European Affairs

Article 296 can thus provide a good excuse for any European nation to act in what it considers its national interest, ignoring the pressures for competition inside Europe; and indeed member states in general have invoked essential security interests to make the bulk of their defense purchases on a national basis.

This situation is no longer sustainable, for many reasons – political as well as economic. On the political side, a European solidarity in the defense sector is emerging in more European countries as they become involved in international crises – today, for example, in Kosovo. This has increased the importance of the EU’s “second pillar” comprising the Common Foreign and Security Policy (CFSP) and the European Security and Defense Policy (ESDP). In this context, new instruments have been put in place on the military and operational side in Europe, and they link up to the need for the defense industries in these countries to have a common and competitive equipment program for these European forces. In other words, the new operational environment imposes the need for a sound Defense, Technology and Industrial Base (DTIB). Its success or failure will impact the ability of Europe to successfully participate in managing the crises in which it is involved.

In addition, transatlantic solidarity means burden-sharing and Europe needs to become a stronger partner to the United States. That requires interoperability, which in turn means an effective technology base.

In economic terms, too, that industrial base needs to be looked after because it is the main supplier for European forces and because it generates jobs and technology. The present fragmentation of the European market leads to the waste of scarce money, which is needed for investment in the technology and industrial base. Investment, of course, would also mean better budget, although this is not my topic today. But the base also requires competition, and that means as wide a market as possible.

Faced with these facts, a powerful European consensus is gradually emerging about the need to consolidate the European Defense Equipment Market, the so-called EDEM. The necessity to have a better coordinated European market was perceived long ago. In 1975, the IEPG (Independent European Program Group) was established in order to create a single European partner for our American ally.

More recently, the OCCAR (Organization for Joint Armament Cooperation – Organisation Conjointe de Coopération en matière d’Armement) was set up to manage some cooperative program.

The LOI (Letter of Intent) is the latest; although a very interesting initiative, it is still limited to a restricted club.

Now, a new ambition is at work: there is a large consensus between European Member States to set as a goal an open European Defense Equipment Market, giving equal chances to all European suppliers to provide European forces with the equipments and services they need. The objective might be clear. The way to reach it is more complicated.

And yet, this objective of creating that open intra-European market has been adopted by the Member states themselves: in their regular meetings, the Defense Ministers have decided to proceed and, in addition to the tools they had established on the operational side, they established the European Defense Agency. And, given the overall importance and political visibility of the subject, by the European Commission which has summarized its view in this field in a green paper, and more recently in the so-called “Defense Package.”

The European Defense Agency (EDA) was set up in Brussels in 2005 as an agency created by EU member states at the level of their defense ministers. With a staff of about 80, it is organized in four divisions reflecting its four missions: Capabilities, Research and Technology (R&T), Armament and Industry/Market.

On capabilities, the goal is to harmonize and reconcile different equipment requirements inside Europe by setting priorities and getting people behind a capabilities-development plan. On R&T, the goal is to avoid duplicating efforts across Europe and establish a strategic research agenda. EDA has launched a first initiative; its importance is still limited as suggested by its budget: €59 million over three years. Since it involves 19 nations, i.e. at least 19 companies or more, it works out to a maximum of one million euros a year per company. So, it’s not big business. But at least it is a first attempt to bring people together on R&T and identify the real problems. Armaments is tasked with promoting cooperative programs while Industry/Market is aimed at organizing the EDEM and promoting competition by opening that market, currently worth some €80 billions.

Following its creation, the agency put together a proposal for an “intergovernmental regime” encouraging competition and defense procurement on a fair and transparent basis, even in the areas covered by Article 296. The proposal has been adopted by the Defense Ministers, leading to the so-called “Code of Conduct”. It came into force a year ago on July 1, 2006. The “code of conduct,” as its name implies, is not a law but a voluntary regime. It is built around four guiding principles. The first one addresses transparent market behavior, meaning that a nation must give an explanation when it is not going to propose a tender to all possible suppliers. Another is mutual accountability for decision-makers, meaning that when a decision is made to select a supplier, explanations and criteria are forthcoming about why this choice was made. A third is “proper information” to all potential suppliers, giving them all the information they need. The fourth guarantees fair and equal treatment of all the participants in the market. In practical terms, the code applies to any contract worth more than one million euro, so it gets down to small deals. And it does not apply to cooperative programs, R&T or highly classified contracts – for example, nuclear armament or submarines. In addition, a code of best practices for the supply chain has also come into effect since March 2007 that is designed to ensure that small and medium companies are also included in a similar procurement process.

The results are still limited, but the codes have only been in effect, respectively, for a little over a year. The good news is that 22 member states have now subscribed to the code of conduct. An Electronic Bulletin Board (EBB) exists on the EDA’s website listing opportunities, and it is monitored by the agency. So these changes have been made in trying to amend the practice with regard to items that used to be entirely protected by Article 296. These changes have brought to light some of the many obstacles to creating a wider, more competitive market, from the difficulties created by sensitive questions like security of supply, security of information, intellectual property rights, and export regulations, to the compatibility with the U.S. International Traffic in Arms Regulations (ITAR) which might impact the transatlantic cooperation.

So there is a long list of difficulties. As things stand, the EDA has started with the code of conduct, hoping to convince member states not to use Article 296 and instead to voluntarily open up their national markets.

As for the initiative taken by the European Commission, called the Defense Package, it is the latest in efforts over many years in the EU to restrict the use of Article 296 and bring back all procurement to the common rule of the first pillar. Since 1996, the Commission has been putting out its “communications” on defense-industrial activity. Now it is taking a more pro-active approach. It issued a green paper in 2004 (which is the basis for the defense package) consisting of four elements:

  • An “interpretative communication,” published in 2006, explaining what Article 296 really means. As I explained at the outset, the article refers to “national essential interests in security.” So, when you are ordering off-the shelf civilian equipment for a military aircraft, is that impacting an essential interest in the security of the country? You could claim it is, arguing that the supplier of this common equipment might have access to some parts of this military aircraft and get militarily sensitive information. But, most likely, this would be an unreasonable abuse of article 296 and the interpretative communication says that the Commission is entitled to ask the corresponding country to justify why a specific acquisition was covered by article 296. Then, if the Commission does not agree, it will be up to the Court of Justice to rule.
  • A defense-procurement directive is currently being prepared, hopefully for promulgation in September 2007. It is being debated among member states, the Commission and to some extent the industry, so the details are not yet known. But ultimately it should be translated into national laws making it compulsory for governments to abide by.
  • There is a regulatory instrument taking shape on intra-community transfers – both of equipment and information – to reduce barriers to their circulation throughout the EU.
  • There will be a communication on defense-industrial policy which might involve some R&T projects.

As you will note, both the European Commission and the EDA are pursuing the same objective: restricting the use of Article 296 to a bare minimum. But there is a sizeable difference: what the Commission does will end up in compulsory national legislation. The EDA proceeds in a more pragmatic way.

To sum it up: The Code of Conduct may open what is covered and protected presently by article 296: on a voluntary basis, the member state may decide to open to the other members a procurement which was, up to now, restricted to national suppliers. The Defense Package, on the other hand, is restricting the field of application of the same article, by excluding some procurements from the shield of article 296.

All this process will be painful and slow but it clearly shows the objective.

There will be many other obstacles and complications. As companies, we sometimes have the feeling that many of those discussions have little to do with real business. It can be frustrating but the train, undoubtedly, is moving. As Churchill said, success is the ability to go from one failure to another with the same kind of enthusiasm.

Bernard Rétat is Chairman of the Defense Commission at the AeroSpace and Defense Industries Association of Europe (ASD).

 

This article was published in European Affairs: Volume number 8, Issue number 2-3 in the Summer/Fall of 2007.