European arms industry to be opened up to competition

European Union defence ministers adopted a plan today to open up their €30bn arms industry to increased cross-border competition – a landmark move designed to cut costs for tight military budgets.

The new “code of conduct” is voluntary and non-binding, but it marks a breakthrough for the EU after decades of trying to persuade nations to relax the protection of their tightly guarded national defence markets and allow Europe’s defence companies to compete on a continent-wide level.

“It is a critical first step,” said Nick Witney, head of the European Defence Agency. “This will strengthen the defence industrial base in Europe and make it more globally competitive.”

Governments have been able to protect their national defence industry champions because military contracts have been largely excluded from EU legislation that has ripped down barriers to trade within Europe in other sectors.

EU officials say more than half the annual spending on new military equipment in Europe lies outside EU free market rules. Ministers hope increased competition will drive down prices for new weapons.

“This code of conduct has the potential to deliver defence capability in a way that provides better value for money to the taxpayer,” said British Defence Secretary John Reid.

By allowing companies to compete more in each others’ markets, the EU hopes to encourage a restructuring of the continent’s fractured industry so it’s better placed to take on US rivals on world markets.

“Unless defence industries, which are still in many cases confined to national markets, are able to break out of those markets and enjoy demand on a more continental scale they will find it increasingly difficult to run profitable and internationally competitive businesses,” warned Witney, whose agency was set up last year to co-ordinate EU defence purchases.

The code of conduct is to take effect in July. EU nations will have until April to decide if they want to take part. Denmark has already opted out and officials said Spain also has doubts, but the other 23 EU members are expected to sign up.

Ministers also adopted a report on efforts to fill shortfalls in Europe’s military arsenal by 2010. They noted progress in developing mechanised infantry units and field laboratories for use in chemical or germ warfare attacks, but persistent gaps remained in areas such as helicopters, transport planes and missile defence.

Under the new arms market system nations commit to posting defence contracts on an internet bulletin board open to companies from all EU nations who could then compete for it. The rules will apply to defence contracts over €1m, but exemptions will be allowed if ongoing operations dictate they need especially quick supply.

Although the rules are not legally enforceable, Witney said nations would face considerable peer pressure to allow free competition from other EU companies. The EU will monitor application of the system to ensure governments are sticking to the rules.

However, analysts warn it could take time before Europe’s defence ministries from the main arms producers, such as Britain, France, Germany, Sweden and Italy, move away from trusted national suppliers.

Seven of the world’s 10 biggest defence companies are American.

The US top four – Lockheed Martin Corp., Boeing Co., Northrop Grumman Corp. and Raytheon Co. – had a combined revenue from defence of €105.4bn last year. That is more than double that of the four biggest European defence companies – BAE Systems PLC, European Aeronautic Defence & Space Co., Thales SA and Finmeccanica SpA.