Finally, a Single EU Defense Market?
By Scott Jones
Published: 2 February 2009
Recent action by the European Parliament to ease the transfer of defense articles among EU member states is the latest step in creation of a truly competitive common European defense market that could offer a more customer-friendly alternative to U.S. producers.
Legislation approved by the parliament Dec. 16 would help supplant the 27 separate export licensing regimes now operating within the European Union.
Such initiatives have been undertaken before - remember the Western European Armaments Organization? But the current economic crisis is squeezing European social outlays, and the benefits of genuine defense production and procurement momentum may result in lasting structural reforms in how European countries, and the European Union, produce, trade and procure military equipment within the bloc.
If successful, these reforms will have implications beyond Europe, directly affecting the global defense market.
These moves follow years of efforts to streamline EU defense and trade activities.
As the European Union evolved from a postwar customs union to a supranational and intergovernmental organization addressing political as well as economic issues, the defense trade has always enjoyed exemption. Like Article 51 of the United Nations charter, the EU treaties have treated the defense trade as the holiest of holies.
However, the political spillover of economic union has invariably led to mission creep into traditional state areas of high politics: defense and security. In treaty form, this movement began with the establishment of the Maastricht Treaty in 1992, in which, for example, the EU mission was to include a Common Foreign and Security Policy.
Also in 1992, the union established a regulation for the trade in dual-use commodities, creating a common market for most dual-use items and ensuring that all member states worked from a common control list and used a common license. Licensing decisions, however, still reside at the nation-state level.
At the same time, various European countries sought to harmonize their post-Cold War defense production and procurement policies, resulting in, for instance, the relatively successful OCCAR (Organisation Conjointe de Coopération en Matière d'Armement) in 1996, which manages the Tiger helicopter project. OCCAR is not, however, an EU body.
In 2004, the union established the European Defence Agency (EDA), which reports to the Council of the European Union. The EDA is intended to help member states improve their defense capabilities and aid in crisis management, part of which includes coordinating defense production and the development of something called the European Defence Equipment Market (EDEM).
The creation of a defense trade single market is key to realizing the EDEM.
So far, defense industry adaptation has mainly taken place on a national basis and in the form of ad hoc transnational working agreements. Although there have been some successful crossborder mergers within the union, most European cooperation has tended to take the form of joint programs or ventures that have limited value in improving competitiveness.
This has slowed consolidation, specialization, modernization and restructuring in Europe's defense industry. The recent parliamentary decision was aimed at precisely these limitations.
In this grim economic environment, European governments have realized that they must change their "national champions" approach. It is interesting to note that France, one of the last European defense producers to begin the denationalization process, is leading many of these defense trade and production changes.
The EDA, as an EU institution, is a structural means to reach the stated goals of European economies of scale, streamlined procurement and improved competitiveness by bolstering, for example, research and development (R&D) capabilities.
Europe's disadvantage in R&D spending is a primary focus in development of an EDEM. In the aggregate, the United States outspends Europe by six to one in defense R&D. A consolidated defense market would seek to pool R&D resources, reducing that competitive disadvantage.
The EDA operates a Research and Technology Directorate, the sole aim of which is to coordinate member states' defense R&D activities, particularly with an eye toward common procurement. If realized, R&D would be more effectively pooled, decreasing redundancy and increasing value per R&D euro spent.
Finally, the steering board of the EDA in 2005 established a voluntary Code of Conduct on Defense Procurement for all procurement of materials and services of military application of over 1 million euros.
These changes can increase the competitive tempo between the U.S. and European defense industries. In addition to reducing the burden of restrictions imposed by the International Traffic in Arms Regulations regime, the European Union is looking to expand into emerging markets such as India and Brazil. A truly EU-based single defense market could fundamentally change the scope of and dynamics within the global defense trade.
With a streamlined regulatory environment, transnationalized defense producers, and more cohesive procurement and defense export policies, the European Union could enhance its internal defense market and offer a more competitive, less cumbersome option to U.S. defense producers.
Scott Jones is the director of the Strategic Trade Control Program at the Center for International Trade and Security, University of Georgia, Athens.
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