Opinion of the Economic and Social Committee on the 'Communication from the Commission - The challenges facing the European defence-related industry, a contribution for action at European level` (97/C 158/07)

On 24 May 1996 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 3 March 1997. The rapporteur was Mr Sepi.

At its 344th plenary session (meeting of 19 March 1997), the Economic and Social Committee adopted the following opinion by 118 votes to four, with nine abstentions.

1. A new Commission approach

1.1. The Communication is the Commission's first comprehensive document on the problems of the defence industry.

1.2. The document shows a clear awareness of the newness of the approach and of the special nature of the sector. Bearing in mind the latter, and the need for action to be phased in gradually, the Commission provides the Member States and the social partners with examples of industrial, technological and commercial policy instruments which could also be harnessed in this sector.

1.3. This involves a new application, in the light of Court of Justice rulings, of Article 223 of the Treaty which allows Member States to derogate from Community regulations in the interests of national security. Thus far, the derogations afforded by this provision have been given a broad interpretation, virtually giving the individual Member States a free hand in industrial defence policy.

1.4. The end of the cold war and the break-up of the Soviet bloc have provided an opportunity to revamp Western European defence policies and reduce military spending ('peace dividend`). The Maastricht Treaty and the launch of the debate on the second pillar of the EU, i.e. common foreign and security policy (CFSP), are evidence of the fact that European governments wish to include armaments policy in this.

1.5. The Treaty and successive Council Decisions have called on the WEU () to frame a European integration policy for the armaments sector, and have also raised the possibility of setting up a European Armaments Agency. The WEU Member States have agreed on the need to develop a genuine European defence and security identity and a greater European responsibility for 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. The Western European Armaments Group (WEAG), bringing together 13 European members of NATO, was 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 create a European defence equipment market, to reinforce Europe's technological and industrial base in the defence sector, and to strengthen cooperation on research and development.

1.6. The WEU's activities, inter alia in the WEAG, have not yet produced tangible progress towards greater integration of national defence industries. However, recent developments at the WEAG suggest that closer cooperation between general staffs might be achieved. A growing commitment, on the part of the Commission, to industrial policy in the sector could facilitate the WEAG's action.

1.7. The decision taken by WEU defence ministers in Ostend on 19 November 1996, to establish a Western European Armaments Organization as a precursor to the European Armaments Agency, will have to be dovetailed with the various proposals currently under consideration.

2. The Commission's analysis

2.1. The Commission begins its study of the problems of the defence industry in the European Union with an analysis of the challenges facing that industry. In economic and industrial terms the main problems stem from budget constraints and the fact that the European market for armaments has always been fragmented.

2.2. The problems encountered by the defence industry in the European Union have obviously had their effects on its international competitiveness, which has duly declined, especially when compared with the US defence industry. The US industry has been much faster in concentrating and adapting its structure to present conditions, and has taken advantage of the undervaluing of the dollar.

2.3. One of the weaknesses of the defence industry in the European Union compared with the US is the fragmentation of the European market. This has allowed individual national companies to survive which are not capable of taking advantage of economies of scale; it has allowed contractual and other forms of support for national companies to continue, and international cooperative agreements to be based essentially on political arrangements guided by the principle of 'juste-retour` for each programme between the various countries. There are at least five factors which restrict industrial integration between European companies in the defence sector:

- the perception by individual governments of risks to national security;

- different operational requirements of the European armed forces;

- different practices on arms exports;

- the disparity in the various countries between public and private undertakings; and

- the lack of a legal framework in Europe which would facilitate the establishment of transnational companies.

2.4. The internal demand for defence equipment in Europe has been on the decline since 1987; in real terms the reduction in the demand for arms in the countries of the European Union has been a little less than a third.

2.5. The drop in demand has meant major industrial restructuring, the main features being a reduction in labour requirements and attempts to diversify production. Within each of the individual countries a marked process of concentration has given rise to groups of 'national champions` which have participated in cooperative programmes at the international level.

2.6. So far, there have been few cross-border mergers in the European defence industry.

2.7. The contribution from the defence industry to the civil sector in R& D in terms of high technology is still important, although the opposite, so called spin-in effect, has gained in importance. Due to their economic advantages, dual-use technologies are gaining ground. Efforts must therefore be stepped up to develop the possible synergistic effects between civil and military research activities, in both company strategies and public policies.

2.8. The Commission sees new challenges for the EU defence industry, in the context of the definition of a European security and defence identity. One of the priorities in this context is to strengthen the EU defence and technology base as a precondition for the creation of a future defence policy.

2.9. In parallel with the development of a CFSP, the EU should also promote the establishment of its own industrial base so as to have the technologies and products essential to defence in Europe. Even if these are along the lines set out by the Treaty on European Union and by the policy documents of the WEU, the results of the IGC will be crucial. This does not mean, as far as the Commission is concerned, that any action in the defence industry should await the outcome of the IGC. On the contrary, the urgent situation of the defence industry calls for immediate action as a necessity for a potential common foreign and security policy.

2.10. In particular, the Commission thinks that the defence sector could draw enormous benefit from opening public procurement to competition and transparent regulations. The Community regulations in this area could be used for this purpose, provided they are adapted to the specificity of this industry. A new regulation could lead to annual savings of between ECU 5 and 11 billion according to a study made.

2.11. The Commission feels that there is a need to encourage intra-Community trade in defence equipment. The creation of a 'European defence market` should make for increased cooperation and integration between European companies.

2.12. Civil research and technological development (RTD), as supported in the EU by way of Community research programmes, are also of growing interest to the military sector. About a third of the activities financed by the Community could be of dual interest. The Commission therefore feels that more synergy should be promoted between military research and civil research.

2.13. Standardization and technical harmonization are becoming more and more important in increasing efficiency in the single market. As far as the Commission is concerned, their application to the military sector should be one of the principal objectives of the Community's policy in the defence sector, the aim being to reduce the costs of supply, to increase competition in the supplies sector and to shorten the time needed to prepare technical standards.

2.14. The gradual establishment of a single European defence market will make it necessary to extend EU competition policy to this sector. Competition policy will obviously have to be applied gradually to the sector since it will have to be coordinated with the other Community policies and take account both of the specific nature of the sector and of the national security requirements of the Member States.

2.15. The Commission points out that more than half the areas of the European Union which depend on the defence sector can make use of financing provided for by the existing Structural Funds. However, it is important to note that even in assisted areas, Structural Fund aid is not available for investment in the defence-related industry itself. The Commission mentions the Konver and Adapt programmes, but also notes the possibility of 'financing from other EU resources`.

2.16. Among the measures needed to create a single European defence market, the Commission considers the definition of a European policy on arms exports to be essential.

2.17. The Commission can draw on the experience of setting up a Community system of export controls on dual technologies and goods which has been operative since July 1995.

2.18. In the context of a single European arms market, the Commission feels it must confirm its exclusive jurisdiction over customs agreements and, in particular, import duty on military equipment. The Commission also feels that it should define its own commercial policy in this sector, in particular with a view to improving the balance of trade in military equipment between the EU and the United States.

2.19. In short, the difficult situation within the EU defence industry, the challenges facing it and the fact that the Commission has instruments immediately available, all illustrate the wisdom of taking action at European level.

3. General comments on the Commission document

3.1. The Commission document first and foremost prompts consideration of the problems of defence and security in Europe. The approach to security problems should not be confined to military aspects alone. The European Union is already dealing with a range of intervention areas which have a direct influence on security. Amongst these could be included diplomatic initiatives, intervention in international trade, development cooperation policies, emergency aid initiatives, etc. More generally, the EU already has the means to help ensure security in Europe by promoting economic and social development in its neighbouring areas (Eastern Europe, the Mediterranean, the Middle East).

3.2. It must also be borne in mind that the most commonly-felt security problems in post cold war Europe extend beyond the defence of borders; they also concern the need to defuse tense situations and re-establish peace in the world, and to safeguard the EU against ecological and natural disasters. Hence, these too should become the EU's future strategic objectives, and diversification of the defence industry could be directed towards this end.

3.3. In the defence sector, the gradual framing of the CFSP will have to take account of the differing membership of the international bodies (EU, WEU, WEAG, NATO, OSCE, Partnership for Peace) which play differing roles in European security. Particular attention will have to be paid to the needs of those EU Member States which have a tradition of neutrality or non-alignment on military matters.

3.4. When deciding a new 'framework for security` in Europe, the relations between the EU, WEU and NATO will have to be considered and clarified, as will relations between these and other international bodies such as the UN and the OSCE. The intention, revealed at the Berlin NATO conference in June 1996, to give European countries more responsibility in NATO military intervention (chiefly peace-keeping and peace-enforcing) brings a pressing need to clarify the role of the EU and the WEU in security matters.

3.5. However, the Commission communication is strictly confined to the defence industry, and seeks to gauge whether certain Community measures to support and rationalize the EU defence industry could be implemented before the framing of the CFSP and hence of a common defence policy.

3.6. The Committee notes that, as is the case with the EU's partners and competitors and chief amongst them the US, the European defence industry is marked by characteristics which are quite specific to it, in respect of political and security objectives, international competition data, the organization of R& D, standardization requirements and conditions with regard to exports.

3.7. This means that for as long as national defence policies remain, account will have to be taken of the link between these policies and the national defence industries, and the possibility that different strategic options may limit or constrain the Commission's action in this sector. However, so as not to obstruct the integration process, an over proliferation of options should be avoided.

3.8. Moreover, any measures taken under industrial or competition policy must take account of the time needed to plan, develop and produce military equipment, and the fact that R& D investment can account for as much as 40 % of the overall cost, compared to around 12 % in the chemicals industry and around 8 % in the car industry.

3.9. However, there is an overriding need for early action to safeguard the industrial and technical capabilities of the EU defence industry. These capabilities are jeopardized inter alia by the reduction in military spending by Member States in recent years. This has thrown the defence industry into crisis and led to major restructuring and downsizing, with Member States adopting very different industrial policies.

3.10. The Committee therefore believes that, subject to the limitations mentioned above, the pressing need for maximum diversification in order to safeguard jobs and technological expertise in the EU defence industry calls for Community action prior to the framing of the CFSP. The Committee therefore feels it useful to make a careful evaluation of the instruments that are already available in the Community to support and rationalize the defence sector.

3.11. Lastly, the introduction of procurement systems based on more intra-EU competition should be proposed and possibly geared to different applications levels according to product type, as a way of speeding up the integration of the sector.

3.12. The Committee also thinks that in order for the EU to retain independent technological and production capabilities in the defence sector and make world trade more balanced, governments must give preference to European production, not least in order to counterbalance the direct and indirect support given by third-country governments to their home industries.

3.13. Lastly, the Committee considers that in this sector the EU must retain a level of technological expertise commensurate with the international role which it intends to play in safeguarding the peace, independence and security of its citizens.

3.14. The Committee urges the IGC to define the second pillar as soon as possible, as this definition will have important effects on the remit, instruments and direction of industry policy.

4. Specific comments on the Commission document

4.1. Defence spending trends in EU Member States

As the appended table shows (Table 1), Member States further reduced their defence spending in 1995, and the information available shows that this trend is continuing in 1996. Moreover, all Member States currently have to make budgetary reforms. The recent trend thus looks set to continue in the immediate future, with arms spending continuing to fall even more rapidly than overall defence spending. In these circumstances, as the Commission suggests, the need for Community policies to support the defence industry will become increasingly urgent.

4.2. Diversification and conversion

Defence industries are usually high-tech and, more importantly, are often capable of producing complex systems. Their quality standards are high. In short, they are an asset which should not be lost, not only in the interests of the CFSP but also with a view to converting them to new forms of production. In the present situation, Community instruments could therefore also support a thorough-going diversification of the sector, identifying new objectives and products for the civil market which can make use of this technological and organizational capital and safeguard employment levels. Examples of industrial diversification also exist in the European military sector; these should be enhanced and consolidated.

4.3. Dual-use activities

Recent advances in technologies and in products have meant that the technical and operational specifications for many military components are now more similar to those for civil use. Many businesses have exploited this in order to produce for both the civil and the military market (dual products) without having to revamp their facilities. The Commission could accord priority attention to encouraging and supporting dual R& D and production activities. However, care must be taken here not to distort competition on commercial markets.

4.4. Research and development (R& D).

Redefining funding for scientific and technological research in dual use terms might help to improve the technology base of the European defence industry ().

4.5. Planning and management of military programmes

When framing industrial policies in high tech sectors, coordination of the timeframe of the industry with that of public policymaking and administration can pose a particular problem. In high tech industries, and especially in ones producing complex systems (as is the case with some military subsectors), strategic decisions have to be taken for a timeframe of up to ten or fifteen years. This generates a partnership between producer and customer which would seem automatically to rule out the introduction of the competition or market elements found in other industries. However, provided that steps are taken to safeguard the technological and systems capabilities of the defence industry which cannot be recreated at short notice, the introduction of competition in public procurement, together with more competitive subcontracting sectors, could do much to boost the efficiency and productivity of the defence industry.

4.6. Industrial cooperation in the defence sector

The reduction of spending on armaments and the rising cost of new arms systems have obliged European firms to work together on joint projects in order to achieve higher production levels. This has led to many bilateral and multilateral cooperation agreements (Table 2). Although this represents a step towards integration of the EU's defence industry, as it has encouraged the rationalization of some industrial activities and the establishment of consortia that can operate effectively on international markets, it raises a number of problems. Firstly, agreements tend to be intergovernmental and provide little scope for real technological and industrial integration at company level (company acquisitions and agreements are rare at EU level - see Table 3). Secondly, such acts of cooperation are generally designed to produce a single arms system, and only rarely involve wider industrial cooperation agreements. These intergovernmental agreements therefore appear unsuitable for a more complex and finely differentiated integration of the defence industry involving all the Member States.

4.7. Industrial policy

Restructuring of the EU's defence industry is necessary in order to prevent the loss of technological and industrial expertise that is vital for European defence. This restructuring must be guided by a resolute EU industrial policy. The Commission can help by speeding up the definition of the 'European company` as a legal instrument, so as to permit companies to rationalize and allow agreements and mergers on an equal basis. With a view to the single market and the need for equality of opportunity between European firms, the Committee also thinks that the Commission should encourage the privatization of armaments companies. The Commission's wider aim should be to establish a framework in which a single market can develop without pre-existing dominant positions and in which potential competitors are placed on an equal footing.

4.8. The role of subcontractors

The Committee also recommends greater outsourcing of systems and sub-systems, in order to prevent excessive verticalization of the EU defence industry and make it more flexible.

4.9. The EU single market for defence

Integration and rationalization of the European defence industry are vital in order to boost efficiency and international competitiveness. This can only be achieved by creating a single EU market for defence. The Community and the WEU should take charge of the creation of this market, inter alia by setting up a European armaments agency. The Committee calls on the Council of Ministers to frame an overall agreement on the setting-up of the agency, building on existing cooperation between France, Germany, Italy and the UK.

4.10. The question of a single market for defence products

The European armaments agency would have the task of steering technical standardization and market rationalization and integration without creating adverse social effects. However, when defining the role of the agency, account must be taken of the responsibilities already assigned to the WEU in the field of military strategy and the economic and industrial responsibilities of the Commission. The latter, in particular, can draw on its regulatory powers, the technical and administrative services at its disposal and the experience it has acquired in other sectors of industry; these make it well qualified to play an important support role, offering tried and tested rules and contractual provisions that are bound to facilitate and speed up the establishment, development and management of the agency

The key role of Member States' governments cannot be overlooked here; the political commitment enshrined in the Maastricht Treaty must be backed by appropriate action.

4.11. Public procurement

The Committee thinks that the Community could begin to gradually align the rules governing public procurement in the civil and military fields according to the principles of non-discrimination and equal treatment of Community parties, applying the competition rules (starting with the less sensitive products) and using open, transparent procedures based on objective selection and award criteria, as already occurs in the case of civil and dual-use products used by the Member States' armed forces. The Committee asks that, when applying the competition rules, attention be paid to the special nature of the sector and the security interests of the Member States.

4.12. Standardization and technical harmonization

The definition of common EU technical standards is vital for the development of a single market for defence. The Committee is aware of the difficulties which effective technical harmonization has posed in other sectors. It endorses the Commission's idea of aligning military standards with existing civil standards, in cooperation with the WEU and NATO, so as to maximize the opportunities for dual production.

4.13. Criteria for an EU arms export policy

In recent years, partly with a view to the CFSP, the Council of Ministers has considered the framing of common criteria for regulating arms exports. The main reference point when harmonizing Member States' trade policies is provided by the eight criteria approved by the Luxembourg European Council in 1991 and confirmed in Lisbon in 1992. Legal instruments will have to be devised for applying these criteria so that the Commission can implement them under the terms of Article 113 of the Treaty. Harmonization of Member States' arms-export policies and legislation is urgently required to provide industry with transparency, hard and fast regulations and clear prospects. Here the approach should be that countries with stringent rules do not need to follow any 'downward alignment`.

4.14. Transparency of arms exports

In order to avoid distortions between Member States, the future EU rules should provide for close control of arms exports and a proper flow of information to the European Parliament and national parliaments. On the subject of export controls and transparency, the Committee suggests that the Commission issue a periodic report on Member States' arms sales to third countries, in order to show that the criteria are being applied properly. The Committee thinks that the criteria already discussed and approved by the Council in 1991 and 1992 should be further defined and fully implemented to prevent discrepancies in interpretation. In particular, the Committee calls for a European and international ban on the production, sale and use of anti-personnel land mines.

4.15. Export controls on dual-use goods and technologies

The Committee welcomes enactment of the Community rules on the export of dual-use goods and technologies, which should also be further defined and fully implemented to prevent discrepancies in interpretation.

4.16. Social implications of the rationalization of the defence industry

Military spending cuts and the need to rationalize production at EU level and improve productivity have led to the loss of many skilled production jobs. The social consequences have been particularly severe in regions which rely heavily on the sector. These problems merit special attention and support, with a view to redeploying former defence workers in other sectors. Such support could take the form of:

a) pilot regional diversification and redeployment projects, drawing on existing local schemes;

b) vocational training schemes to develop new activities;

c) support for the development of small businesses, as part of the Community's general policies;

d) involvement of these small businesses in R& D programmes;

e) coordination of the various tiers of authority (regional, national, EU) with a view to making the best use of the available financial resources, notably from the Structural Funds

4.17. Structural Funds

Access to the Structural Funds has hitherto been made difficult by inefficient national bureaucracy and over-restrictive EU rules for medium to large defence companies. More information is needed on the results of the Konver programme; this is the only Community support instrument for conversion of the defence sector. New programmes should be devised that are better tailored to the restructuring and diversification needs of defence firms, especially as regards the social impact on the areas concerned.

The Committee asks the Commission to check on Konver's results and re-target the programme's objectives.

4.18. Subsidiarity

This is the context in which the role of subsidiarity has to be defined, in an effort to coordinate financial and production resources at the various institutional levels with a view to preserving technology and employment levels.

4.19. Further action by the Commission in the defence sector

Lastly, the Committee thinks that it would be very useful if the Commission could draw up a master plan as soon as possible, setting out the measures which it intends to adopt in liaison with the Member States. The plan should consider the objectives of future Commission action in the defence sector, the players who will be involved in the process and their respective responsibilities, possible measures for achieving the stated objectives and, above all, the various stages in which the measures that are deemed most effective will be phased in.

5. Summary

5.1. For the first time, the Commission in 1996 presented a communication on the problems facing the EU defence industry, on the basis of a fresh interpretation of Article 223 of the Treaty and as part of the second pillar defined at Maastricht.

5.1.1. The end of the cold war has altered the concept of security and its related instruments, highlighting the limitations of a concept based on opposing blocs and exclusively military instruments.

5.1.2. The EU Member States are moving towards the framing of a new architecture for European security. This architecture must take account of existing international organizations such as the WEU, NATO and the OSCE, and of the needs of EU Member States which have a tradition of military neutrality or non-alignment.

5.1.3. The Commission's involvement in the defence industry must, at all events, take account of its special nature, namely the links with security and defence policies, the way in which R& D and production are organized, and the reliance on defence ministries for its market.

5.1.4. Such involvement should focus on safeguarding employment levels and technological expertise in the EU defence industry.

5.1.5. In this context, and given the present imbalance in the international arms trade, preference should be given to European production.

5.2. In order to maintain jobs and technology levels in the EU defence industry at a time when military demand is falling, reconversion and diversification must be speeded up. The focus should be on technological reskilling, exploiting the opportunities offered by dual-use technologies.

5.2.1. The complexity and timeframe of military programmes and the development of intergovernmental cooperation based on the juste-retour principle have hitherto placed technical and political limits on the development of a European armaments market.

5.2.2. The (albeit incomplete) application of single market principles to the defence sector, in tandem with the creation of new instruments such as the European Armaments Agency, must aim to improve the efficiency and productivity and hence the international competitiveness of the EU military industry.

5.2.3. Community competence for foreign trade should gradually be extended to the armaments trade, inter alia with a view to preventing distortions being generated by differing national rules on arms exports. Future Community rules should be based on the principles already decided by the European Council in 1991 and 1992, and on broad criteria regarding transparency.

Brussels, 19 March 1997.

The President of the Economic and Social Committee

Tom JENKINS

() WEU = Western European Union.

() See Point 4.5 of the ESC Opinion on coordination of research and technological development policies (OJ No C 18, 22. 1. 1996).

APPENDIX to the opinion of the Economic and Social Committee

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