Günter Verheugen
Vice President of the European Commission

A single market for the EU defence industry

EU Defence Industries and Marketplace
Brussels, 11 July 2005

Distinguished guests, ladies and gentlemen, thank you for coming in such large numbers to this Conference on "EU Defence Industries and Marketplace".

Introduction/the importance of the European defence industry

The defence industry is a heavyweight in the European economic landscape. Main players of the European defence industry - the 28 companies belonging to the world top 100 - represent a turnover of more than 55 billion Euros. It plays an essential role from a strategic, economic and technological point of view. Its competitiveness is crucial to the EU.

The Commission fully recognizes the importance of the challenges faced by the European Defence Industry. In 2003, we adopted a Communication entitled "Towards an EU Defence Equipment Market" in which we put forward a series of actions intended to foster the competitiveness of Europe's defence industry.

Today's Conference will allow you to review progress on the issues raised in this 2003 Communication and to join us in a discussion on the way forward.

The challenges that we confront although well known are intensifying. While equipment costs are always on the rise, defence budgets remain scarce.

A growing political will is also illustrated by the creation of the European Defence Agency.

Both these challenges and opportunities should encourage Member States, with the support of the European Institutions, to take decisive steps to develop their defence equipment policies at a European level.

These steps should address demand, supply and the functioning of the market.

Demand must be rationalised

On the demand side, this means in particular that the Member States should ensure that the impulsion already given towards harmonising their various military requirements will effectively result in shaping common equipment programmes. Achieving economies of scale through common defence programmes is key to a better use of the industrial potential and available financial resources.

The rapid creation and build up of the European Defence Agency in the EU framework is for me a clear sign of the political will that now exists. I hope that it will be maintained and lead us to reform armament procurement methods in Europe and to become ultimately, much more efficient in European defence spending.

The Agency with its mission to systematically promote European approaches to capability development, research and defence markets has an essential role to play in helping to shape an integrated European defence technological and industrial base.

Equipment decisions determine the pattern of production which are developed by enterprises and thus the structure of the Defence Technological and Industrial Base (DTIB). Given the length of acquisition cycles and the lifetime of defence systems, it is essential to plan for the long-term use of means of production and research if we wish to avoid the loss of technological capacities.

Rationalisation of Supply will follow

Arms programmes often give rise to industrial consolidation leading to the elimination of overcapacities in pursuit of efficiency and thereby, to an acceptance of mutual dependence among states in their acquisition policies.

The dismantling of barriers between industries and markets inside the Union will not only benefit enterprises of bigger Member States but will also encourage the involvement of the often smaller enterprises from other Member States in programmes from which they are currently excluded.

Yet, today in Europe there are still three or four times as many arms producers as in the USA, for a combined market roughly half the size. 4 Tank and some 23 Armoured Fighting Vehicle programmes co-exist in Europe, not to mention the ammunition sector that has around 30 companies of various sizes.

The European defence industry has already made considerable progress in restructuring, especially in aeronautics, space and defence electronics. But it will also have to move ahead in land-based equipment and on the naval side.

It is clear that restructuring is for industry to decide. However, both the Commission and the Member-States having recognised the necessity for such restructuring should be ready to provide support wherever they can.

Overall defence spending in the EU remains at about one half of that in the US. The difference in equipment procurement spending is even higher with EU spending only one quarter of that of the EU. When we turn to the gap between EU Member-States and the US in research and development in the defence sector, the gap is even greater -between fourfold and seven fold depending upon how you define research. We all recognise that the future of the European economy depends on its capacity to innovate and develop new technologies, goods and services. Defence is no different and this gap of course puts considerable pressure on the European Defence Industry and slows down technological development in Europe. There is no doubt that the difference in level between the European and American defence budgets will remain considerable. This is all the more reason why we have to seek to increase the efficiency of our spending and reduce fragmentation and duplication and ensure an increased focus on R&D in European defence budgets.

Improve the functioning of the market

Other conditions must also be met in order to further improve cost efficiency at the research, development and production stages in military programme management. I am referring to the need to progressively harmonise defence market rules in Europe to create a European Defence Equipment Market to make European products more affordable.

The building of a true European Defence Equipment Market is a necessity. This is the issue where the Commission's institutional role allows it to best contribute with its expertise and experience.

The creation of a true European Defence Equipment market will require an active collaboration between the EDA and the Commission. The Commission is engaged with the Agency in looking at how best to achieve the opening of the Defence Equipment Market within Europe, and is considering complementary initiatives it might take to help achieve this goal. Being myself, a Member of the Steering Board of the Agency, I intend to work hand in hand with the Agency on this great endeavour.

The Conference programme

Today's conference gives the opportunity to all stakeholders in the defence sector to review and debate the four main actions the Commission has initiated or intends to initiate:

• mapping of the European defence technological and industrial base;
• transfers of defence goods within the EU;
• standardisation in the defence area;
• and defence procurement.

Setting up a European Defence Equipment Market implies that decision makers must be able to rely on accurate data on the economic situation of the defence-related industries at EU level. This is what the Commission aims at with its mapping project, which will help us assess properly the impact and needs of the sector, including its many SME's. This project will be carried out on the basis of information available in the public domain to avoid creating any burden for companies of the sector. It will also be conducted with due consideration to EDA's more focussed studies on specific areas of the defence sector.

A future European Defence Equipment Market also needs to seek to remove unnecessary burdens which lead to inefficiencies in the defence-related industrial sector. Such burdens include the very heavy rules which currently treat intra-community transfers of defence equipment goods in the same way as those destined for exports to non-members countries. Heavy and time-consuming administrative procedures are used by Member States. Considering that removing this hurdle would benefit the whole sector, the Commission has commissioned a study on ways of simplifying intra-community transfers. The results of this independent study will be discussed this morning and I intend to proceed to a further exchange of views with all actors as to how we should best follow-up the findings of the study.

The Commission considers that standardisation is an important precondition for the opening-up of national markets and for the gradual establishment of a single European Market. By the end of this year, a first operational version of a "Defence Standardisation Handbook" will be made available. This project will be presented to you today and will be used by the EDA in their future work.

Pursuing harmonisation of defence procurement rules would also help. We at the Commission are convinced that, to optimise defence procurement at national and EU levels, a single set of rules for procuring defence equipment in Europe is needed. With this aim we published in 2004 a Green paper to launch a debate on the definition of common procurement rules applying to defence goods taking due account of course of the level of sensitivity of the equipment. We will look at the results of this consultation towards the end of the afternoon.

I do not want to prejudge the discussion but let me nevertheless be a tiny bit provocative. We must accept that in the long run, competitiveness cannot be served by protectionism. What was true in so many other sectors of the economy, is also true of the European defence industry whose long-term survival will not be served by systematic recourse to Article 296 of the EC Treaty which allows Member States to derogate from treaty rules requiring open public procurement where they can demonstrate that their essential security interests are at stake. National governments have traditionally defined these `security interests' very broadly in order to override the disciplines of Community policies in the field of armaments and reduce to a strict minimum those areas where open competition takes place.

Concluding Remarks

We know the road is long. But the survival and strengthening of the European Defence and Industrial Base depends on a well functioning European defence equipment market. And without a well-functioning defence technological and industrial base, it will be difficult not only for the European Union, but also for each of its Member States to pursue external and security policy goals.

Nonetheless I am optimistic that Europe is now beginning to seriously face up to the need to provide the right conditions for our defence industry to make a full contribution to our ambitious security and economic aims.

By focusing on market and competitiveness issues, we in the Commission are strongly committed to playing our part in this collective endeavour and we hope that our efforts will encourage others in pursuit of a more secure Europe in a more secure world.

Thank You.