‘Trading and competing’ is as important as ‘pooling and sharing’ for European defense

A guest posting by Dr. Christina Balis, Principal and Director of European Operations for Avascent

The EU Council’s conclusions last month on the common security and defense policy (CSDP), an event eagerly awaited since the decision in late 2012 to put defense on the EU agenda, proved in the end fairly predictable—both in terms of what was included and what was not.

The overarching theme of the Council’s final declaration can be summarized as pooling resources, harmonizing requirements, and increasing cooperation in pursuit of greater efficiencies and policy coherence—not a small feat when considering the need to accommodate the often-competing views of 28 stakeholders. Yet, regrettably, one critical issue was left largely unaddressed: the broader internal market for defense and the lack of a corresponding shared industrial strategy. Too much focus on increased cooperation among EU members now risks eclipsing much-needed efforts in the area of competition.

Unfinished Business

The Council’s so-called third cluster, titled “strengthening Europe’s defence industry,” was supposed to cover topics of an economic nature, while leaving issues of policy (“increasing the effectiveness, visibility, and impact of the CSDP”) and operations (“enhancing the development of capabilities”) to the first and second clusters respectively. The Council’s conclusions include one reference to the need for a “well-functioning defence market” based on the principles of openness, equal treatment and transparency, and stress the importance of ensuring the “full and correct implementation and application of the two defense Directives of 2009.” Ensuring greater cross-border market access to subcontractors and SMEs—a particular concern of member states with smaller or less-developed defense industries—is a rare recognition of the value of the internal market. 

In the end, however, the Council falls short of calling for any concrete action to ensure compliance with internal market rules, and merely “notes” the Commission’s intent to develop a related implementation roadmap. The Parliament’s earlier call on the Council to “provide the necessary fresh and ambitious impetus and to lay down guidelines, overarching political priorities and timelines for supporting a truly European defence technological and industrial base” went unheeded.

Towards a “Second Defense Package”

The EU ‘Defense Package’ of 2009, consisting of the two directives on defense and security procurement (2009/81/EC) and intra-EU transfers of defense-related products (2009/43/EC), was the first critical legislative step towards the creation of an internal EU defense market. In addition to delays in transposing these directives into national law, implementation has been patchy and enforcement weak at best. As of March 2013, all EU member states have at last, even if unevenly, transposed Directive 2009/81/EC. Avascent’s analysis of contract awards posted via the EU’s Tenders Electronic Daily suggests that nine months into the defense procurement directive’s full transposition, member states are still far from having embraced or correctly interpreted its intent despite progress in the area of transparency. 

Directive 2009/81/EC applies to all defense purchases above a certain threshold, as well as to the procurement of sensitive equipment, works and services that have a security purpose and involve classified information. In the area of defense, the directive allows for several derogations consistent with the exceptions provided for by the Treaty on the Functioning of the European Union (TFEU). Of these exceptions, the most notable for its potential for (and past record of) abuse is Article 346 TFEU. It allows member states to diverge from the directive’s rules if considered necessary to protect their essential security interests. Per its July communication, the Commission intends to ensure that the directive is strictly and correctly applied moving forward. One hopes that such improved oversight will also come with increased enforcement powers. 

Five years after the first Defense Package was adopted by the Council, a fresh look is needed at both progress to date and required changes for the future. The following three propositions could serve as a starting point for such a discussion in 2014.

Put the single defense market on the agenda. Given broad recognition among EU member states that CSDP should be a recurrent agenda topic at EU summits, the Italian EU presidency during the second half of the year could propose the single defense market as an agenda topic leading to the December 2014 EU Council summit. 

Give competition a voice. Following last year’s transposition of the Defense Procurement directive, the Commission might consider dedicating a section on the defense industry in its 2014 competition report. This would send a message that defense is as much a part of the EU’s internal market as any other industry that claims €96 billion in annual turnover, more than 1.3 million direct and indirect jobs across Europe, and a multiplier of 1.6 on GDP. 

Evolve the policy and legal framework. While practical reasons exclude new legislation anytime soon, it is not too early to start a debate on potential amendments to Directive 2009/81/EC that take into account important proposals around innovative procurement techniques, facilitating cross-border contracting and joint procurement, as well as further improving transparency of existing processes. 

Progress toward a truly functioning EU internal defense market is urgently needed. It cannot wait until June 2015, when the Council is expected to assess progress on its recent conclusions, or even until summer 2016, the due date for the Commission’s implementation report on the two defense directives. Even a basic recognition by EU leaders in 2014 that “trading and competing” is as important as “pooling and sharing” would serve as tangible proof of their latest affirmation that “defense matters.”

This is an abbreviated version of Avascent’s latest publication on its series on the European Defense Industrial Base Forum.