Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - Implementing European Union strategy on defence-related industries
Date: 1997-12-04
Institutions: European Commission
Subjects: EU policy, action programme, arms industry, defence policy, industrial restructuring

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 04.12.1997 
COM(97)  583 final 

COMMUNICATION  FROM THE COMMISSION 

TO THE COUNCIL,  THE EUROPEAN PARLIAMENT, 
THE ECONOMIC AND  SOCIAL COMMITTEE 
AND  THE COMMITTEE OF THE REGIONS 

IMPLEMENTING  EUROPEAN UNION  STRATEGY 
ON DEFENCE-RELATED  INDUSTRIES 

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IMPLEMENTING  EUROPEAN  UNION  STRATEGY 
ON DEFENCE-RELATED  INDUSTRIES 

SUMMARY 

industries 

The  need  to  implement  a  European  Union  strategy  to  keep  up  with  the  major  changes  in 
is  becoming  more  pressing  every  day.  The 
the  European  defence-related 
industrial  and  technological  base  of  defence  are  both  precious 
in  terms  of  economic 
development  and  indispensable  for  weapons  capabilities.  Despite  the  urgent  warning  and 
in  its  Communication  of  January  1996  on  the 
call for  action  issued  by  the  Commission 
defence-related 
then. 
in  the  sector  has  deteriorated 
the  situation 
industry, 
in  the  industry  fell  by  13%  between  1993  and  1995.  In  1995  the  value  of 
Employment 
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 
in  the  Treaty  on  European 
the  "eventual  framing  of  a  common  defence  policy".  The  essential 
Union  concerning 
responsibility 
States. 
restructuring 
for 
their  cooperation  within  the  framework  of  the  Union  is  important  and  the 
However, 
purpose  of 
of  such 
cooperation. 

the  political  objectives  formally  enshrined 

the  Commission's 

the  development 

is  to  facilitate 

the  Member 

the  defence 

lies  with 

initiatives 

industry 

since 

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  proposed  CFSP  Common 
The  Commission  calls  on  the  Council 
Position 
to  such  a 
in  order  to  open  up  the  debate  on  the  major  issues  relating 
policy  and  promote  the  Member  States'  commitment  to  its  establishment.  The  areas 
specifically 
public 
procurement  and  common  customs  arrangements. 

the  proposal  are 

intracommunity 

covered  by 

transfers, 

to  adopt 

-  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 
practical  action  on  this  matter  in  1998. 

the  Union  to 

initiate 

1.  THE  CONTEXT 

industry  has  been  undergoing 
In  the  last  few  years  the  European  defence-related 
restructuring,  shaped  notably  by 
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 
is  now  essential  to  provide  adequate 
restructuring  needed.  A  European  framework 
solutions,  but  it  has  not  yet  evolved  into  a  source  of  rules  governing  a  European  market 

the  new  security  environment  and 

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 
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 

the  restructuring  and  consolidation  of 

the  European  defence 

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. 

DRAFT COMMON  POSITION 

ON FRAMING  A  EUROPEAN  ARMAMENTS  POLICY 

adopted  on the basis of Article J.2 of the Treaty on 

European Union 

. ANNEX I 

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. 

// 

to  national  defence.  Unlike 

4.  The  defence-related  industry  is  a  strategic  industry,  the  products  of  which  can  be 
crucial 
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. 

in  other 

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 
As  sole 

defining  operational  requirements  and 
customers, governments determine demand for the industry's products ; 

technical  specifications. 

-  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 
In  certain  areas,  some  Member  States  consider  an  indigenous 
relationship. 
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 

to  national 
interests.  This  can  lead  to  constraints  on  competition  and  to  relationships  between 
customer and supplier which are more close-knit than usual. 

is  crucial 

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 

EUROPEAN  COMMISSION 

•b 
•Ù 

-to 
-à 

te  4* 

/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 
V.2 
V.3 
V.4 
V.5 
V.6. 
V.7 
V.8 
V.9 
V.10 
V.ll 
V.12 
V.13 
V.14 

Simplification  of Intra-community  transfers 
European  Company  Statute 
Public Procurement 
RTD  (Research  and  Technological  Development) 
Standardisation 
Custom  duties 
Innovation, transfer  of technology  and  SME's 
Competition  policy 
Exports 
Structural  funds 
Taxation 
Principles for  market  access 
Benchmarking 
Enlargement 

VI.  Timetable 

2 
3 
3 
4 
4 
5 
5 
6 
6 
. 7 
8 
9 
9 
9 

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. 

for  Research  and  Technological 
The  Community's  Framework  Programme 
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 
for  defence  equipment 
programmes; 

identifying  a  homogeneous  system  of  standards 

-  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 
the 
is  why  Community  competition  policy  and 
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  particular 

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 
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. 

innovation,  professional  education, 

to  SME's  and 

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 

to  taxation, 

the  Commission  adopted 

its  new  global  approach 

As  part  of 
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 

V.2  European Company Statute 
V.3  Public procurement 

V.4  RTD 

V.5  Standardisation 

V.6  Customs duties 

V.7 

Innovation, 
transfer 
technology and SME's 

V.8  Competition  policy 

V.9  Exports 
Dual-use 
- 
technologies 
Conventional armaments 

goods 

1998 

complementarity  1998-1999 
and  European 
• 

The  Commission  shall  propose  a  1998 
simplified  licensing regime 
Council decision 
Proposal  of  rules  for  procurement  in  1998-1999 
the defence  sector 
Establishment  of 
between  national 
research programmes 
Finalisation of study. 
Draw  up  a  work  programme 
identify  homogeneous 
standards 
programming. 
Commission 
initiatives 
arrangements within the Community 
Review 
proposal  from  1988  on  temporary 
suspensions on import duties 

system  of 
for  defence  equipment 

adopt  Commission  End 1998 

legislative  End 1998 

to  End 1998 

harmonise 

propose 

tariff 

and 

to 

Second semester 1998 

• 

of  Continue  to  support  initiatives  such  Ongoing 

as : INTERPRISE, IBEX 
Take  into  account  specificities  of  the  Ongoing 
defence-related 
industry 
Competition  assessments 

in 

I 

and 

-  Report  on  the  application  of  the  First semester  1998 

Dual-use regulation 

-  White paper 
-  Proposal for a code of conduct 

First semester  1998 
In  accordance  with  White 
Paper 

V.10  Structural funds 

-  Proposal  for  a  general  reform  of  First semester  1998 

cohesion  policy  according 
Agenda 2000 

to 

-  Negotiation  of  these  proposals  in  2nd semester  1998 

V. 11  Indirect Taxation 

Direct Taxation 

V.l2  Principles for market access 

V.l3  Benchmarking 

V.l4  Enlargement 

. 

new  Between  end  of  1998  to 

- 

the 

interest  and  Early  1998 

end of  1999 
Ongoing 

the  Council  and  in  Parliament  as 
well  as  consultation  of  the  other 
institutions and bodies 
Implementation 
of 
regulation/framework 
Pursue Council discussions 
Propose  directive  on 
royalties 
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 
The Commission  will consult  industry  1998-2000 
and  other 
relevant  actors  on  a 
benchmarking exercise in the defence-
related industry. 
-  Finalisation of Study 
- 

Industrial impact assessment 

End  1998 
1998-2000 

10 

s 

ISSN 0254-1475 

COM(97) 583 final 

DOCUMENTS 

EN 

06  10  01  15 

Catalogue number  :  CB-CO-97-627-EN-C 

ISBN  92-78-27693-6 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg 

ou