Concern at EU defence plan delays

Date: 03/10/1996

By Tim Jones

NINE months after it put together an ambitious yet spartan programme to help rescue Europe's defence industry from decline, the European Commission is becoming frustrated at its slow progress.

Introduced in January, the scheme, aimed at 'Europeanising' national defence and aerospace industries to give them the kind of market their American counterparts enjoy, is stuck in legislative mud.

Although it has been discussed by industry ministers, they were reluctant to take decisions without the say-so of their cabinet colleagues specialising in defence policy and foreign affairs, and the Italian presidency was unable to decide which Council of Ministers should take responsibility for the issue.

Industry Commissioner Martin Bangemann is hoping Ireland will have more luck in choosing a venue for a debate which he considers vital to EU industrial interests.

“To prevent the national (defence) industries from a substantial loss of their economic power and to prevent Europe from a substantial loss of its international competitiveness, there is a need for action at European level,” he said in a recent speech to industrialists.

Bangemann does not care where the programme is debated as long as it is actually discussed somewhere, at a time when the industry is going through its most difficult period since the end of the Cold War.

Over the past decade, 600,000 jobs have been lost in the military aerospace, shipbuilding and armoured vehicles industries in Europe. The shake-out has been most ferocious in the UK, where 70,000 jobs were lost between 1980-92 and 50,000 more have been shed in the past four years.

Huge reductions in military budgets, which had grown predictably and steadily for 40 years, pulled the carpet from under many of Europe's major defence contractors.

Meanwhile, newly-emerging hardware producers in Israel, South Africa and Central and Eastern Europe are adding to the competition already coming from the big US manufacturers.

Employment in the sector has shrunk in Italy and is starting to go down the same road with a vengeance in France, where the government has implemented a tough plan to reduce military spending as part of its budget-cutting plans to prepare the country for monetary union.

In May, French President Jacques Chirac unveiled a plan to slash defence spending in 1997-2002 from 120 to just 80 billion ecu which includes ending con- scription into the armed forces.

All governments acknowledge the type of measures which have to be taken to rationalise their defence industries, but actually persuading them to do so is like pulling teeth.

Industries protected for years by the presence of the Soviet threat have suddenly had to justify their existence. As they slowly moved towards necessary reforms - wholesale restructuring of firms to reduce their costs, mergers to end the duplication of product ranges, and joint procurement - governments themselves called on the EU to coordinate measures.

In November last year, the ministers of the seven countries involved in this sector (Germany, France, Italy, the UK, the Netherlands, Spain and Sweden) held a meeting with Bangemann and his colleague, Research Commissioner Edith Cresson, to run through the issues.

From this, the two Commissioners pieced together an action plan to try to put Europe's defence industry on an equal footing with the Americans.

“The Commission sees its responsibility in creating a framework favourable to the development of strong and competitive companies operating in a European-wide market,” said Bangemann.

Some of the Commission's proposals should prove relatively easy to implement, such as the drawing-up of European defence equipment standardisation and harmonisation rules, particularly for telecommunications and information technology products.

Much more difficult will be the recommendations from the Commission regarding public procurement and competition.

The ability to supply armed forces anywhere in the Union is something that the major industries support.

“The ideal would be that it should no longer make any difference, politically, legally and administration-wise, whether an aerospace company operates in France, Great Britain, Italy, Spain or Germany,” says Manfred Bischoff from Germany's DASA.

The Commission is calling for greater use to be made of primary contractors, such as Eurocopter, which can then farm out manufacturing work to their constituent companies. At the moment, firms are tending to duplicate bids and, as a result, are sometimes losing out to American rivals.

Moves to end this kind of duplication will be helped by a proliferation of cross-border mergers, such as the creation of Messier-Dowty and Matra BAe Dynamics (see box).

Most controversially, the Commission wants to see the normal rules of public procurement - including common notices to tender for contracts and selection according to price and quality - apply to the sector, although this would be tailored to countries' national security needs.

It is certain to take years of negotiations to create a public procurement market for military products, particularly as, at the moment, governments cannot even agree who should debate the issue.

Until such rules are agreed, European companies already competing with one hand tied behind their backs against

tough American rivals such as McDonnell Douglas and Lockheed Martin-Loral will find it hard to use the other.

“The American market is in fact an internal market, whereas we still have multiple national markets in Europe,” explains Bangemann.

The US public procurement market is worth 75 billion ecu and is dominated by firms which are ruthless about cost-cutting. The largest national markets in Europe - Germany, France and the UK - are individually six times smaller than the US.

Huge multinational projects such as the German, Spanish, Italian and British 'Eurofighter' project will be encouraged, since development costs for new aircraft are impossible to recoup unless carried out jointly between many manufacturers.

The recent decision by the UK government to go ahead with its part of the deal, after months of negotiations between the parties, has given the project a boost.

Drafting common rules for competition and state aid could prove even more difficult. While the Commission can complain about the levels of public money going into Crédit Lyonnais, it has no right to even give its opinion on the recent 570-million-ecu capital injection for French tank maker Giat.

Telling member states when and how much money they can pump into what they consider a vital defence interest would touch on the rawest of national sovereignty nerves.