COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 04.12.1997 
COM(97) 583 final 
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THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 
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IMPLEMENTING EUROPEAN UNION STRATEGY 
ON DEFENCE-RELATED INDUSTRIES 
SUMMARY 
The need to implement a European Union strategy to keep up with the major changes in 
the European defence-related industries is becoming more pressing every day. The 
industrial and technological base of defence are both precious in terms of economic 
development and indispensable for weapons capabilities. Despite the urgent warning and 
call for action issued by the Commission in its Communication of January 1996 on the 
defence-related industry, the situation in the sector has deteriorated since then. 
Employment in the industry fell by 13% between 1993 and 1995. In 1995 the value of 
European Union imports of defence-related products from the United States was six 
times the value of its exports of the same category, whereas in 1990 the ratio was five to 
one, and in 1985, four to one. In 1996 it took eight European defence undertakings to 
achieve sales worth $60 billion, while the three biggest American undertakings alone 
achieved sales of $90 billion. This trend is even more worrying when one considers how 
it compromises the political objectives formally enshrined in the Treaty on European 
Union concerning the "eventual framing of a common defence policy". The essential 
responsibility for restructuring the defence industry lies with the Member States. 
However, their cooperation within the framework of the Union is important and the 
purpose of the Commission's initiatives is to facilitate the development of such 
cooperation. 
An integrated European market for defence products must be set up using a combination 
of all the instruments at the Union's disposal: Community and Common Foreign and 
Security Policy legislative and non-legislative instruments. The Commission proposes a 
global approach to implementing this strategy: 
— a proposal for a Common Position on drawing up a European armaments policy. 
The Commission calls on the Council to adopt the proposed CFSP Common 
Position in order to open up the debate on the major issues relating to such a 
policy and promote the Member States' commitment to its establishment. The areas 
specifically covered by the proposal are intracommunity transfers, public 
procurement and common customs arrangements. 
- an Action Plan for the defence-related industries. The Plan put forward by the 
Commission describes the areas in which immediate EU action seems necessary. 
The Commission will take appropriate steps to develop more detailed versions of 
the measures outlined in the Plan. 
The speed and scale of current change make it imperative for the Union to initiate 
practical action on this matter in 1998. 
1. THE CONTEXT 
In the last few years the European defence-related industry has been undergoing 
restructuring, shaped notably by the new security environment and international 
competition. The process involves, inter alia, shedding jobs and reducing production 
capacity. National frameworks no longer have the capacity to achieve the scale of 
restructuring needed. A European framework is now essential to provide adequate 
solutions, but it has not yet evolved into a source of rules governing a European market 
2 
for armaments. Similarly, the objective of gradually defining a European defence policy 
is accepted, but the first steps towards a common defence initiative have not yet produced 
any list of specific European needs regarding defence equipment. 
The essential responsibility for the restructuring process lies with the Member States 
because of the nature of the sector. However, cooperation between them at European 
level seems important for the success of this process. The purpose of the Commission's 
initiatives is to facilitate the development of such cooperation. 
The process of restructuring and consolidating the European defence-related industry, 
which should be carried out on a European scale, cannot progress satisfactorily unless 
market barriers are lifted and a clear, reliable political and institutional frame of reference 
is provided. The European Union must take the necessary steps to establish this 
regulatory framework. The urgent need for such action is still greater given the fact that 
the European industry's biggest competitor, the United States industry, has achieved a 
much greater level of consolidation with the open and practical support of the 
Administration. The US industry's success in exporting arms to international markets is 
closely linked to the size of the American undertakings and their special relationship with 
government. The Commission Communication on the aerospace industry1, which 
highlights the striking difference between the situations on either side of the Atlantic, 
calls for a reaction at Community level and contains some valuable suggestions on this 
matter which are equally applicable to other sections of the defence-related industry. 
The Union accepted the need to adopt a strategy in this area as far back as the summer of 
1995, when the Council established a working party on European arms policy with a 
mandate to put forward specific measures for areas within the Union's jurisdiction; these 
recommendations could be formulated as Community or CFSP measures. After two years 
of work, although the group has been unable to formulate any recommendations, it has 
made useful progress in defining the special characteristics of this sector and identifying 
areas in which action should be taken as a priority. 
The Treaty of Amsterdam sets the course for the development of an armaments policy. 
Article J.7.1 stipulates that "The progressive framing of a common defence policy will be 
supported, as Member States consider appropriate, by cooperation between them in the 
field of armaments." The Declaration on Western European Union, which will be 
annexed to the Amsterdam Treaty and was adopted by the WEU Council of Ministers on 
22 July 1997, provides for armaments cooperation between the EU and WEU "in the 
context of rationalisation of the European armaments market and the establishment of a 
European Armaments Agency." 
The imminent establishment within the WEU of the Joint Organization for Armaments 
Cooperation (OCCAR), which will have important responsibilities in the management of 
joint armaments programmes, is an essential step towards setting up the European 
Armaments Agency. The latter body, which will have extensive responsibilities for all 
factors affecting the definition and organization of demand for armaments products, will 
facilitate the restructuring and consolidation of the European defence industry. 
Commission initiatives are also contributing to this process by helping to create a suitable 
environment for setting up the Agency sooner rather than later. In the interests of 
economic efficiency, the creation of a European market for defence products and the 
COM(97) 466. 
establishment of the Agency should not be treated as unconnected. Complementary rules 
of operation should be developed for the market and the Agency so that a homogeneous 
overall framework can be established. The establishment of OCCAR and the preparation 
for setting up the European Armaments Agency must take full account of EU acquis. 
This, together with the development of a European armaments policy, means that more 
effective links will have to be established between Union institutions and the Western 
European Armaments Group (WEAG). 
As far back as January 1996 the Commission presented a Communication on the 
challenges facing the European defence-related industry in which it outlined the action 
the Union should take. The strategy indicated in this document was approved by 
Parliament which, in June 1997 adopted a detailed resolution on EU initiatives. The 
Economic and Social Committee also approved the communication. The Commission has 
built up close links with the defence-related industry and through meetings and 
discussions with its representatives it has identified the most important areas in which 
action should be taken in the short and medium term. 
It has to be said that since the Communication was adopted in January 1996 the situation 
of the defence industry has deteriorated still further. The warning then issued by the 
Commission did not trigger action at Community level. According to BICC (Bonn 
International Center for Conversion) data for 1997, employment in the defence-related 
industry fell by 13% between 1993 and 1995. US Arms Control & Disarmament Agency 
statistics show that in 1995 the value of European Union imports of defence-related 
products from the United States was six times the value of its exports in the same 
category; in 1990 the ratio was five to one; in 1985 four to one. In 1996, thanks to 
consolidation, the three biggest American defence undertakings achieved sales of more 
than $90 billion, while it took the eight biggest European undertakings to achieve a total 
of $60 billion in sales. These figures should be considered in the light of the fact that 
there is a single internal market for American companies which is considerably bigger 
than all the Member States' markets put together. Since 1990 the market for defence 
products has fallen significantly in the Member States because of the end of the Cold 
War. The United States, faced with a similar decline, reacted to the new situation by 
restructuring its defence-related industry. The European market is still too fragmented 
and the level of intracommunity trade in defence equipment is astoundingly low 
compared to total procurement by the Member States. 
This downward trend in the industrial base is all the more worrying if one considers how 
it compromises the objectives formally adopted by the Member States. The Amsterdam 
Treaty, which was finalised at the Amsterdam European Council in June 1997 and signed 
on 2 October, provides for the first time (in the first subparagraph of Article J.7.1) that 
"the common foreign and security policy shall include all questions relating to the 
security of the Union, including the progressive framing of a common defence policy ... 
which might lead to a common defence, should the European Council so decide." The 
Atlantic Alliance, at its ministerial meeting in June 1996 and at the Madrid Summit in 
July 1997, stressed the emergence within the Alliance of a European security and defence 
identity and set out a number of guidelines to further this process. But there can be no 
European defence policy or identity without a healthy and competitive European 
technological and industrial base. 
2. EUROPEAN UNION STRATEGY 
The need to implement a European Union strategy to keep up with the major changes in 
the European defence-related industries is becoming more pressing every day. The most 
important undertakings in the sector and the association representing them at European 
level are calling for action by EU institutions. The defence-related industry and the 
context in which it operates are changing fast, although not so fast as its American 
counterpart. The factors driving this change are still at work. The Commission 
Communication on the European aerospace industry2 stresses the importance of these 
changes in the United States and the need for drastic action in Europe. It is not possible 
for the aerospace industry of any single Member State alone to maintain adequate 
performance and competitiveness. It is vital to consolidate the industry's non-military and 
military activities at European level. The same applies other defence-related sectors. 
There, too, change within the industry must be accompanied by public measures at 
European level. The industry needs a reliable and transparent frame of political and legal 
reference and it needs it soon. 
The Commission Communication of January 19963 gave rise to a widespread debate, a 
key product of which was the Parliament resolution adopted in May 1997 which strongly 
endorsed the Commission's ideas. The Council's working party on European armaments 
policy ("Polarm") has reviewed the positions of the Member States and found a number 
of points of convergence: 
Firstly, the Union must maintain the industrial and technological base of its defence-
related industry. This base, which increasingly involves dual-use products, is valuable for 
economic development and indispensable for a weapons capability. The reasons for 
maintaining it therefore relate to establishing a European defence identity and to 
competitiveness and jobs in crucial manufacturing sectors. 
Secondly, the Union is one of the preferred frameworks for action in this area. It 
complements others such as the national frameworks and those of the defence 
organisations to which most Member States belong. The Community framework has 
proved its efficacy in setting up European markets for non-defence products; Union 
instruments can now also serve the same purpose for defence products. This kind of 
market would be of great benefit to the defence industry. The Union should therefore 
apply a combination of its legislative, non-legislative, first pillar and second pillar 
instruments. 
Thirdly, the different strategies afforded by these instruments need to be combined 
because of the particular nature of the defence industry, namely that it is both a major 
means of production and essential to foreign and security policy. Any action by the 
European Union has to take this dual nature into account, if necessary by adapting the 
resources within the Community's jurisdiction. 
Presented in September 1997. 
3 COM (96) 10: The challenges facing the European defence-related industry, a contribution for action at 
European level 
In conclusion: Action should be taken at once, without waiting for a new institutional 
context to be established, in areas in which it is urgently needed to protect the defence 
sector's technological and industrial base. 
3. COMMISSION INITIATIVES 
The Commission proposes a global approach to implementing EU strategy: 
• A proposal for a Common Position on drawing up a European armaments 
policy. The Commission herewith sends to the Counci1 a draft Common Position 
adopted under Article J.2 of the Treaty on European Union. This form of CFSP 
instrument has been used because of the foreign policy and defence dimensions of 
any European Union measures on arms. Following work done earlier by the 
Council, the Common Position proposed by the Commission sets out a number of 
principles and indicates where the first steps should be taken. The areas specifically 
covered by the proposal are intracommunity transfers, public procurement and 
common customs arrangements. The Council has already done work on them, 
specifically in connection with armaments. Furthermore, their advantage is that EU 
measures could be based on a substantial acquis communautaire in these areas. 
This proposal for a Common Position should open up the debate on the major 
issues relating to European armaments by directly involving policy-makers in the 
decision-making at the appropriate levels. It is intended to promote Member States' 
political commitment to the progressive establishment of a genuine European 
armaments policy. 
• An Action Plan for the defence-related industries. The Commission has drawn 
up a list of areas in which it considers EU action necessary and specifies what 
measures should be taken at once to ensure progress towards a true European 
market for defence products. Some of these measures require legislation while 
others could be adopted under instruments already available to the Union. The 
Action Plan has been drafted for the attention of the EU institutions and the 
Member States, but also for the European defence industry. The Commission will 
take the necessary steps to develop more detailed versions of the measures outlined 
in the Plan. 
In the Commission's view the Council should adopt a position on EU strategy on the 
defence-related industries as a matter of urgency. The proposed measures would 
provide a framework and a programme for initiatives at European level. The speed and 
scale of current change make it imperative for the Union to initiate practical action on 
this matter in 1998. 
CONCLUSIONS 
• The Council is asked to adopt the proposal set out in Annex I. 
• The Commission calls on the Council to take note of the Action Plan attached as 
Annex II. The Commission will take the appropriate initiatives following the 
procedures provided for by the Treaty in close collaboration with the relevant 
authorities in the Member States. 
• The Commission calls on the European defence-related industries and other parties 
concerned to cooperate in the implementation of the Action Plan. 
. ANNEX I 
DRAFT COMMON POSITION 
ON FRAMING A EUROPEAN ARMAMENTS POLICY 
adopted on the basis of Article J.2 of the Treaty on 
European Union 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty on European Union, and in particular 
Article J.2 thereof, 
Whereas drawing up a European armaments policy based on the 
existence of a competitive technological and industrial base is 
an essential precondition for the development of a European 
defence identity within the framework of the Common Foreign and 
Security Policy; 
Whereas specific measures, including measures on armaments, must 
be taken to follow up on the political commitment to the 
progressive framing of a defence identity which was reaffirmed by 
the Amsterdam European Council of 16 and 17 June 1997; 
Whereas the Declaration by Western European Union on the role of 
WEU and its relations with the European Union, adopted on 22 July 
19 97, and in particular paragraph 7 thereof, provides for greater 
cooperation between these two organisations; 
Whereas Community policies and instruments can make an important 
contribution to developing a European armaments policy; 
Whereas the Commission Communications of January 1996 on the 
defence-related industries and of September 1997 on the European 
aerospace industry, which focus on the urgent need to restructure 
the industries at European level and promote synergy between 
military and non-military production and trade, demonstrate the 
necessity of taking action at European level, in particular 
through the Community; 
) 
Whereas it is necessary to protect the industrial and 
technological defence base and promote the competitiveness of the 
European industry; 
Whereas the defence industry is an important source of -employment 
in some regions; 
Whereas the Council has named intracommunity transfers and public 
procurement as priority areas for EU action; 
Whereas in is in the interests of the European Union and the 
Community that certain imports of arms and equipment for the 
European armed forces should benefit from exemption from customs 
duties and a list of- equipments suitable for exemption from such 
duties is therefore, needed; 
Whereas, in accordance with Article 223(2) of the Treaty the 
Council has drawn up a list of products to which the provisions 
of Article 223(l)(b) apply, 
HAS ADOPTED THIS COMMON POSITION: 
Article 1 
For the purposes of this Common Position account shall be taken 
of the specific features of the armaments sector as defined in 
the annexed document. 
Article 2 
The Council considers that developing an effective European 
armaments policy entails using CFSP and Community instruments. 
Article 3 
The Council notes that European armaments policy is linked to 
Community policies, in particular on industry, trade, customs, 
the regions, competition, innovation and research. 
Article 4 
The Council notes that the Commission has presented an Action 
Plan for the defence-related industries calling for the 
application of a number of Community instruments and that the 
Commission will take the appropriate initiatives to ensure that 
it is implemented. The Council declares its intention of using 
the Plan to further develop a European armaments policy. 
Article 5 
In accordance with Article M of the Treaty on European Union, the 
following measures will be adopted as soon as possible following 
the appropriate procedures: 
1. Movement of goods 
- a simplified system applicable to intracommunity transfers 
including export and re-export guarantees, and monitoring and 
surveillance mechanisms; 
- binding principles, rules and mechanisms on transparency and 
non-discrimination in respect of procurement, taking current 
Community public procurement rules as a guiding principle. 
2. Customs 
The Council undertakes to draw up, before 31 December 1998, a 
list of products which could be exempt from the common customs 
tariff in the light of the defence needs of the Member States and 
the desirability of encouraging the development of a European 
armaments policy. 
°i 
Taking account of this list Commission will, where appropriate, 
make appropriate proposals for exemptions based on the Treaty 
establishing the European Community. 
Article 6 
This Common Position shall be. reviewed 18 months after its 
adoption. 
c 
Article 7 
This Common Position shall enter into force on the day of its 
adoption. 
This Common Position shall be published in the Official Journal 
of the European Communities. 
lu 
Appendix to Annex I 
Definition of specific characteristics of the defence-related sector 
(Text drafted by the working party on European armaments policy and approved by the 
Coreper on 10 December 1996) 
1. Any definition of the characteristics specific to the defence-related sector must begin 
with the current circumstances in which the sector finds itself. There are a number 
of political and economic factors which have specific relevance for this sector. On 
the political side, there is the impact of the end of the Cold War and the changes that 
have resulted in the international climate in which foreign, security and defence 
policy is formulated and conducted. There is also the development of the EU's 
Common Foreign and Security Policy (CFSP), which "shall include all questions 
related to the security of the Union, including the eventual framing of a common 
defence policy, which might in time lead to a common defence". The EU's 
Intergovernmental Conference is currently reviewing the CFSP provisions of the 
Treaty on European Union. At its meeting in Berlin in June 1996, the NATO 
Ministerial Council agreed to develop the European security and defence identity 
within NATO, and the WEU and NATO are currently working on the 
implementation of the inter-related aspects of the decisions taken in Berlin. 
On the economic side, the domestic demand for European defence equipment has 
been falling since 1987 and the global arms market has practically halved in the last 
decade. This reduction in the national defence budgets of European countries has 
implications for the survival of an independent industrial and technological defence 
base. Employment in this sector has fallen by 37% since 1984 (from 1.6 million to 1 
million). This has hit certain regions in particular and has implications for the 
manufacturing base and innovation capacity of European industry as a whole. The 
market remains fragmented - in the 1988-92 period, intra-European trade amounted 
to 3-4% of total procurement. The lack of competition and impossibility of fully 
exploiting economies of scale has worsened the competitive position of the European 
industry vis-à-vis the US since the 1980s. The consolidation of defence-related 
industry has advanced much more in the US than in Europe, due to, inter alia, less 
fragmented market conditions in the US, an insufficient degree of harmonisation of 
European operational requirements and the various security imperatives in Europe. 
The specific characteristics of the armaments sector, which have been acknowledged 
since the foundation of the Community, are taken into account by the provisions of 
Article 223 of the Treaty. 
// 
4. The defence-related industry is a strategic industry, the products of which can be 
crucial to national defence. Unlike in other industries, where economic 
considerations are the determining factor, security and defence policy, to vaiying 
degrees, also dictates national armaments policy. Political, strategic and security 
considerations accordingly come into play in determining the conditions within 
which the industry operates and the demand for its products. 
5. 90% of the production of EU defence equipment is concentrated in some Member 
States: France, UK, Germany, Italy and Sweden. 
Since governments are the only customers, and in some cases a major owner of 
defence industries, the market differs from most other sectors of the economy. Also, 
relations between the government and defence-related companies differ considerably 
between Member States, for example the extent of State ownership, the extent of 
funding for R&D, etc. The role of governments explains many of the characteristics 
of this sector and has a major influence on the way it is built up and restructured. At 
the same time, the industry itself has a specific role and responsibilities in this 
regard. 
The following considerations arise in the context of the role of governments : 
in the first place, the production and trade of armaments are subject to 
governmental authorisation ; 
- secondly, governments being the sole customers, they are therefore alone in 
defining operational requirements and technical specifications. As sole 
customers, governments determine demand for the industry's products ; 
- furthermore, long-term demand cannot be forecast with certainty, since it is 
dependent on the evolution of threats, which influences the assessment of needs 
and budget planning; 
- in addition, the quality-price relationship is not the sole criterion which 
determines procurement policy. Offset (compensation), including industrial co­
operation agreements, as well as strategic political, economic and security 
considerations can also be a factor ; 
- finally, national defence interests require guaranteed sources of supply. The 
requirement for security of supply goes beyond the normal customer supplier 
relationship. In certain areas, some Member States consider an indigenous 
capability essential for their national interest. This should not, however, prevent 
governments from purchasing from an external supplier. 
II 
The long-term technological value of the industry is important. This includes the 
maintenance of both technological and industrial capabilities. Defence programmes 
can be spread out over 20-30 years, and, following lengthy development 
programmes, equipment can have an in-service life of as much as 30 years or more. 
8. Confidentiality regarding sensitive military information is crucial to national 
interests. This can lead to constraints on competition and to relationships between 
customer and supplier which are more close-knit than usual. 
9. Many products in the armament sector carry disproportionately high Research & 
Development costs. High standards are required, as technological advances are 
necessary to national defence. However, returns on this investment are uncertain. 
Mass production, which might offset high R+D costs, is rare in comparison with 
civil industry. The need for confidentiality can preclude the wide circulation of 
technological developments and the financial benefits of such a circulation. There 
will always be a need for one-off products, which it may be uneconomical to 
produce. Numbers of programmes are limited and R+D teams sometimes cannot be 
supported by purely commercial means during intervals between programmes. 
Commercial organisations driven by market-t forces could not be expected to make 
the necessary investment in R+D and government support could be therefore 
required. 
10. Some defence-related technologies can have both civil aid military applications. 
However, there is an increasing synergy between civil and military technologies in 
some areas and the above characteristics of purely military programmes may not 
apply to all defence-related or dual-use domains. 
11. The exports of this sector are subject to government authorisation. Arms export 
policies, including export control policies of Member States, differ. The European 
Council has adopted Common Criteria to be applied to arms exports. 
Conclusions and recommendations ' 
12. It was concluded that the analyses contained in this paper of characteristics specific 
to the defence-related sector is a useful contribution to the ongoing consideration of 
items on the agenda of the Ad Hoc Working Party on European Armaments Policy, 
and will be taken into account as appropriate, inter alia, in the deepening discussions 
on "the simplification of controls governing intra-EU transfers of armaments and 
other defence related products" and "procurement policy". It is recommended that in 
accordance with its mandate the Ad Hoc Working Party should keep the item 
"definition of characteristics specific to the defence-related sector" on its agenda, 
with a view to further developing its analyses in the light of future developments. 
/5 
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te 4* EUROPEAN COMMISSION 
/Annex ÏI 
Action Plan for the defence-related industries 
h 
Action Plan for the defence-related industry 
I. Introduction 
II. Defence industry restructuring 
III. The European Defence Technological and Industrial Base 
IV. Objectives for an Action Plan 
V. Actions 
V.l Simplification of Intra-community transfers 2 
V.2 European Company Statute 3 
V.3 Public Procurement 3 
V.4 RTD (Research and Technological Development) 4 
V.5 Standardisation 4 
V.6. Custom duties 5 
V.7 Innovation, transfer of technology and SME's 5 
V.8 Competition policy 6 
V.9 Exports 6 
V.10 Structural funds . 7 
V.ll Taxation 8 
V.12 Principles for market access 9 
V.13 Benchmarking 9 
V.14 Enlargement 9 
VI. Timetable 10 
IS 
I. INTRODUCTION 
The Treaty on European Union as well as the new Amsterdam Treaty offer a context for 
action in the area of defence-related industries by calling for enhanced co-operation 
between the European Union and the Western European Union. For this co-operation, 
the European Commission could offer its experience and legal and administrative 
structures in support of this new relationship. 
The necessary urgent restructuring of the defence industries in Europe, which are still 
nationally based, requires that a European dimension is provided to this industry and to 
the market, demand and supply sides, in which it operates. 
As far as the demand side is concerned, the role of Member States, the WEU and other 
multilateral organisations is particularly important in areas such as the harmonisation in 
time and content of operational requirements and the creation of a European Armament 
Agency to run programmes with a European dimension. 
As far as the supply side is concerned, intense discussions, during the recent months, 
between the Commission and industry have been useful in identifying industry's 
requirements to establish a strong, integrated and competitive European Defence 
Technological and Industrial Base. 
This Action Plan takes into account the issues raised by industry that fall within the 
competence of the European Union. It will be implemented according to the Timetable 
provided in chapter VI. 
Some of these actions were also drawn up together with a Common Position, under 
Article J.2 of the Common and Foreign Security Policy (CFSP). 
II. DEFENCE INDUSTRY RESTRUCTURING 
In response to declining demand and increasing competition a restructuring process has 
started among the European defence industries. So far the restructuring has mainly taken 
place on a national level, but the need to pursue these efforts at a European level is 
pressing. 
The European industry must be allowed to carry out the necessaiy restructuring process, 
co-operate or merge activities where they are similar or complementary and improve its 
competitive position. Whilst industry must lead this process, the Member States and 
European Institutions and Organisations must strive to establish the necessaiy framework 
to allow for the proper functioning of the European defence-related equipment market. 
When creating this framework the European industry's position in the global arena must 
be taken into account. 
(G 
III. THE EUROPEAN DEFENCE TECHNOLOGICAL AND INDUSTRIAL BASE 
The defence technological and industrial base, including technological know-how, R&D 
facilities, a skilled work-force, manufacturing facilities and a marketing and export 
capacity, is a vital strategic asset for Europe and needs therefore to be consolidated and 
preserved. Some very important reasons for this are: 
- It is a pre-requisite for the establishment of a genuine European Security and Defence 
Identity; 
- It is a necessity for the preservation and the development of an important 
technological and industrial base which is of importance both for military and civil 
purposes; 
- It is an important factor for employment, particularly in specific European regions, and 
for many SME's. 
The situation as it is today, with European companies fragmented into too many and too 
small national suppliers, is no longer sustainable. The consequences of the present 
structure are for example: 
- Costly research and development of similar technologies and systems by national 
suppliers; 
- Too small batches of systems and therefore inadequate economies of scale. 
IV. OBJECTIVES FOR AN ACTION PLAN 
The main objectives of the Action Plan are therefore to establish the necessaiy conditions 
to: 
- strengthen the competitiveness of the European defence industry; 
- preserve the Defence Technological and Industrial Base; 
- favour the integration of European Defence Technological and Industrial Base in the 
general economy to avoid duplication of efforts between the civil and the military 
areas; 
- create the necessary preconditions for a European Security and Defence Identity. 
V. ACTIONS 
A timetable for the actions proposed below can be found in chapter VI. The timetable 
shows that the Commission will work in parallel with actions to be implemented in the 
short term and actions that will be implemented in the medium term. 
V.l Simplification of Intra-communitv transfers 
National procedures relating to intra-Community transfers of defence related products are 
burdensome and time consuming. A simplification of these procedures could increase 
the competitiveness of the European defence industry and lighten the administrative tasks 
and reduce costs. 
1} 
The simplification objective cannot be obtained without a significant commitment by 
Member States. It also supposes the establishment of confidence mechanisms between 
the Member States. The Commission will therefore propose to put in place a simplified 
licensing system applicable to the shipment of defence related products within the 
European Community. This system shall comprise guaranties for exports and re-exports 
as well as mechanisms for control and surveillance. 
V.2 European Company Statute 
The creation of a European Company Statute which would help the creation and 
management of companies with a European dimension will facilitate the necessaiy 
restructuring of this industry. The Commission will continue its efforts to create such a 
legal framework. 
The report of the "Davignon Group" on the European Company Statute opens new 
perspectives for political agreement on employee involvement in the European Company 
in the months ahead. If this hurdle can be overcome it could lead the way to the adoption 
of* the Statute as one of the priority measures foreseen in the Single Market Action Plan 
agreed at the Amsterdam European Council of the European Union. It is therefore 
important to obtain a favourable Council decision on this subject as soon as possible. 
V.3 Public procurement 
The concrete system of rules that will apply to procurement of' defence equipment will 
impact substantially on the way a competitive Defence Technological and Industrial Base 
will be set up. 
This framework should make provision for competitive tendering whenever feasible. 
Furthermore, it must favour the maintenance and development of the fundamental 
industrial capabilities and key technologies at European level. In addition, these rules 
must guarantee the security of the necessary supply, while enabling a progressive 
elimination of over-capacity. 
To this end, taking into account the need to build broad support in this matter, it is 
necessary to establish an appropriate set of principles, rules and mechanisms on 
procurement by the defence sector. In order to take into account the specificities of the 
defence sector, and in particular the need for confidentiality and security of supplies, an 
appropriate level of flexibility should be envisaged where necessary. 
For this purpose, materials for the defence sector could be divided into three categories: 
- Products intended for the armed forces but not for military use therefore not covered 
by Article 223 EC nor by Article 2 of the directive 93/36 (markets declared secret, 
protection of vital interests, national security, etc). As these products are already 
subject to the Community public procurement rules, the Commission will specify, 
where appropriate, in the most suitable form the conditions for the application of 
these rules; 
- Products intended for the armed forces and for military use, but not constituting " 
highly sensitive defence equipments ". The Commission could work out a fairly 
flexible set of rules, while respecting the principles of transparency and non­
discrimination, inspired by the existing Community public procurement rules; 
IP 
- Highly sensitive equipments covered by the scope of Article 223 EC. These products 
could be exempted from the rules referred to above when safety or the protection of 
vital national interests of the country in question so require. A notification 
mechanism for this purpose should be foreseen in order to ensure a degree of control 
and transparency. 
V.4 RTD (Research and Technological Development 
The level of research and development costs in relation to turnover is in general much 
higher in the military field than in the civil field. Technology plays a vital role for the 
competitiveness in these industries. 
Increasing integration of civil and military research activities within company's is a 
reality in the United States, in particular in certain sectors of the defence-related industry 
such as aeronautics or space. The Commission, for example, highlighted this 
phenomenon in its analysis of the merger between Boeing and McDonnell Douglas. 
It is therefore desirable that the European firms as well as Member States draw the 
conclusions from this development as regards the restructuring of these industries, the 
merging of research teams, and the impact of certain military purchases on the civil 
technological capacity. 
The Community's Framework Programme for Research and Technological 
Development4, is aimed solely at civil objectives. Some of the technological areas 
covered (e.g. materials, Information and Communication Technologies - ICT) have a 
multiple use dimension: the development of these technologies can contribute to the 
improvement of the defence technological base and the competitivness of this industry. 
The Commission also considers that the complementarity between national and European 
research programmes should be reinforced to avoid a wasteful duplication of effort. 
V.5 Standardisation 
Setting up a European defence equipment market and consolidating Europe's defence 
industrial base will call for an effort to rationalise the sets of standards currently being 
used by the defence ministries of the Member States. 
With increasing use being made of dual-use technologies in the military systems, the 
current trend is to make as much use as possible of civil standards. 
The on-going replacement of military standards by civil standards in the US should be 
considered so as to avoid that the European industry finding itself at a disadvantage. 
It is with the purpose of promoting the use of international industrial standards that the 
Commission is proposing to take into account the experience gathered in the field of 
standardisation by the Community. 
4 The Commission adopted, on 9 April 1997, its proposal for the Fifth Framework Programme 
(COM(97)142). 
n 
Therefore, the Commission will pursue the following actions: 
- inviting the industrial circles concerned to get together to draw up a work programme 
for identifying a homogeneous system of standards for defence equipment 
programmes; 
- assessing different ways and means of setting up a system of regular exchange of 
information between NATO and the European standardisation bodies, so as to reduce 
as far as possible the risk of duplication of efforts in the future; 
- providing support at Community level to the standardisation organisations concerned 
that have agreed on the need to act. For this support, careful consideration will be 
devoted to taking account of the particular characteristics of the industrial sectors 
concerned (aeronautics, space, electronics, mechanics...) and the "defence" specificity 
of the topics covered. 
V.6 Customs duties 
Common tariffs for imported products is a basic principle of the Customs Union and the 
Single Market. 
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 
for tariff arrangements for imports of military or dual-use equipment generates unequal 
treatment of operators and for this reason common rules on the tariff arrangements for 
such equipment need to be established. 
Therefore: 
- legislative initiatives should be taken to harmonise tariff arrangements with a view to 
achieve equal treatment of operators throughout the Community; 
- the Commission proposal from 1988, for temporary suspension of import duties on 
certain weapons and military equipments, should be reviewed and adopted; 
V.7 Innovation, transfer of technology and SME's 
In the Commission's Green Paper on Innovation dated December 1995 the potential for 
civilian use of defence technologies is acknowledged. General policies to promote 
technology transfer can facilitate the civilian exploitation of defence technologies; and 
should also involve SMEs because of their interest and role in this process. 
In this context, the Commission will support initiatives for the purpose of disseminating 
ideas, technologies and best practices. In particular, the Commission will continue to 
support the following activities: 
- the organisation of partnering events between suppliers (e.g. INTERPRISE) and 
between suppliers and research institutes; 
- the organisation of partnering events between main contractors and suppliers (e.g. 
IBEX). 
2à 
V.8 Competition policy 
The emergence of a Community market for the defence industry, resulting from common 
programmes, from necessary restructuring and European alliances, and from common 
rules on public procurement requires that the Community's competition policy examines 
in an appropriate way all competition issues within the defence industry. 
The process of restructuring the European industry, in particular the defence industry and 
related industries, has given rise and will continue to give rise to an increasing number of 
mergers and co-operations between companies within the European Union. Such a 
development must be welcomed as being in line with the requirements of dynamic 
competition and capable of increasing the competitiveness of the European industry, in 
particular the defence industry, insofar as it does not result in lasting damage to 
competition. This is why Community competition policy and in particular the 
Community Merger Control Regulation provides for a clear framework and quick 
decisions, so as to facilitate those concentrations and co-operations between companies 
which do not call into question effective competition. Moreover, Community control of 
State aids in all industrial sectors, including those of the defence sector, makes it possible 
to distinguish between those aids necessary for restructuring - to the extent they 
accelerate change, encourage research, development and innovation and reduce the social 
consequences of reorganisation - and for the preservation of adequate security of supply, 
and those aids granted for by Member States for the mere protection of their national 
companies which do not promote the overall competitiveness of the sector. 
In this respect, it is important to recognise the specificity of the defence-related industry 
in the application of Community competition policy, in particular as regards the 
geographical scope of the market. Whilst this scope may be kept limited by public 
procurement rules and administrative procedures, competition may increasingly take 
place for certain products, at European or even world wide scale. In this context, the 
Commission will take into account the manner in which, in particular, governments of 
third countries which produce armaments formulate and apply competition law to their 
own industry. 
V.9 Exports 
Dual-use goods and technologies 
A common regime for dual-use exports controls was adopted by the Council in December 
1994, on a proposal from the Commission. It is based on two legal instruments, an article 
113 Regulation (No 3381/94) and a Joint Action under the Common Foreign and Security 
Policy (94/942/CFSP) which together form an integrated system. This regime reflects the 
international arrangements to prevent proliferation of weapons of mass destruction. 
For dual-use goods, industry and administrations are invited to provide evidence if they 
face disadvantages under European export control compared to US and Japanese 
controls. The Commission will work to balance the situation and create a level playing 
field in this area if such a need exists. 
dl 
The Commission will draw a report on the application of the Dual-use regulation and 
possible proposals to strengthen and improve the current system particularly taking into 
account the ruling of the European Court of Justice in cases C-70/94 and C-83/94 that 
states that dual-use goods fall within the scope of the common commercial policy defined 
by Article 113. 
Conventional armaments 
Increasing industrial co-operation in the form of transnational co-operations and mergers 
is necessary to achieve an efficient industry structure. It is therefore urgent to eliminate 
limits to such co-operations arising from differing export policies. 
In this respect it should be recalled that political guidelines already exist, notably in the 
form of 8 criteria adopted by the European Councils in Luxembourg (June 1991) and 
Lisbon (June 1992) to guide Member States in their decisions concerning arms exports. 
Given the difficulties in developing a common basis for harmonisation of arms export 
policies, a gradual process should be pursued. First, the exchange of information on the 
application of the 8 criteria within the Council should be intensified. 
Secondly, the adoption by Member States in the EU framework of a code of conduct 
concerning arms exports, which the incoming UK Presidency has indicated to be a 
priority, would be an important development. 
* ' 
The resolution adopted by the European Paidiament in may 1997 in support of the 
Commission communication on defence industry invites the Commission to present a 
White Paper on the subject of arms export policy. The Commission intends to prepare 
such a White Paper formulating possible options for progress toward a common arms 
export policy, which could contribute to the establishment of an effective code of 
conduct. 
In the case of co-operation programmes further progress could be achieved on the basis 
of some experiences, namely by following the principle whereby will apply the export 
rules of the country where the prime contractor is established or where the final assembly 
and the physical export takes place. 
V.10 Structural funds 
In Agenda 2000, (EU-Bulletin Supplement 5/97) the Commission proposes a reform for 
the Structural Funds in the light of the new financial perspective (period 2000-2006): 
Three Objectives are foreseen under the new Structural Funds framework. In addition to 
Objective 1 which concerns the development and structural adjustment of regions lagging 
behind, a redefined Objective 2 will be created for other regions with structural problems. 
These are areas undergoing economic change (in industry or services), declining rural 
areas, crisis-hit areas dependent on the fishing industry or urban areas in difficulty. A 
limited number of significant areas should be identified in order to facilitate an integrated 
strategy for economic diversification. Objective 3 will concern the strategy for human 
resources outside these regions. 
21 
In Agenda 2000, the Commission does not foresee the continuation of a number of 
specific Community initiatives, including the one related to the reconversion of areas 
dependent on the defence, since these objectives could already be integrated in the afore­
mentioned programmes as such. 
Possible needs for diversification and conversion within the defence-related industry will 
therefore have to be properly considered when considering the new programmes for the 
next programming period. The new programmes supporting Objective 2 regions should 
focus on economic reconversion and diversification, including in regions heavily 
dependent on a single declining economic sector. For this reason specific attention should 
be given to SME's and innovation, professional education, local development, 
environmental protection and the fight against social exclusion. In this context, regional 
reconversion linked to the defence industry may also be the subject of actions aimed at 
the economic and social reconversion of regions covered by Objective 2. A similar 
approach may be followed in the regions covered by Objective 1. Further, Objective 3 
could possibly contribute in the context of the adaptation of workers to industrial change. 
V.ll Taxation 
Indirect taxation 
In July 1996 the Commission published its suggested programme for a "common system" 
of VAT for the European Community (EC), COM 328(96) Final. To achieve this, the 
new system's essential characteristics must ensure that: 
- No distinction shall be made between domestic and intra-EC transactions; 
- All transactions shall be taxed in the EC on the basis of the origin principle, and; 
- A new mechanism to decide the place of supply of goods and services needs to be 
established; 
- The VAT rates shall be simplified. 
The Commission believes that the new system will benefit also to the defence industry. 
The Commission will in parallel secure a fuller implementation of the eighth directive. 
Direct taxation 
As part of its new global approach to taxation, the Commission adopted in 
November 1997 a Communication outlining a tax package on which it invited Member 
states to reach a political agreement. Part of this package is a request to Member states to 
make a political commitment to work towards the early adoption of a Directive to 
eliminate withholding taxes on interest and royalty payments between companies. Such a 
directive would eliminate an important barrier to transfers of capital and technology 
between companies, as these withholding taxes create obstacles for economic operators: 
they can involve time consuming formalities, result in cash flow losses, and sometimes 
lead to double taxation. 
The Commission's new proposal for a directive on interest and royalties can be expected 
in early 1998. 
& 
V.12 Principles for market access 
Based on principles of comparable and effective access to markets, the Community 
should seek to remove obstacles to European exporters, including Customs duties. 
In the case of the US (with which the EU trade balance is in the ratio of 1 to 6) the issue 
might be raised , if European and American industries so decide, in the Transatlantic 
Business Dialogue or in the context of the New Transatlantic Agenda (the chapter on the 
new Transatlantic Marketplace). 
V.13 Benchmarking 
In line with the Commission's industrial policy to promote benchmarking as a tool for 
increasing the competitiveness of European industry and spreading best practice, the 
Commission will consult industry and other relevant actors for a benchmarking exercise 
in certain areas of interest to the competitiveness of defence-related industries. Such an 
exercise could for example look at issues such as best practice for the utilisation of 
synergies between civil and military information technologies, best practice for the 
integration of civil and military standards or best practice concerning multilateral 
projects. 
V.14 Enlargement 
The Commission will launch a study in order to better assess the situation of defence 
industries in the CEEC. The outcome of this study together with other relevant 
informations should be used as a basis for further analysing and reflecting upon the 
following topics: 
- the potential of the defence and industrial base of Central and Eastern European 
countries and its impact on European industry. 
- the relevance for and the best ways of promoting industrial co-operation. 
21 
VI. TIMETABLE FOR MAJOR ACTIONS PRESENTED IN THE ACTION PLAN (SUMMARY) 
Area Action Timing 
V.l Intra-Community transfers The Commission shall propose a 1998 
simplified licensing regime 
V.2 European Company Statute Council decision 1998 
V.3 Public procurement Proposal of rules for procurement in 1998-1999 
the defence sector 
V.4 RTD Establishment of complementarity 1998-1999 
between national and European 
research programmes • • 
V.5 Standardisation Finalisation of study. Second semester 1998 
Draw up a work programme to End 1998 
identify homogeneous system of 
standards for defence equipment 
programming. 
V.6 Customs duties Commission propose legislative End 1998 
initiatives to harmonise tariff 
arrangements within the Community 
Review and adopt Commission End 1998 
proposal from 1988 on temporary 
suspensions on import duties 
V.7 Innovation, transfer of Continue to support initiatives such Ongoing 
technology and SME's as : INTERPRISE, IBEX I 
V.8 Competition policy Take into account specificities of the Ongoing 
defence-related industry in 
Competition assessments 
V.9 Exports 
- Dual-use goods and - Report on the application of the First semester 1998 
technologies Dual-use regulation 
Conventional armaments - White paper First semester 1998 
- Proposal for a code of conduct In accordance with White 
Paper 
V.10 Structural funds - Proposal for a general reform of First semester 1998 
cohesion policy according to 
Agenda 2000 
- Negotiation of these proposals in 2nd semester 1998 
the Council and in Parliament as 
well as consultation of the other 
institutions and bodies 
- Implementation of the new Between end of 1998 to 
regulation/framework end of 1999 
V. 11 Indirect Taxation Pursue Council discussions Ongoing 
Direct Taxation Propose directive on interest and Early 1998 
royalties 
V.l2 Principles for market access Issue to be raised in the context of the During 1998-1999 
the TABD if EU and US industries so 
decide or in the New Transatlantic 
Agenda 
V.l3 Benchmarking The Commission will consult industry 1998-2000 
and other relevant actors on a 
benchmarking exercise in the defence-
related industry. 
V.l4 Enlargement - Finalisation of Study End 1998 
. - Industrial impact assessment 1998-2000 
10 s 

ISSN 0254-1475 
COM(97) 583 final 
DOCUMENTS 
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ISBN 92-78-27693-6 
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