Europe’s defence and security industry, which provides highly skilled employment, contributes significantly to the security of its citizens and is crucial in enabling the EU to operate autonomously and to cooperate internationally. The sector also drives economic growth, involving cutting-edge research and development in fields such as electronics, ICT, transport, biotechnology and nanotechnology. Many new technologies developed for defence have also turned into drivers for growth in civil sectors such as in global positioning and earth observation, and companies producing ancillary equipment and systems can be found all over Europe.

Where to from here?

Developing and nurturing  an innovative and competitive European Defence Technological and Industrial Base (EDTIB) operating in an open and transparent European Defence Equipment Market is key in order to deliver EU and Member State policy objectives and, in particular, those of the EU Common Security and Defence Policy (CSDP). For this to be achieved however, a number of challenges must be overcome, and current budget cuts in nearly all EU Member States affecting procurement and R&D must be faced.

The defence industry, which is highly regulated at national level due to its sensitivity, differs from other economic sectors because it depends almost entirely on national governments. Industry turnover is either generated through state customers or exports to third country governments.

The sector is also characterised by marked fragmentation along national lines, whilst big companies are concentrated in only six countries – France, UK, Germany, Italy, Spain and Sweden – with the UK and France dominating.   Europe's defence-related industries – primarily the defence part of sectors such as aeronautics, space, electronics, land systems and shipbuilding – have largely operated so far outside the internal market rules.

This situation has generated red tape and hampered innovation. Many defence programmes and research projects are duplicated. The EU, for example, has 16 major naval yards (compared to three in the US) and 11 tank programmes (compared to two in the US).

Furthermore, national systems to control the transfer of defence equipment to other Member States often do not distinguish between exports to third countries and transfers between Member States. The lack of a harmonised licensing regime has hampered the security of supply between Member States and cost over an estimated €400 million a year. In addition, the defence industry has been badly hit by the financial crisis, with falling defence budgets in the EU and ongoing Member State reviews of national defence strategies.

Providing solutions

In order to open up national markets, reduce fragmentation, and increase transparency and the overall competitiveness of the sector, the European Commission adopted in 2007 the  Defence Package including the Communication "A strategy for a stronger and more competitive European defence industry" and proposals for two directives, which were approved by the Parliament and the Council in 2009. These two Directives – Directive on Defence and Security Procurement (2009/81/EC) and Directive on the Simplification of Intra-EU Transfers of Defence-related Products (2009/43/EC) – must be transposed into national law during the summer of this year.

Enhancing efficiency of defence spending

The procurement Directive coordinates national award procedures and therefore streamlines the regulatory patchwork of Europe's defence and security markets. It adjusts existing EU public procurement law to suit the specificities of the defence sector, in particular by establishing specific provisions on security of supply and security of information. These are vital for a sector where works, supplies and services can often be extremely sensitive.  The Directive also allows the use of flexible award procedures, which is important to manage the complexity of many defence acquisitions. All this will enable Member States to use the new rules for the vast majority of their defence procurement contracts which have been exempted up until now from EU rules on the basis of Article 346 TFEU.

Importantly, the Directive will bring a requirement for the EU-wide publication of contracts over a certain value, underpinned by non-discriminatory award procedures. This will encourage greater transparency and openness, make public procurement more efficient and improve market access of European companies in other Member States.

Promoting industrial cooperation at EU level

The Directive on intra-EU transfers on the other hand aims to establish a genuine European market for defence equipment in which common production projects are stimulated and competitiveness of EU defence companies is enhanced, without sacrificing Member States' control over their essential defence and security interests. The Directive will achieve this through a harmonised licensing procedure which uses a common set of simplified licences and harmonized reporting requirements for suppliers of defence-related products that will contribute to increasing transparency.

It will encourage Member States to replace their existing individual licences with general licences for intra-EU transfers where the risk of unauthorised re-exportation to third countries is limited. For example, this would cover purchases by armed forces of another EU Member State and transfers to certified companies of components in the context of industrial cooperation. Furthermore, general licenses will largely contribute to reducing the current administrative burden for licensing authorities and companies.

Overall the Directive will support cross-border industrial cooperation by enabling defence industries to benefit from smoother and more predictable supply chains. SMEs, often operating as defence subcontractors, will more easily be able to join cross-border programmes managed by large system integrators, and security of supply for EU armed forces relying on cross-border deliveries will be improved.

A dynamic strategy is neededto improve Europe's existing approach to the defence industry. The transposition into national law of these two Directives and closer cooperation will help increase competitiveness within the sector, prepare it for future challenges and promote its capacity for innovation.

The text only of the articles can be republished as long as the source of the article is quoted: Enterprise & Industry magazine (http://ec.europa.eu/enterprise/magazine/index_en.htm), © European Union, 2008 - 2012