FEATURE ARTICLE

March 2005

Common European Defense Market Still Years Away

by Roxana Tiron

The newly created European Defense Agency is positioning itself to play a pivotal role in guiding European Union countries towards a common military equipment market.

But the Union, which has hit a barren period in cooperative programs, has a massive task ahead, despite the European Commission’s efforts, asserted several of the continent’s defense officials.

The European Commission is the political institution that governs the EU. Its four main roles are to propose legislation, to administer and implement policies, to enforce laws and to negotiate international agreements, mainly those relating to trade and cooperation.

Each member state, however, manages its own defense budget. This fragmentation poses a “major problem for all member states with defense industries,” stated a defense procurement policy paper published last year by the Commission of the European Communities. The paper explored options for the creation of a common European defense equipment market, or EDEM.

Following budgetary reductions and the restructuring of armed forces, even wealthy nations, such as the United Kingdom, Germany and France no longer can afford the high cost of the research and development for new weapon systems. Ultimately, this predicament affects the competitiveness of the European defense industry, noted the commission.

Creating the EDEM will require an extensive review of procurement policies. At press time, a four-month consultation phase—in which stakeholders had a chance to comment on the commission’s idea for more coherent regulations—was reaching its end.

At the core of the debate is an article allowing European states to diverge from the common market in the interest of national and “essential security interests.” Most defense contracts are grounded in national procurement laws. Not only are laws complex, but they also differ from country to country, said Burkard Schmitt, with the Paris-based EU Institute of Security Studies. The result is a “complex regulatory framework that lacks transparency, is highly inefficient and hinders fair intra-European competition,” he wrote in an editorial.

Manufacturing and selling in a national market is no longer sustainable in a global economy, Nick Witney, EDA chief executive, said on the website Euractiv, a portal dedicated to EU affairs. “The demand side needs to increasingly come together on the continental scale for the supply side to respond to that demand in a continental-scale market,” he added.

The United Kingdom, a strong supporter of the EDA, champions the creation of a coherent European market. At the same time, it wants the option of buying U.S. or other equipment. To do so, the country would have to keep its market reasonably open, said U.K. officials.

The United Kingdom considers the creation of EDEM a matter of priority. A policy paper published by the U.K. Ministry of Defense urges a pragmatic approach to a common market based on a voluntary code of conduct. This form of internal governance would stimulate cross-border competition and trade, said U.K. officials.

The creation of a common European defense market, meanwhile, would affect military transactions and exchanges between the United States and Europe, analysts stressed.

“When Europeans buy in a collective way … our people will compete,” said Frank Cevasco, an international defense industry analyst based in Fairfax, Va.

When the Pentagon issues solicitations for a certain program, it is hard for a European company to win the prime contractor spot, he explained. “The same would happen to U.S. companies in Europe,” he added. “Our side is not particularly pure, and we have written the book on protectionism.”

One-sidedness could be damaging to U.S. contractors, and it is “naïve” to think that Europe always is going to buy from the United States, Cevasco said. The U.S. government is going to have the greatest influence determining whether Europe will go “protectionist.” The magnitude of trade is driven by the presence or absence of reciprocal access, he added.

If Europe moves forward with a common defense procurement agency, the U.S. State Department, which is responsible for issuing export licenses for military items sold to foreign customers, will have to adjust its practices to be able to deal with a multinational entity rather than just with a single country.

While Europe has had armament cooperation, its attempts have been sporadic, said critics. Failure to respond to the Balkan crisis of the 1990s prompted the creation of the European Security and Defense Policy, or ESDP.

Its objectives are to strengthen European contributions to NATO by enabling national forces to assume a larger share of the European security burden in cases when NATO is not engaged. ESDP also is meant to make military forces more rapidly deployable and sustainable, and enable the European Union to oversee crisis management operations.

This political-military impetus led five European countries to join the United Kingdom in its efforts to develop the Meteor air-to-air missile. Similarly, Belgium and Spain joined France in the Hélios II military observation satellite program, conducted in close coordination with Germany and Italy, which are acquiring similar capabilities.

In addition, the much-delayed military cargo plane program, the Airbus A400M, took off two years ago, with an order of 180 aircraft worth $20.6 billion. The program is handled by the Organisation Conjointe de Coopération en matière d’Armement, or OCCAR.

Also known as the European Joint Organization for Armaments Cooperation, OCCAR became a legal entity in 2001. It is acting as a multi-national agent on collaborative projects for its member countries.

The State Department has yet to come up with a policy for how to deal with OCCAR-managed programs, which has upset U.S. contractors seeking to compete for A400M work, for example.

Progress made by the ESDP has helped revive the process of consolidating European industry. The six leading European arms manufacturing countries—France, the United Kingdom, Germany, Italy, Spain and Sweden—now are trying to implement the provisions of the framework agreement known as the letter of intent. The goal is to simplify transnational transactions, while ensuring governments retain some form of control.

These six nations have “85 to 90 percent of the defense-oriented research and development investment, and manufacturing capacity in Europe,” Cevasco said. “They are trying to lower barriers among themselves” to operate like a single entity. Currently, because each country has its own set of export controls, cooperating efficiently is hard to do, he pointed out.

In Cevasco’s opinion, the letter of intent runs in parallel to the efforts of the EDA, and “will complicate things. They want to do things more among themselves rather than delegate to the EDA … They have institutions that work in parallel, but their goals are common, and they are coming to it from different ways.”

It is not clear which entity will end up managing common defense procurement programs. EDA, whose role is solely advisory and has no procuring power, recommended that OCCAR manage programs, but OCCAR oversight so far is limited only to programs funded by its members—France, Germany, Italy, the United Kingdom, Belgium and Spain, which is expected to join shortly. The EDA would have to figure out how to handle projects that involve other EU members outside of OCCAR.

“OCCAR could be and might be brought into later on, and they would have the requirements people, the folks that would deal with research and development and the procurement authority,” said Cevasco.

OCCAR has been managing, besides the A400M, the German-French Tiger helicopter program, the French-Italian surface-to-air anti missile system family, and the French-German Roland, radar-guided surface-to-air missile.

Apart from a new Franco-Italian frigate program, nothing else is forthcoming. This problem figures into one EDA’s chief goals: to identify common capability gaps.

The agency said it will fund technology demonstration work in areas viewed as critical to future military operations, such as long-endurance unmanned aerial vehicles. In advanced European jet pilot training, the agency will assume leadership in a current effort involving 11 countries to develop a common European system.

In the area of command, control and communications, EDA is working to find solutions to operational shortfalls and developing interoperability standards. The agency also is looking at ways to save money by eliminating duplicate or redundant facilities.

Armored fighting vehicles are on the list as well. EDA also will consider developing an common “electronic marketplace” where buyers and sellers can exchange information.

The agency also plans to investigate the potential value of a naval defense technological and industrial base, maritime surveillance, air-to-air refueling and chemical, biological, radiological and nuclear defense.

But these efforts are in their early stages. Observers said they are cautiously optimistic.

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