working document

European Economic and Social Committee

INT/406 A Strategy for a stronger and more competitive European Defence Industry

Brussels, 17 June 2008

WORKING DOCUMENT of the EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: “A Strategy for a stronger and more competitive European Defence Industry” COM(2007) 764 final _____________ Rapporteur: Marius – Eugen Opran (Gr.I – RO) _____________

Administrator: J. Pereira dos Santos

INT/406 - R/CESE 460/2008 EN/o 99 rue Belliard - B-1040 Brussels - Tel. +32 (0)2 546 90 11 - Fax +32 (0)2 513 48 93 – Internet: http://eesc.europa.eu

EN

-1Study Group on: Communication from President: the Commission to the European Rapporteur: Parliament, the Council, the European Members: Economic and Social Committee and the Committee of the Regions: “A Strategy for a stronger and more competitive European Defence Industry” COM(2007) 764 / INT 406

GKOFAS (GR-III) OPRAN (RO-I) BOYLE (UK-II) CABRA DE LUNA (ES-III) CARR (EE-II) CASSIDY (UK-I) CEDRONE (IT-II) (art. 62 – Iozia) DANEV (BG-I) (art. 62 – Behar) D'SA (UK-III) GENDRE (FR-II) van IERSEL (NL-I) KOTOWSKI (PL-III) METZLER (DE-III) SCHALLMEYER (DE-II) (art. 62 – Ott) VOLEŠ (CZ-I)

Experts: Mrs Cathy NOGUEZ (for the Rapporteur), Thales Alenia Space, Director for European Affairs, Brussels Office

* * * On 5 December 2007 the European Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on: The Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: “A Strategy for a stronger and more competitive European Defence Industry” COM(2007) 764 final. The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on … The rapporteur was Dr. Marius – Eugen Opran . At its ... plenary session, held on … (meeting of ...), the European Economic and Social Committee adopted the following opinion by ... votes to ... with ... abstentions.

* *

*

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I.

CONCLUSIONS

1.

Currently, the EU MS have under development a numerous different National Military Projects 1 underway (89 for the main categories of Armaments, comparing with US DoD / DARPA only 27 major projects), often motivated by Regional economic needs instead of a solid commitment to either serious Military Capability or Economic Efficiency, leading to the European Market fragmentation, unnecessary duplication and often poor interoperability.

2.

A Continuous Degrading of European Armed Forces and - to make matters worse, the reduced State of Capability and Readiness leads to the derogation of the European Defence Technological and Industrial Base (DTIB), allowing Foreign Competitors to gain ground on us almost every year, further complicated by Defence Inflation and low levels of Military Expenditure, particularly for the small and medium-sized MS - and some of the larger ones, not least Spain, Italy and Germany, each spending merely between 1.1% and 1.8% of their GDP on Defence.

3.

In the actual circumstances, the Europeans are increasingly less able to contribute anything of real substance to the Transatlantic Partnership, reducing the effectiveness of NATO and producing an environment more conductive to American unilateralism.

4.

Restructuring the Defence Industry in accordance with the Lisbon Strategy represents the actual major task conditioning Survivability and Global Future of the EU Defence Industry.

5.

First of all that means to set up a real European Defence Equipment Market (EDEM), in accordance with the full set of specific requirements unique for this special domain:

5.1.

Strict Rules framing the Production and the Sales – this sensitive matter being entirely under the MS decision, outside the scope of the Community competence (referring first to the Third - Countries Export Operations);

5.2.

Secret Character of the Activities, imposing severe constraints on the Access to Information;

6.

Technological Excellence Level of the Products, requested by the Beneficiary in order to successfully accomplish their missions.

7.

The Public Procurement activities should be done according with a Common Set of Rules, accepted by all MS in order to have a better utilisation of the allocated funds and to strength the DTIB - by:

1

The EU MS Armed Forces are currently using 4 different models of Main Battle Tank, more than 20 different Armoured Vehicles models, two types of Jet Fighters produced in the same country - one of them under simultaneous production in all four countries of origin of the joint developers. We have more than 20 different Armoured Vehicles models under development, in the same time – by contrary – the activities regarding the development of a new 5th-Generation Jet Fighter, Ground-to-Air Laser Weapons or Reactive Protection of the Army Combat Vehicles are totally missing!

-37.1.

Defining an European Common Model for the Public Procurements (as a “Template”) in the field of Defence and Security, accepted by the all MS;

7.2.

Developing the right Benchmarking procedures specially dedicated to evaluate the contribution of the both Codes issued by the EDA, despite of the fact that the aspects regarding the Security of Supplies was not included;

7.3.

This problem was corrected by the Commission with the new Defence Package, introducing both the Security of Supply and the Security of Information - as Selection Criteria.

8.

The process of DTIB Reinforcement can be supported too by setting up:

8.1.

A strict and efficient Community control of the Foreign Investments in the area of EU Defence Industry, in order to avoid illegal access to the latest technologies developed by the EU Defence industry companies;

8.2.

A harmonised Common Politics in the field of the Golden Share Practice (not included as individual aspect in the Strategy proposal of the Commission) imposed by some EU MS as a mandatory condition for the privatisation process of the Defence Industry. This condition, practically never used by the governments after privatisation, creates a false motivation for the foreign investors to offer acquisition prices much lower than the real market price.

9.

Links with the Lisbon Strategy: The future industrial policy for the European Defence Industry can fully fulfil the following aspects emphasized by the Lisbon Strategy for growth and jobs:

9.1.

Building up the Internal Market and improving European and National Regulations;

9.2.

Encourage knowledge and innovation by promoting more investment in R&D: • In line with the Lisbon goal, the Defence Industry should increase research investment with the aim of approaching 3% of Total Defence Expenditure (TDE) 2; • EU Member States could increase the efficiency of research spending if they pool research activities and work more closely together - for example, through the Commission and through the European Defence Agency (EDA); • Furthermore, it could be considered to promote the use of Synergies between Civil and Military Research. It is probable that the European Security Research Programme will co-finance technology developments which might lead to Dual - Use applications, mutually increasing the knowledge and innovation about civil and military technologies;

2

Whereas the United States spends 3.3% of TDE on defence R&T, the EU MS together spend only 1.1%

-49.3.

More and better Jobs: The development of new defence technologies, especially the increasing complexity of defence systems, will require excellent technological skills and a well trained workforce. A European defence industry able to respond to all future military needs will require a special human resources politics, including important investments in the continuous professional training of its own personnel.

10.

An industrial policy for the defence sector will emphasize the need for Member States and industry to better coordinate the national programmes, work more together and ensure that all capabilities are available which are needed for a European Security and Defence Policy (ESDP). This cooperation would ensure the best use of available resources and the identification of new technologies and products needed for future defence missions.

Note:

According with the actual political status, two Western non-EU countries – Switzerland and Norway both of them having highly developed defence industry national sectors and also officially recognized as traditional partners of the EU and of NATO in various projects, can not participate as members to the creation of EDEM. This situation can push these countries - like an unique alternative option - for a more stronger alliance and cooperation with US defence industry, including facilities for a massive implementation in Europe of the American companies in order to compete the new – born EDEM on its home location. It is the role of the Community Institutions to keep away EU from this potential threat by direct negotiations followed by political decisions. A similar case for discussion and evaluation is Israel.

11.

In order to lift the actual barrier blocking the R&D joint programs, the Council by the EDA should fill up the actual existing gap between various national politics of the MS by setting up a new “List of the Military Products” considered to be of general common interest for the Community’s members. Of course, the Council by EDA should start work on issuing the new “Euro-Armaments List” only after applying and being officially mandated by the EDA’s Ministerial Steering Board (EDA-MSB).

12.

Subject of the unanimous approval of the new “Euro-Armaments List” by the assembly of the MS, it will be the role of the EDA to define the technical & operational requirements for the Future Generation of Euro-Armaments to be designed and manufactured under the brand “Made in EU” – with the support of a team of independent experts from all MS.

13.

To have a successful “Euro-Armaments” Programme, after the Commission, the Council by EDA and the MS will decide on the rules regarding the Rights of Intellectual Property defending the Intellectual Property Rights of the Industrialists on the new-developed

3

On May 26, 2008, the EU Defence Ministers agreed to allow non-EU member Norway to participate in the Regime on Defence Procurement, under which governments and industry voluntarily commit to more open cross-border competition for defence equipment contracts. The decision was taken at a ministerial Steering Board meeting of the EDA, to which all EU members except Denmark belong. “We are delighted that Norway will be participating in the Regime, which will help our efforts to open the EDEM and further strengthen our DTIB”, said Head of the Agency Javier Solana. Norway has an Administrative Arrangement for cooperation with the EDA. Although not a member of the EU, it participates in its European Security and Defence Policy (ESDP) in many ways, contributing troops to ESDP operations and forming part of the EU Nordic Battle Group.

3

-5Know-How and the effective Business Management Principles, the EDA R&D allocated budget should be exponentially increased. Informally, the Ministers of Defence of the Member States (MS) proposed, as a short-term target, 2% of the R&D European Defence expenditure - Euro 500M based on actual expenses. The ministers mentioned also the possibility of increasing the budget limit to EUR 900 M, or 2% of the credits contracted for the development of new equipments and technologies

II.

MILITARY AND POLITICAL ASPECTS AND THEIR IMPACT ON THE SECTOR

14.

The roots of actual critical situation was all realised a long time ago, starting during the Gulf War in 1991, raising again after the subsequent Bosnian and Kosovo wars and culminating in the ongoing intervention in Afghanistan, where many European militaries have found it difficult to interoperate with the American troops - or even with other European countries contingents.

15.

Indeed, facing the ongoing rise of China, India and Russia, alongside a myriad of regional powers like Brazil and Iran, the need of a strong and militarily capable European Union has never been greater, despite of the fact that the power of the individual power of its Member States - even UK and France - is in a steady albeit relative decline. Also, the European’s influence in Washington has been reduced, due to the growing Asian-Pacific orientation of the US, but also because of the widening gulf of power between the two sides of the Atlantic.

16.

As one of its major priority, the French Presidency of the European Council (01.07. – 31.12.2008) drove forward the European Security and Defence Policy (ESDP), first of all by redrafting the still into force 2003 document 4. Also, the European Parliament's defence and security subcommittee is currently preparing its own document on ESDP.

17.

The drive to enhance Europe's military capabilities was partly responsible for the St. Malo Agreement between the UK and France in 1998, the aim of which was to provide for a greater level of European military cooperation with NATO. The conditions may now be right for the UK and France to take European defence integration on to a new plane, opening the door for all MS to fulfil the requirements that have to be met by the members of EU defence forces.

18.

Referring to EU military capabilities, EU High Representative for the Common Foreign and Security Policy, Javier Solana noted at the informal meeting of EU defence ministers in Deauville on 1 October 2008, that the European Union urgently needs national action to overcome current shortcomings. This will only be possible if Member States make informed decisions on specific projects. Over the past few months there have been some interesting proposals by the Member States, with the active support of the EDA, mainly on helicopters,

4

Compiled in 2003 by Robert Cooper and Javier Solana.

-6strategic transportation, air-sea cooperation, space, military naval observation and maritime mine clearance. 19.

In his speech at the High-level conference on EU - NATO relations (Paris, 7 July 2008), NATO Secretary General Jaap de Hoop Scheffer pointed out that many EU members accept the need for a closer EU-NATO relationship and agree that a strong ESDP is becoming increasingly necessary from a transatlantic perspective. In the same speech he tabled a proposal for specific cooperation between the two organisations on a joint strategic airlift project bringing together the A400M and the C17.

20.

Some politicians already expressed their support for the solution that the way forward is for we Europeans to band together in the European Union, which should then become a member of NATO in its own right, replacing the current twenty-odd European Members.

III.

PROPOSALS PROPOSAL 1: The Committee considers that the Council, the Parliament, the Commission, the Council and the EDA - SBMF should promote during 2009 – 2010, a full set of political, financial and economic measures enforcing the EU Defence capabilities – in order to:
eliminate the actual distressing factors discontinuing the healthy growth of the European Defence Industry – mainly: (a) Market fragmentation between different manufacturers of the same category of armaments; (b) Unnecessary duplication of the R&D activities; (c) Often poor interoperability between different national contingents, members of the European Joint Task Force (or similar);
In the same time, improving at the level of the all Member States: (a) The Defence Capabilities; (b) The Armaments Manufacturing Capacities 5. PROPOSAL 2: The Committee requests to the Commission and the Council mandatory represented by the EDA to define during 2009 a EU Common R&D Defence Programme “DEFENDING THE FUTURE!” - approved by the highest level political organs: the Council, the Commission, the High Representative for CFSP and – the most important – by the EDA SBMF. In order to promote and to accelerate the European R&D cooperation in the area of Defence projects, the main task of the new approach should be to define the List of the Military Products considered by the all MS as representing the highest priorities – “THE EURO-ARMAMENTS LIST”. The main goals which motivated that are represented by the necessity to achieve the minimal requirement of standardisation and interoperability among the EU military capabilities.

5

It’s embarrassing that when European nations – with almost 2 million men and women under arms – are only able, at a stretch, to deploy around 100 thousand at any one time. EU countries have around 1,200 transport helicopters, yet only about 35 are deployed in Afghanistan. And EU member states haven't provided any helicopters in Darfur despite the desperate need there.are deployed in Afghanistan. And EU member states haven't provided any helicopters in Darfur despite the desperate need there.

-721.

The Committee strongly recommends to the EDA – SBMF to urgently set up and approve the level of the obligatory annual contribution of the MS 6 – as percentage of the National Defence R&D Budget allocation - to the EDA Common Fund for the R & D activities.

European nations – with almost

PROPOSAL 3: During the next Czech Presidency, the Committee requests to the Council, the Commission and the EDA – SBMF:
to express their firm position regarding the definition and the implementation of the Euro-Armaments concept;
to set up a new Strategic Document on the EU Common Policy on Euro-Armaments : (a) Identifying the Challenges and defining the needed Operational Capabilities; (b) Establishing the Targets for National Investments in R&D, production and training – in order to upgrade the Combat Level of our Armed Forces; (c) Establishing the concrete actions for an efficient Cooperation between the MS; (d) Supporting the backing up of the Strategy with Political Drive;

to organize during the 2-nd qt./2009 the 1st EU Forum on Euro-Armaments – as a large
debate with the participation of the governments, industrialists, trade unions &
organised civil society.

22.

If the Euro-Armaments concept is approved by the EDA-SBMF, the Committee considers that a possible Road Map for the Euro-armaments R&D programme setting out concepts and possible stages could be represented as follows: a. EDA: using the EDA CAPTECH database, selecting and appointing the EDA Independent Experts Group (IEG) of 27 people (27 EU MS – Denmark + Norway) – one expert from each country; b. IEG: setting up the list of armaments included in the category of "Euro-armaments" to be developed jointly and to become operational within all EU MS Armed Forces; defining the Technical and Operational Requirements (TOR); c. EDA: sending the proposed list of Euro-armaments and the TOR to the military joint staffs of all MSs for evaluation and comments; d. EDA: receiving the comments and requests of each MS declaring their interest in participating (or not) in a specific Euro-armament project, taking needs into account and establishing the final order and schedule for developing Euro-armaments; e. IEG: modifying initial TOR in accordance with amendments received from the MS;

6

The Ministries of Defence of the MS already approved last year, like short-term objective, an annual contribution of each country representing 20% of the National Defence R&D allocated budget, the financial estimation being close to EUR 500 M.

-8f.

EDA: selecting priorities for Euro-armaments in accordance with the existing budget;

g. EDA: establishing the optional share of national financial contributions for each Euroarmaments project in accordance with MS expressions of interest; h. IEG: preparing tender documents; i.

EDA: launching the tender procedure to select the integrator – company/JV - in charge of drawing up technical documentation and developing the project demonstrator for each type of Euro-armament project;

j.

IEG: technical and operational evaluation of bids;

k. IEG: field test and evaluation of the demonstrator, before taking any final decision on starting industrial production to meet firm orders by MS; l.

IEG: preparing tender documents;

m. EDA: as proprietor of the intellectual rights of the project and of the demonstrator, the Agency will select the system manufacturing integrator by a tender procedure; n. IEG: technical and operational evaluation of bids.

PROPOSAL 4: The Committee considers that the Parliament, the Council and the Committee should set up a special EU INTER-AGENCY COMMITTEE FOR THE CONTROL OF THE FOREIGN INVESTMENTS IN THE AREA OF EUROPEAN AEROSPACE AND DEFENCE INDUSTRY – a EU adapted version of CFIUS 7.
Its task: to reviews the Community security implications of foreign acquisitions of the EU companies or operations 8.

7

8

The Committee on Foreign Investment in the United States (or CFIUS) is an inter-agency committee of the United States Government that reviews the national security implications of foreign acquisitions of U.S. companies or operations. Chaired by the Secretary of the Treasury, CFIUS includes representatives from 12 U.S. agencies, including the Defense, State and Commerce departments, as well as (most recently) the Department of Homeland Security. CFIUS was established by Gerald Ford's Executive Order 11858 in 1975. Ronald Reagan delegated Presidential oversight to CFIUS by his Executive Order 12661 in 1988. A Russian consortium owns +6% percent of EADS common stock. Analysts expect the Russian consortium of banks and aircraft companies to increase their ownership of the EADS to at least 10% of common stock. Given the current low share prices, the politically-controlled Russian banks will probably increase their holdings of this stock. When evaluating the various political and economic issues, EADS management should consider the fact that an increased Russian share holding might well empower its high-level officials, resulting in additional demands on the Airbus Board.

-9PROPOSAL 5: The Committee considers the Organisation for Joint Armaments Co-operation (OCCAR) created by France, Germany, Italy and the UK to be a precursor of a genuine common armament agency/programme management agency, and recommends that Council start consultations with all Member States regarding their position on a possible official merger/joint cooperation between this organisation and the EDA, as envisaged in the joint action that created the EDA. This would allow new programmes to start aimed at developing a new generation of major European armament systems to be used jointly by all Armed Forces and Security Forces of the EU Member States. The Committee is putting forward this proposal in good faith, and understands that implementation is ultimately solely a national responsibility.

23.

Regarding the position expressed by some international politicians supporting EU to become a member of NATO in its own right and replacing the current twenty-odd European Members of NATO, the Committee believes that this option is not of actual interest for the moment!

a.

Of course, this requires much Political Solutions, not least a decision by the so-called “Neutral Member States” like Austria and Ireland to take a firm position;

b.

The EESC thinks that this solution will also necessitate considerable Institutional Changes in Brussels and a certain Transfer of Powers between Member State capitals and the European capital should be actually postponed …

c.

… but can be considered like a goal for the New Generation of Young Politicians and Military Experts can work towards!

24.

Finally, the Committee much appreciates the official public position expressed on 30 May 2008 by the Council on current and future problems of the EU defence industry and agrees that this document should be included within the Commission's strategy as a basis for key guidelines to be followed by the future action plan for the sector 9.

IV.

THE EU DEFENCE INDUSTR IS STILL COMPETITIVE?

25.

The answer is “Yes” – but does face a large number of constraints:

25.1.

The European Market remains fragmented, each MS trying to preserve its status of “Donor of Orders” and “Protector” of its own National Defence Industry;

25.2.

In fact, the so-called Competition with the US is an asymmetric one, because of the Gap between the levels of the Budgetary Allocations and of the Lack of Reciprocity regarding the Market Access.

9

PRESS RELEASE, 2871st Council meeting on Competitiveness (Internal Market, Industry and Research), 29-30 May 2008. par. 3.3. http://data.ellispub.com/pdf/EN/2008/Council/100733.pdf

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TYPE OF DEVELOPED SYSTEM

EUROPE

USA

LAND SYSTEMS Main battle tank

4

1

Armoured Infantry Fighting Vehicle

16

3

155 min howitzer

3

1

Fighter-strike

7

5

Ground attack – trainer

6

1

Attack helicopter

7

5

Anti-ship missile

9

3

Air-air missile

8

4

Frigate

11

1

Anti-submarine torpedo

9

2

Diesel submarine

7

0

Nuclear-powered submarine

2

1

89

27

AIR SYSTEMS

SEA SYSTEMS

TOTAL

TABLE 1: Duplication of R&D activities and programmes in the EU Member States (Source: UNISYS 2005, page 104)

Research Cost (Billion Euro)

Expected Output (Units)

EUROFIGHTER

19.48

620

GRIPEN

1.84

204

RAFALE

8.61

294

JSF (US)

19.34

3003

AIRCRAFT

TABLE 2: Combat Aircraft research costs (Source: UNISYS 2005, page 105)

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European - US Defence Expenditure - General Europe Total Defence Expenditure

10

US

11

€ 201 Bn

€ 491 Bn

Defence Expenditure as a % of GDP

1,78%

4,7%

Defence Expenditure Per Capita

€ 412

€ 1,640

Table 1: Comparison between EU and USA in the area of Defence Expenditures General - for the FY2006.

European - US Defence Expenditure - Reform Europe

US

1,940,112

1,384,968

484,827

699,520

Defence Spent per Soldier

€ 103,602

€ 354,898

Investment (Equipment Procurement and R&D) per Soldier

€ 20,002

€ 102,489

Military Personnel 12 Civil Personnel from Military

Table 2: Comparison between EU and USA in the area of Defence Expenditures – Reform - for the FY2006.

10 11 12

Europe means 26 EDA participating Member States. Euro/US Dollar exchange rate is based on average for 2006 rate of 1,2556. Authorized strengths of all active military personnel; includes non- MoD/DoD personnel in uniform who can operate under military command and can be deployed outside national territory.

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