission has approved/notified concentrations (see table in Annex) of 
defence industries on the following lines: 
- For the moment, geographic markets for defence products and services tend to remain 
national where a domestic supplier exists because MODs still tend to have strong 
preferences for national suppliers. However, where there is no domestic supplier, then 
subject to other barriers such as export restrictions and national preferences, suppliers 
of defence products and services compete with each other world-wide. Consequently, 
dominant positions by European defence-related companies at world level are not 
likely to be observed, given the weight of US competitors in this area. Likewise, when 
the geographic market is national, a dominant position, if any, is normally not 
strengthened, given that there is no addition of market share, except when the merger 
concerns two national suppliers. 
- When assessing the market position of a firm in the defence industry, account must be 
taken of the bargaining power of its main clients: the Ministries of Defence (MODs) of 
the States concerned. MODs generally formulate the operational requirements and 
technical specifications of armaments. Also, as a consequence of the reduction in 
national defence budgets, MODs tend to require higher technical specifications with 
lower levels of manpower and lower overall costs and to be reluctant to bear the risks 
associated with R&D. 
- fhe Commission considered the general views of the MODs concerned as relevant for 
the assessment of the operation. 
The extent to which a common market for defence equipment is achieved is crucial to 
evaluate the effects of the merger policy on the conditions of competition. As far as 
national markets remain, further concentration may aggravate monopolistic inefficiencies 
23 
that can extend into civilian areas of business. On the other hand, if progress towards a 
common market for defence equipment is achieved, and provided that conditions of 
competition are preserved, business consolidation may contribute favourably to Euiopcun 
competitiveness on a global market. 
Finally the Merger Regulation allows Member States to take appropriate measures to 
protect public security 7This clause which reaffirms Member States' ability either to 
prohibit a concentration or to make it subject to additional conditions and requirements 
compatible with Community law, has been used once by a Member State 8. 
As regards agreements and State aids, the Commission has always approved the notified 
operations. The Commission is conscious that cooperation programmes are necessary in 
the defence-related industry, in view of the size of certain projects which require 
substantial financing and multiple skills. As far as financing of military R&D by Member 
States is required, the Commission takes account of the particularities of defence-related 
activities, namely a high technology base of production, high costs and a very long 
development cycle, which, to a large degree, require public financing. Concerning aid for 
rescuing and restructuring firms in difficulty, great attention should be given in particular 
to social and regional policy considerations. 
4.1.6 Structural Funds 
A study carried out in 1992 for the Commission on the economic and social impact of 
reductions in defence spending and military forces on the regions of the Community 
showed that about half of the regions in which defence-related activity is concentrated are 
not eligible for assistance under the Structural Funds instruments (Objective 1, 2 or 5(b) 
regions). Following the revision of the Structural Fund Regulations in 1993, a number of 
these areas (in UK, France and Italy) were integrated into Objective 2 regions. As a result 
more than half the defence-dependent areas are now in assisted areas. It is, however, 
important to note that even in assisted areas, Structural Fund aid is not available for 
investment in the defence-related industry itself. The role of the Structural Funds is 
therefore limited to providing general economic development assistance (including aid 
for conversion) through the Community Support Frameworks in place in the assisted 
regions and to the KONVER initiative. 
In this context, Objective 4 of the European Social Fund and the related Community 
Initiative ADAPT have established a horizontal approach (i.e without a priori reference to 
specific industries or sectors) to structural change and its effects on the 
workforce.Incertain circumstances, assistance is available for measures which help the 
adaptation of workers threatened with unployment due to industrial change and change in 
production systems (especially within small and medium size enterprises).Particular 
emphasis is placed on the anticipation of labour market trends and improving 
qualifications and employment opportunities for the workers in question. 
7 Cf. Art. 21(3) of the Regulation 
8 See point 321 of the XXIIIrd Report on Competition Policy 
24 
In response to calls from the European Parliament, the Commission adopted Perifra 1 
(1991) and Perifra II (1992). These special measures included support for demonstration 
projects which could serve as models for the conversion of military installations. In 
conformity with the position taken by the Parliament, the KONVER Community 
Initiative was adopted in 1993 to assist regions weakened by the decline of defence indus­
tries and installations, fhe annual programme introduced in 1993 has been extended on a 
multiannual basis up to the end of 1997. 
The purpose of KONVER is to provide support for economic diversification in areas 
heavily dependent on defence-related activities through the encouragement of 
commercially viable activities not related to defence. 
Eligible areas can be located anywhere in the EU, although at least 50% of the 1994-97 
KONVER budget must be spent in ERDE assisted areas (Objective 1, 2 or 5(b)). fhe 
eligible areas are small geographical regions in which actual or announced defence-
related job losses total 1.000 or more since 1990. Other areas heavily dependent on 
defence can also be accepted as eligible regions taking into account their high 
unemployment rates, poor environmental conditions, or isolation/remote location. 
A full range of conversion measures including the financing of both tangible and 
intangible investment in alternative economic activities, the modernization of 
infrastructure in relation to the economic regeneration strategy of the area concerned, and 
measures in favour of the environment and tourism can be financed through KONVER. 
The budget for the programme is ECU 130 million for 1993 and ECU 500 million for the 
period 1994-97. A reserve of ECU 245 million to support product innovation, the 
development of environmental technologies and SMEs was allocated to the KONVER 
initiative on 4 October 1995. KONVER was also extended until the end of 1999. Loans 
from the European Investment Bank are also available. 
Also, the possibility and detailed ruled for financing from other EU resources could be 
examined in the light of the priorities of the armament policy. 
4.2. The external dimension 
4.2.1 Export policy 
In the European Union, national policies on arms exports have traditionally differed 
considerably, ranging from nearly total ban to a voluntaristic approach, where arms 
export is considered vital not only for strategic and political reasons but also for reducing 
unit costs and maintaining a broad defence industrial and technological base at the 
national level. Not less importantly, assessments of the risk of exports to certain 
destinations, linked to foreign policy considerations, have traditionally been made on a 
national basis. The ensuing differences between Member States are not without cost : 
national concerns about either a too restrictive or too liberal approach of one or more 
other Member States on arms exports in general, or in regard to specific destinations, 
have not favoured intra-European industrial cooperation or integration. Differences in 
export policy thus also impede the development of intra-European policies. As a 
consequence the development of common policies inside the European Union in order to 
secure the industrial basis of the sector should be complemented by a corresponding level 
of harmonization of national export policies and export-control systems. 
25 
The European Council has taken a first step towards a common approach on arms 
exports, by adopting, in June 1991 (Luxembourg) and June 1992 (Lisbon) (in the annex), 
eight criteria which Member States interpret when deciding on issuing a licence for a 
specific export. Exchanges of information on the concrete application of the criteria are 
being conducted between Member States, with a view to harmonizing their interpretation. 
Given the difficulties in developping a common basis for the harmonization of arms 
export policies a gradual process should be pursued following a two steps approach. In 
a first stage, regular exchange of information between Member States on arms exports 
(type and quantity of exported material, destination, end-use) should be pursued. In the 
case of cooperation programmes, which should be encouraged, progress could be 
achieved on the basis of current experiences, namely by following the principles 
according to which export rules of the country where the prime contractor is located 
apply. 
In a second stage the establishment should be pursued of an operational system aimed 
at eliminating the distorsions between the various national treatments. The drafting of 
such a system should, for it to become effective, take into account the modalities, 
principles, scope and the possible needs for improvement, based on the experience 
gained with the establishment of the export control regime on dual-use goods and 
technologies (see below). 
4.2.2 Export controls on dual-use goods and technologies 
To resolve one of the most difficult problems hindering the completion of the internal 
market, i.e. the problem of controls on intra-Community trade in dual-use goods, the 
Council agreed, after two years of intensive discussions on a Commission proposal, to 
establish a Community export control system. It is based on two legal instruments, viz. an 
Article 113 Regulation9 and a Joint Action under the Common Foreign and Security 
Policy 10, which together form an integrated system. Both texts were formally adopted by 
the Council on 19 December 1994 and apply from 1 July 1995. 
The objective of the integrated system is to ensure that effective controls, based on 
common standards, are applied by all Member States on exports of controlled goods from 
the Community. 
Council Regulation (EC) No 3381/94 of 19 December 1994 setting up a Community regime for the 
control of exports of dual-use goods, as amended by Council Regulation (EC) No 837/95 of 10 
April 1995, OJ L 367 of 31 December 1994 and OJ L 90 of 21 April 1995. 
Council Decision 94/942/CFSP of 19 December 1994 on the joint action adopted by the Council on 
the basis of Article J.3 of the Treaty on European Union concerning the control of exports of 
dual-use goods, as amended by Council Decision 95/127/CFSP of 10 April 1995 and by Council 
Decision 95/128/CFSP of 10 April 1995, OJ L 367 of 31 December 1994 and OJ L 90 of 21 
April 1995. 
26 
Two key features of the integrated system are: 
• a common list of dual-use goods and technologies subject to export control by all 
Member States as well as a list of destination countries; 
• common criteria to be applied by all Member States when determining whether or not 
to authorize exports from the Community. 
This system is part of the effort of the international community to reinforce and 
coordinate export controls over sensitive items. In particular, 28 countries, among which 
all EU Member States, agreed in December 1995 on the establishment of the "Wassenaar 
arrangement". This arrangement succeeds the COCOM regime as regards export controls 
for arms and dual-use goods. There are obvious links between this arrangement and the 
EU system, which will call for an adaptation of the EU common list of dual-use goods. 
In such a sensitive and complex area where internal market, trade, foreign and security 
policy interests converge, the common export control system cannot be applied overnight. 
Consequently, a transitional period is foreseen to ensure that the system works 
effectively. It will be used to strengthen, where necessary, the control systems of Member 
States and to reinforce administrative cooperation between the competent authorities. 
The new system provides for a clear identification (and a common list) of dual-use goods 
and technologies and serves as a basis for the reduction, and ultimate elimination, of 
policy differences between Member States.The fact that an export licence issued by one 
Member State is presently valid throughout the Union, facilitates joint export projects 
between companies established in the Community. 
The creation of a common regime for dual-use export controls is an important 
improvement in the regulatory framework for the European defence-related industry 
which will facilitate structural adjustments thereby increasing companies' 
competitiveness.Therefore the whole system has to be implemented effectively. When 
making new proposals for a common regime, the Commission will take into account the 
ruling of the European Court of Justice in case C-83/94 that dual-use goods fall within 
the scope of the common commercial policy defined by Article 113. 
4.2.3 Import duties on military equipment 
The common customs tariff provides for the application of customs duties to most 
military or dual-use civil and military equipment imported from third countries. Only 
certain products benefit from specific exemptions, generally as a result of GATT 
negotiations. Individual exemptions from duties have also been granted under 
preferential arrangements with certain third countries, such as the members of EFTA. 
However, other military equipment, and dual-use products are in principle subject to 
customs duties, although the level of those duties has been lowered considerably in the 
course of multilateral trade negotiations. 
It is against this background that the Commission submitted a proposal to the Council in 
1988 for a regulation temporarily suspending import duties on certain weapons and 
military equipment ' '. The aim was a uniform Community response to national defence 
COM(88)502 final - OJ C 265, 12.10.1988. p.9. 
27 
procurement requirements which had hitherto resulted in certain Member States 
unilaterally granting exemptions from custom duties. The Commission considered then, 
and still does, that the tariff arrangements for imported products, even military or dual-
use equipment, are the sole responsibility of the Community and that Article 28 of the 
Treaty therefore constitutes the only permissible legal basis for granting autonomous 
suspensions. In this respect, the existence of differing national approaches, apart from 
not being founded in Community law, is incompatible with the very principles of the 
Customs Union and the Internal Market. 
The scope of the proposal for a regulation was defined with the aim of establishing a 
balance between the desire to facilitate access by national armed forces to the most 
technologically advanced equipment and the need to take account of the interests of the 
Community arms industry. It therefore covers equipment which is military "by nature", 
and parts thereof. During discussions in the Council, a number of Member States asked 
for the list to be extended to certain equipment which would necessarily imply not only 
verifying that importation of this dual-use equipment with duties suspended is not likely 
to disturb the balance mentioned above but also defining what is meant by "military use" 
in their regard. 
These discussions could be resumed within the overall context of this communication in 
order to establish a list of products benefiting from duty suspensions which is most suited 
to the various objectives of a European defence policy. This will also contribute, as 
proposed by the Commission since 1988, to resolve outstanding difficulties, referred to 
above. 
4.2.4 Trade relations 
The development of a European defence equipment market, to the extent that it would 
lead to greater self-sufficiency in different market segments, has potentially far-reaching 
implications for relations with third countries, and particularly with the United States, 
which is the main third-country supplier of arms to the European Union Member States. 
Exploitation of the Community dimension in defence procurement does not imply 
unilateral opening at Community level of the defence market to third-country suppliers. 
Because of the exceptions in me multilateral trade regime, including the Government 
Procurement Agreement (GPA) concluded in the framework of the WTO, competitive 
tendering does not yet apply to purchases of defence-related material by our trading 
partners. Every Member State will remain free to consider if bids received from non-EU 
firms should be examined. 
Negotiations should be undertaken in order to lay down the conditions under which third-
country suppliers could enjoy, in relation to public procurement and other market access 
issues, the same rights as Community suppliers in the armament sector, based on 
comparable and effective access to the markets of those countries for EU suppliers, whilst 
respecting each party's security interests. 
28 
S. Conclusions: 
fhe Commission notes that matters concerning the production of and trade in armaments 
are linked to defence and foreign-policy considerations of Member States and to progress 
in the development of a European security and defence identity. On the other hand 
securing a competitive European defence-related industry is also a precondition for a 
European security and defence identity. 
There is therefore an urgent need for recognition of the state of health of the 
defence-related industry since, if this is not followed by tangible action, there is a danger 
of aggravation of the situation, leading to massive job losses and the disappearance of 
technological skills, with serious repercussions in the civil sector. 
Numerous questions, particularly concerning the demand side (for example, 
harmonization of operational requirements) can only be discussed within the framework 
of the preparations for a European security and defence identity. In the short term, 
however, the CFSP provides mechanisms and procedures which could smooth the way 
for urgent measures. 
Many other questions, particularly with an impact on the competitiveness of businesses, 
can be answered within the European Community framework. 
In fact a coherent range of Community instruments is available for the establishment of 
unified markets and competitive industries. The specificity of this industry can be taken 
into account adequately when implementing the current instruments. 
The action proposed in this document could usefully be complemented by measures in 
the framework of the Western European Union, in particular the establishment of a 
European Armaments Agency referred to in the WEU Declaration of 10 December 1991. 
The Council is requested to give its opinion on the foregoing analysis and on the 
suggestions concerning the contribution by the Community instruments. 
In the light of the Council's work, the Commission plans to take the appropriate action in 
the form of specific proposals or other suitable measures. 
29 
ANNEX 
Table 1* : Military expenditure, in constant price figures, 1985-1994 
Figures are in US $m., at 1990 prices and exchange-rates. 
North America 
Canada 
USA 
l:ur<>l>c 
Belgium 
Denmark 
Trance 
Germany 
( ireeee 
Italy 
Luxembourg 
Netherlands 
Norway 
Portugal 
Spain 
Turkey 
UK 
Austria 
I inland 
Ireland 
Sweden 1985 
11.014 
313.307 
4.789 
2.613 
39.918 
38.824 
4.524 
19.538 
74 
7.350 
3.339 
1.336 
9.058 
4.011 
43.549 
1.644 
1.826 
556 
5.234 1986 
11.233 
335.048 
4.984 
2.520 
41.081 
39.889 
3.861 
20.187 
78 
7.461 
3.234 
1.504 
8.827 
4.532 
42.867 
1.726 
1.975 
571 
5.387 1987 
11.488 
331.215 
5017 
2 662 
42.284 
40.570 
3.856 
22.699 
89 
7.598 
3.442 
1.563 
9.995 
4.316 
42.561 
1.612 
1.989 
533 
5.499 1988 
11.631 
323.860 
4.806 
2.714 
42.243 
40.242 
4.078 
24.113 
101 
7.561 
3.279 
1.738 
9.345 
3.802 
40.646 
1.546 
2.085 
530 
5.573 1989 
11.536 
320.427 
4.732 
2 648 
42.793 
40.146 
3.819 
24.304 
93 
7.636 
3.369 
1.824 
9.668 
4.398 
40.792 
1.622 
2.058 
525 
5.762 1990 
11.547 
306.170 
4644 
2650 
42.589 
42.320 
3.863 
23.376 
97 
7.421 
3.395 
1.875 
9.053 
5.315 
39.776 
1.542 
2.116 
596 
5.909 1991 
10.413 
268.994 
4.579 
2.697 
42.875 
39 216 
3.663 
23.706 
107 
7.161 
3.293 
1.925 
8.775 
5.463 
41.087 
1.550 
2.447 
623 
5.540 1992 
10.482 
284.116 
3.760 
2.648 
41.502 
37.697 
3.808 
23.004 
111 
7.088 
3.569 
1.977 
8.113 
5.747 
37.141 
1.507 
2.499 
617 
5.392 1993 
10.433 
269111 
3.571 
2.653 
41.052 
33.486 
3.716 
23.187 
102 
6.548 
3.385 
1.914 
8.823 
6.355 
36.312 
1.502 
2.356 
592 
5.273 1994 
10.151 
252.358 
3.549 
2.608 
41 235 
31.258 
3.778 
23.492 
110 
6.263 
3.523 
1.948 
8.141 
6.173 
35.055 
1.513 
2.167 
613 
5.260 
180.833 182.921 188.527 187.321 188.422 187.827 185.951 176.856 171.087 173.163 
Note : This series is based on the data given in the local currency series, defiated to 1990 price levels 
and converted into dollars at 1990 period-average exchange-rates. Local consumer price indices (CPI) 
are taken as far as possible from Internation Financial Statistics (IFS) (International Monetary Fund : 
Washington, DC). For the most recent year, the CPI is an estimate on the first 6-10 months of the year. 
Period-average exchange-rates are taken as far as possible from IFS. 
From SIPRI Yearbook 1995, pp. 440-44 
30 
Table 2: Major weapon procurement expenditure, 1983-92 
figures are in US $m, at constant (1991 ) prices 
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 
Nor ill A turned 
Canada 2 100 2.350 2.226 2.155 2 568 2 521 2.3H 2.129 .1020 2.053 
USA 68.635 76 442 83.997 90 105 91461 84 956 84 271 79 337 71757 66.110 
lùiro/H' 
Belgium 705 646 615 650 664 583 474 371 379 322 
Denmark 448 416 357 349 393 387 344 391 422 430 
I ranee 9.613 9.491 9.888 10.305 11.235 11.057 11.347 10.615 10.077 9.869 
Germany 7.884 7.805 7.825 8.191 8.218 7.826 7.685 7.545 4.347 3.562 
(,reeee 633 724 681 634 689 987 870 859 773 828 
Italy 3.642 3.505 3.946 3.942 4.994 5.075 5.112 4.202 3.967 3.247 
Luxembourg I 1323 3 4465 
Netherlands 1.700 1.774 1.739 1.531 1.367 1.561 1.359 1.344 1.130 1.208 
Norway 637 527 834 668 704 619 838 769 727 846 
Portugal 76 69 48 104 173 200 238 212 180 131 
Spain 1.970 2.591 1.581 2.164 2.565 2.009 1.838 1.214 1.176 1.492 
Turkey 411 519 573 847 1.010 888 785 1.103 1.287 1.488 
UK 11.467 12.263 12.259 11.505 11.004 10.842 9.575 7.798 8.118 7.359 
Kuropean NATO 
Total 39.189 40.333 40.349 40.894 43.021 42.0.38 40.468 36.427 32.587 30.787 
NATO tolal 109.923 119.125 126.572 133.354 137.050 129.514 127.052 117 892 109.364 98.979 
IX ' member 
eounlries 38.154 39 514 38.965 39416 41330 40 570 38 865 34.574 30.591 28.470 
Sources : NATO, Financial and Economic Data Relating to NATO Defence (NATO : Brussels, annual); 
author's calculations. Figures for France are based on national data. 
31 
Table 3: EU imports and exports of major conventional weapons, 1984-93 
Trend-indicator values, as expressed in mio US $, at constant (1990) prices 
Year 
19X5 
1 9X6 
19X7 
19XX 
19X9 
1990 
1991 
1992 
1993 
1994 TJ imports 
2.126 
3.1 IX 
2.942 
4.162 
4.X27 
3.865 
5.463 
6.190 
3.766 
3.766 World total 
39.713 
44.1 IX 
46.377 
38.5X5 
37.79X 
30.X9I 
25.527 
24.776 
24.494 
21.725 TJ exports 
X.5I4 
X.00I 
7.372 
6.129 
7.696 
6.160 
5.637 
4.611 
5.10X 
6.54X World total 
39.713 
44.1 IX 
46.377 
38.585 
37.799 
30.X91 
25.527 
24.777 
24.494 
21.725 
Source: SIPRI Yearbook 1995, p 510-51 1 
Table 4: Imports by EU Member States of Major Conventional Weapons, 1988-92 
(in millions of US dollars at constant 1990 prices) 
Supplier: 
Recipient 
Belgium 
Denmark 
Germany 
(irecce 
Spain 
France 
Ireland 
Italy 
Netherlands 
Portugal 
UK 
Total EU 12 
USA USA 
709 
204 
4.279 
3.309 
3.040 
1.577 
23 
494 
1.734 
449 
2.074 
17.892 F 
54 
12 
67 
1.365 
372 
17 
36 
121 
2.044 
3 D 
49 
9X7 
30 
58 
14 
836 
32 
2.006 
429 1 
69 
15 
126 
3 
213 
199 INL 
32 
254 
43 
33 
362 UK 
286 
80 
24 
19 
13 
30 
3 
10 
465 
543 Others 
102 
43 
15 
244 
159 
36 
16 
119 
13 
65 
812 
669* Total 
933 
596 
4.473 
6.197 
3.747 
1.626 
71 
688 
1.765 
1.374 
2.326 
23.795 
1.843 
* Of which at least S 128 mio from non-TU countries 
Source: SI PR I Yearbook 1994 
32 
Table 5: Critical technologies 
Critical technologies Dual-use NATO allies 
12 
13 
14 
15 
16 
17 
18 
19 
20 Semiconductor materials and microelectronic circuits 
Software producibility 
Parallel computer architectures 
Machine intelligence and robotics 
Simulation and modeling 
Photonics 
Sensitive radars 
Passive sensors 
Signal processing 
Signature control 
Weapon sytem environment 
Data fusion 
Computational fluid dynamics 
Air-breathing propulsion 
Pulsed power 
Uypervelocity projectiles 
High-energy density materials 
Composite materials 
Superconductivity 
Biotechnology materials and processes 
Capability to contribute to the technology : 
4 Significantly ahead in some niches of technology 
3 Capable of making major contributions 
2 Capable of making some contributions 
1 Unlikely to make any immediate contribution V 
V 
V 
V 
V 
V 
V 
V 
V 
V 
V 
V 
V 
V 
V 
SOURCE : Adapted from Office of Technology Assessment, J990 
33 
Chart 1 
CHART 1: EU Major Weapon Procurement Expenditure 
mio US$ 
1987 1988 1989 1990 1991 1992 
( hail I is based on I able 2 on NAIO and IX ' major weapon procurement expenditure, 19X3-92 period, and on fable 3 on 
I.(J imports and exports of major conventional weapons, 19X4-93. 
Chart 2 
CHART 2: Exports of Major Conventional Weapons 
Chart 2 is based on fable 3 
40% 
Market share 
30% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 
Chart 2 bis 
CHART 2 BIS : Europe's share of total arms exports 
Total deliveries 
100 
90 
80 
70 
60 
50 
40 
30 -•—World Total 
Hi—US 
-A—EU 
Total deliveries (billion US$ at 1985 rates) 20 
10 
19»f> 108/ 1088 1980 1900 1091 VYY? 1003 
Source : ( onvetiormal arms transfers to the Third World 19X6-19963, Kl (irimmett. Congressional Reseaich Service, 
Library of Congress. Washington DC. I 994, pp 87-XX 
34 
Chart 3 
CHART 3: Imports by EU Member States of Major Conventional 
Weapons, 1988-92 
D Total imports 
• US imports 
mio US$ 
B DK D GR E F IRL I NL P UK 
Chart 3 has been derived from the figures in Table 4 
Chart 4 
CHART 4: EU Imports and Exports of Major Conventional Weapons 
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 
Chart 4 has been derived from the figures in Table 3 
35 
List of concentration operations with Community dimension in the defence industry1 which have 
taken place since the "Merger" regulation took effect2 
Reference 
N°of 
operation 
IV/M.17 
1V/M.86 
IV/M.272 
IV/M.318 
IV/M.275 
IV/M.527 
IV/M.528 
IV/M.529 
IV/M.571 
IV/M.598 
IV/M.620 Companies 
involved 
MBB/ Aerospatiale 
Thomson/Pilkington 
Matra/Cap Gemini Sogeti 
Thomson/Short 
Aerospatiale/SNPE 
Thomson/Deutsche 
Aerospace 
British Aerospace/VSEL 
GEC/VSEL 
CGI "/Dassault 
Daimler Benz/Karl Zeiss 
Thorn son/Teneo/Indra Nationaly of 
companies 
involved 
RFA/France 
France/UK 
France/France 
France/UK 
France/France 
France/Germany 
UK/UK 
UK/UK 
France**/France 
FRG/FRG 
France/Spain Activities 
involved 
Helicopters 
Optronics 
Defence 
informatics 
Missiles 
Missiles engines 
Propulsion 
systems for 
missiles 
Military 
shipbuilding 
Military 
shipbuilding 
Defence 
informatics 
Optronics 
Defence 
electronics The status with 
regard to 
"Merger" 
regulation 
approved on 
25.2.91 
approved on 
23.10.91 
approved on 
17.3.93 
approved on 
14.4.93 
not notified under 
art. 223 
approved on 
2.12.94 
not achieved, not 
notified under 
art. 223 
not notified under 
art. 223 
approved on 
24.3.95 
approved on 
27.6.95 
approved on 
22.8.95 
* Subsidiary of d'IBM 
** US for the parent company headquarters 
1 Only includes operations involving solely or principally production of military material. One can find the same number of 
operations partially concerning defence material. 
2 Council regulation (EEC) n°4064/89 of 21 December 1989, on the control of concentrations between undertakings, came into effect 
on 21 September 1990. Only major concentrations with Community dimension are covered by the regulation and these are defined 
in terms of the turnover of the undertakings involved (see Art 1 of Regulation). 
36 
ISSN 0254-1475 
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