European military-industrial cooperation

October 10, 2005 - nr.20
Summary

Introduction

 

On 14 July 2000 the Ministers of Foreign Affairs and Defence asked the Advisory Council on International Affairs for its advice on the development of a European military-industrial policy.1 Both ministers emphasise the fact that the development of a European Security and Defence Policy (ESDP) presupposes the presence of a high quality industry, capable of providing European countries with good, modern equipment when it is needed and under competitive conditions. At the same time they point out that the new momentum in the development of an ESDP and the new dynamism in military-industrial cooperation have as yet had few tangible effects on European equipment cooperation. This they attribute to the fact that national military and industrial interests have remained a very dominant factor in the procurement policy and the defence equipment policy of European nations. Until now these national interests often formed an obstacle to opening up the defence equipment market and to the joint development, production and procurement of equipment. As far as the Netherlands is concerned, the Ministers continue, there is a ‘clear willingness to allow national industrial interests to be less prevalent, provided other countries also actively work towards the greatest possible openness in the defence equipment market, certainly within Europe and preferably also on a transatlantic level’.

Against this background the Ministers submit a number of questions for the Advisory Council relating to six different areas of interest:

  1. An assessment of the general political and industrial climate for an open common market for defence equipment, including an assessment of the differences between big and small European countries.
  2. Suggestions for the way in which positive attention for the ESDP can be translated into greater political support for a European defence equipment policy.
  3. Options for a concentration of European military-industrial strength while maintaining healthy competition relations.
  4. An analysis of the possibilities for a European Armaments Organisation and, in this context, the significance of Article 296 of the EC Treaty.
  5. Suggestions on how to achieve effective and equitable transatlantic militaryindustrial cooperation.
  6. Possibilities for European R&D programmes for (more) defence-related projects

These questions were examined by the Peace and Security Committee of the Advisory Council on International Affairs. This Committee consists of the following members: A.L. ter Beek (Chairman), Prof. G. van Benthem van den Bergh* (vice- Chairman), Dr. A. Bloed, Dr. Ph.P. Everts*, Prof. F.J.M. Feldbrugge, Lieutenant General G.J. Folmer (rtd.)*, J.G.N. de Hoop Scheffer*, Prof. K. Koch, Dr. M. van Leeuwen, Rear Admiral R.M. Lutje Schipholt (rtd.)*, L. Sprangers, Prof. B.A.G.M. Tromp*, General A.K. van der Vlis (rtd.)*, E.P. Wellenstein* and Prof. Dr. F. Wielenga. The members whose names are marked with an asterisk participated in the working group which prepared the advice, under the chairmanship of Prof. B.A.G.M. Tromp. Dr. B. Knapen, P. Dankert en Prof. J.Q.Th. Rood of the European Integration Committee of the Advisory Council on International Affairs were correspondent members of the working group. The activities involved in producing the advice were supported by the official advisors to the Peace and Security Committee Commodore H. Emmens, B.W. Bargerbos (Ministry of Defence) and H.G. Scheltema (Ministry of Foreign Affairs) The secretariat was in the hands of H.A. Würzner (Secretary Peace and Security Committee), with the support of interns G. D. van der Staaij, A.C. Buyse en M.F. de Lange. The text of the advice was adopted by the Advisory Council on International Affairs at its meeting on 20 April 2001.

In preparing the advice the members of the working group consulted representatives of the Ministries of Defence and Economic Affairs, the Netherlands Defence Manufacturers Association (NIID), Stork, Thales Nederland and the German Ministries of Foreign Affairs and Defence. In addition the working group also paid fact-finding visits to Brussels (European Commission, Dutch Permanent Representation to the EU), France and the United Kingdom. The Advisory Council on International Affairs would like to express its gratitude for the particularly intensive support it received at the Dutch Embassies in Berlin, London and Paris and at the Dutch Permanent Representation to the European Union and the German Embassy in The Hague. Members of the working group also took part in the symposium ‘The globalisation of the defence industry. Policy implications for NATO and ESDI’ organised on 29 and 30 January 2001 by the British Royal Institute of International Affairs (RIIA). A list of those consulted by the working group and of the speakers at the RIIA symposium is attached to this document as Annex II.

The Advisory Council has established that the European defence industry consists of a core of major, prominent companies and a periphery made up essentially of subcontractors, both domestic and international. Defence companies in four countries – the United Kingdom, France, Germany and Italy – make up the core of European defence industry. They account for 80 per cent of European defence production and 90 per cent of European Research and Technology (R&T).2 Within the individual countries the defence industry – insofar as it exists – frequently consists of a number of relatively large arms manufacturers, usually with a vertical organisation, and a larger number of specialist companies focussed on niche markets.3 Aircraft production and defence electronics4 make up seventy per cent of the European defence industry, with a great deal of additional value being ascribed to components and sub-systems – often of a commercial nature – produced by medium-sized and small companies.

Over the last five years in particular there have been a large number of mergers and take-overs in the defence industry, both in the United States and in Europe, leading to a substantial restructuring of the military-industrial sector. The most important military-industrial sectors (the production of fighter aircraft, helicopters, missiles, satellites, electronic systems, army systems and, to a certain extent, naval ships) are increasingly dominated by a small number of ever more internationally oriented companies. Through holdings, joint ventures and military cooperative programmes they are establishing numerous connections, both among themselves and with smaller specialist companies. Annex III gives an overview of the major defence conglomerates in each sector. In the discussion about the adaptation of European military- industrial policy to take account of the factors outlined above there are three categories of players: governments, industries and international organisations. Governments determine their interests primarily by weighing up cost effectiveness and (national) industrial interests. The defence industries’ prime concern is their continued existence, which is translated into a search for optimum profit margins, productivity and market value. Finally, international agencies are seeking to create favourable conditions for international cooperation between these industries while incorporating, obviously, an important role for themselves. The questions put by the government in the request for advice all relate essentially to the shifts and changes taking place within and between the parties mentioned above. This is reflected in the structure of this advice.

As far as the Advisory Council is aware there has to date been no comprehensive analysis of the way in which at the end of the 1990s the changes in the militaryindustrial sector, on the one hand, and the position of governments and international organisations, on the other hand, are interlinked. The Advisory Council therefore felt that it was first necessary to establish a situation report before being able to assess the Dutch position as a whole. While fully aware that such a situation report significantly affects the length of the text, the Advisory Council believed that this would be compensated for by the added value for the Dutch debate. This advice also includes a brief discussion of various European and American armaments programmes. However, it is not the role of the Advisory Council to express opinions on the operational, financial or industrial advantages and disadvantages of specific weapon systems which the Dutch government is considering buying or has bought. The Advisory Council is also fully aware that specific areas covered in this advice have much ground in common with advice issued previously by the Advisory Council. 5 Where relevant this will be indicated in a footnote.

 

In order to provide an insight into the interaction between changes in the militaryindustrial sector, the position of governments and international organisations and how these affect Dutch interests, this advice will be preceded by a summary and a list of the recommendations. Specific recommendations to the government are given in italics in both the summary and the main text. In the main text each chapter begins with a resume of the specific questions from the request for advice covered in that chapter. Chapter 1 of this advisory paper considers the link between the European Security and Defence Policy (ESDP) and the interests of the European military industry. Chapter 2 then gives an overview of the most important changes within the European defence sector in recent years. Chapter III takes a closer look at transatlantic military-industrial relations, followed in Chapter IV by an evaluation of the institutional and organisational aspects of European military–industrial policy. Chapter 5 offers an analysis of Dutch interests in this whole area.


1 The request for advice is attached to this document.

2 K. Vlachos, ‘Safeguarding European competitiveness. Strategies for the future of European arms production and procurement ’, Paris 1998 (WEU Institute for Security Studies, Internet version), p. 8.

3 HThe core of national companies is by no means always part of the core of European companies. For example Hollandse Signaal Apparaten (Thales Nederland) is undeniably one of the biggest Dutch defence companies but it holds only joint 70th place on the SIPRI list of the top 100 defence companies. No other Dutch companies appear in the top 100. See: SIPRI, Yearbook 2000, London 2000, p. 331. ‘Niche markets’ in this paper refers to small, specialist sectors of the defence market.

 

4 K. Vlachos, ‘Safeguarding European competitiveness’, p. 8.

5 This applies particularly to the subject of arms exports. In this context we refer to earlier Advisory Council advisory papers ‘Conventional arms control; urgent need, limited opportunities’ (Advice 2, April 1998) and ‘Africa’s struggle. Security, stability and development’ (Advice 17, December 2000).

Advice request

T
The Chairman of the Advisory Council on
International Affairs
Prof. R.F.M. Lubbers
Postbus 20061
2500 EB 's-Gravenhage

 

Subject

The development of a European military-industrial policy

 

Dear Mr Lubbers,

At its meeting in Helsinki on 10 and 11 December 1999 the European Council took new steps towards the development of a European Security and Defence Policy (ESDP). Among other things the European Council approved a goal for ground forces, namely a force of 50,000 to 60,000 strong. In Helsinki decisions were also taken relating to international aspects of the ESDP: the establishment of a standing Political and Security Committee, a Military Committee and a Military Staff, which pending final decisions will first operate as interim bodies.

The approach adopted by the European Union with regard to the development of an ESDP is in accordance with earlier NATO decisions, in particular that of the NATO summit of April 1999, in which the Alliance expressed its willingness in principle to make available planning staffs, command facilities and other collective resources for operations under the leadership of the European Union. This will prevent unnecessary duplication of effort.

A common European security and defence policy presupposes the presence of a high quality industry, capable of providing European countries with good, modern equipment when needed and under competitive conditions. The Cologne European Council emphasised particularly the desire to "strengthen the industrial and technological defence base, which we want to be competitive and dynamic". For several decades European countries have been cooperating on equipment, first primarily within the "Independent European Programme Group" and then in the "Western European Armaments Group" (WEAG). This cooperation attempted to harmonise operational requirements and procurement schedules, to improve the rules for joint projects and to stimulate joint research and development. Other relatively recent initiatives are the founding of the OCCAR armaments agency in 1996 by Germany, France, Italy and the United Kingdom and the "six nation initiative" of July 1998, in which the same four countries and Spain and Sweden express their agreement in principle to extended armaments cooperation.

However, the emphasis in European defence equipment cooperation in recent years has lain with industry. Mergers, take-overs and other forms of cooperation have ensured that European companies, most noticeably in the space and aircraft sector, have scaled up. Examples of this are the British Aerospace take-over of Marconi in the United Kingdom and the merger of Aérospatiale and Matra. This was followed by the merger of Aérospatiale- Matra, Dasa and the Spanish Casa to form the European Aeronautic, Defence and Space Company (EADS) and the recent purchase of the British company Racal by the French Thomson-CSF. This makes Thomson-CSF the third European consortium in the world’s top ten military producers, the others being EADS and British Aerospace. The industrial restructuring is intended to make the European defence industry more competitive. Other important conditions for this include reduced costs, increased productivity and an improved market effect. This may sometimes require drastic measures: it is by no means certain that the necessary political will exists. In this context the question arises as to how the principles of the Internal Market relate to the restructuring of the European defence industry.

With this major restructuring the European industry is following in the footsteps of the American competition, which has already undergone a far-reaching process of reorganisation and scaling up. However, the American defence industry is not solely a competitor: it is increasingly a cooperative partner with whom European industry can obtain comparative advantages. Until recently it was primarily British industry that had close transatlantic links, but in the meantime companies from other European countries, most noticeably France and Germany, have acquired American partners. Up to now politics have limited the possibilities for cooperation. The United States in particular imposes strict security demands on cooperation, which companies from some countries are virtually by definition unable to fulfil. In addition the American market is very inaccessible to foreign enterprises wishing to be able to make a bid on a competitive basis. Forms of industrial cooperation can contribute to openness and transparency in transatlantic defence equipment relations. This is important because the construction of a viable, competitive European defence industry may be accompanied by suggestions for protective measures against foreign, in other words American, competition. As indicated earlier, to achieve openness and transparency it will be necessary to remove some of the obstacles, especially in American legislation, including in the area of technology transfer.

The new momentum in the development of a common European security and defence policy and the new dynamics of industrial cooperation have as yet had few tangible effects on equipment cooperation. It is significant that the passage in the documents of the Helsinki European Council referring to "strengthening the European industrial and technological defence base" repeats almost word for word the text from Cologne. Judging by this text it would seem that with regard to equipment nothing worthy of note happened between June and December 1999. Reality is different, but no more positive.

During the course of 1999 the EU was namely unable to achieve agreement on a Commission proposal for a common position on European defence equipment policy. The proposal contained a number of measures relating to the imposition of customs duties on military goods, putting out to public tender and cross-border movement of military goods. Accepting this common position would have been a further step towards demolishing the persistent taboo on EU involvement with this subject. This turned out not to be possible. Nevertheless this subject will appear again on the agenda in 2000. If the EU takes over the tasks of the WEU a solution will also have to be found for the WEAG. The outlines of this are not yet clear.

Over the years military-operational cooperation among European countries has intensified. This cooperation is important, not least because it can contribute to increasing interoperability. However, experience teaches us that operational cooperation alone does not lead to the standardisation of materiel.

All in all, over the last decades we have seen that national military and industrial interests can be a very dominant factor in procurement policy and the defence equipment policy as a whole. Until now these national interests often formed an obstacle to opening up the defence equipment market and to the joint development, production and procurement of equipment. As far as the Netherlands is concerned there is a clear willingness to allow national industrial interests to be less prevalent, provided other countries also actively work towards the greatest possible openness in the defence equipment market, certainly within Europe and preferably also on a transatlantic level.

The current situation, whereby cooperation at governmental level is lagging behind that at industrial level, can have adverse consequences. It is conceivable that several major European conglomerates will be left over on the supply side. In that case there is in principle a risk that European industry will determine the European defence market. This danger could certainly arise if European governments, either singly or as part of a combined European expression of requirements, were not prepared to consider a non-European offer. The question is how government and industry, working together and bearing in mind each other’s responsibilities, can encourage optimum relations. This will require good arrangements for government participation in defence companies and government support, for the harmonisation of arms export policy to third countries and for cooperation in research and development.

Against this background we have a number of questions for the Advisory Council:

  • What is the Advisory Council’s assessment of the general political and industrial climate for a European military-industrial policy and for an open common market for defence equipment? How does the Advisory Council see the differences between large and small European countries? Is there such a difference between the defence industry in the six countries mentioned above and other European nations, including the Netherlands, that a true common policy would be inconceivable? Would the Netherlands benefit from an explicit pro-European or transatlantic direction in this area or would the interests of the Netherlands be better served by a policy of choices being made on a case by case basis?
  • In the opinion of the Advisory Council, how should the government ensure that the positive attention being given to the CESDP will be translated into greater political support for a European defence equipment policy whcih has a strong industrial and technological base and whcih promotes international competitiveness? How can this best be achieved, bearing in mind the relevant statements from the Cologne and Helsinki European Councils?
  • Competitiveness and a high technological level demand the concentration of industrial strength, which in itself can pose a threat to competition relations. How can governments prevent this and help establish optimum relations?
  • Is it possible to integrate a new ‘European armaments organisation’ into the European Union? How can the involvement of the European Commission and the link with the EU’s internal market policy and industrial policy best be taken into consideration? In this context, what is the vision of the Advisory Council with regard to Article 296 and the possible need to amend it?
  • How can a European military-industrial policy be implemented in an open manner, in particular with regard to the United States? How can European nations act to remove the obstacles to access to the American market and to stimulate effective, more equitable transatlantic cooperation? What are the implications for competition relations of the discrepancy between American and European expenditure on defence technology research? How can governments on both sides of the Atlantic contribute to transparent relations and encourage both cooperation and competition?
  • It is frequently not easy to distinguish between civilian and military technology. Until recently defence was more or less a taboo subject for the EU. Now that this attitude has been consigned to the past the question arises as to whether the Advisory Council believes that European R&D programmes offer opportunities for (more) defence-related projects.

 

On behalf also of the Minister of Economic Affairs and the Secretary of State for Foreign Affairs we are asking the Advisory Council on International Affairs for advice on these and possible other matters relating to the development of a European military-industrial policy. The future of the WEAG will be discussed by Ministers of Defence in mid-November and may also be included on the agenda for the Nice European Council. For this reason we would like to receive your advice by the beginning of November 2000 if possible.

We remain yours sincerely,

MINISTER OF DEFENCEMINISTER OF FOREIGN AFFAIRS
F.H.G. de GraveJ.J. van Aartsen
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