ISB?: 960-8124-26-3 © 2003 Defence Analysis Institute 17, Valtetsiou Street 10680 Athens, Greece Tel.: (210) 3632902 Fax: (210) 3632634 web-site: www.iaa.gr e-mail: [email protected] Preface Introduction The European Defence Industrial Base and ESDP RESTRUCTURING OF THE EUROPEAN DEFENCE INDUSTRY THE INDUSTRY-LED RESTRUCTURING PROCESS. 1997-1999: the European defence industry under pressure 13 Firms seek economies of scale and enlargement of the market State/industry consensus on the need for industrial consolidation From international cooperation to transnational integration 18 The first cooperative programmes, common subsidiaries and joint ventures Privatisation Concentration Groups with diversified activities Appraisal by sector of activities 27 Defence aerospace and electronics: a strategy of segment consolidation The land and naval armaments sectors: an industrial scene divided along national lines Trends in European defence industrial direct employment 37 Overview Situation by country THE OPERATING ENVIRONMENT 41 The permanence of the Europe/United States imbalance 43 Unfavourable conditions... …in the face of the American strategy of expansion in Europe First initiatives aimed at creating a favourable environment for European defence industries 48 Creation of ad hoc structures by the principal armaments producing countries (Germany, United Kingdom, France, Italy, Spain and Sweden) First steps towards an institutional strategy for the EU in the field of armaments ALL-UNION INITIATIVES, ENHANCED COOPERATION AND CONVERGENCE OBJECTIVES ALL-UNION INITIATIVES 55 The establishment of a European Armaments Agency (EAA) 55 Prospects for all-Union initiatives short of fully-fledged procurement functions 56 Research and development Improving the industry-government interface Programme management ENHANCED COOPERATION 60 EDIB-related enhanced cooperation 60 Programme management The creation of NATO-style defence infrastructure programmes ESDP -related enhanced cooperation with EDIB consequences 61 Strategic lift Homeland defence CONVERGENCE OBJECTIVES 64 Convergence objectives: monitoring implementation 64 Input objectives 65 Equipment expenditure as a share of defence spending Defence equipment expenditure as a percentage of GDP Defence equipment expenditure per capita Defence equipment expenditure per military person CONCLUDING REMARKS 68 Transatlantic Gaps and European Armaments Co-operation Introduction 70 The spending, capability and technology gap and the European defence technological and industrial base 72 Are different spending levels across the Atlantic creating a 'gap'? Capability shortfalls of European armed forces Co-operability and interoperability but not gap-closing as the central transatlantic challenge The political relevance of a European defence technological and industrial base (DTIB) Interdependence between governments and industry Spending scarce defence budgets more efficiently by deepening European armaments co-operation 79 Characteristics of the “European armament system” undermining competitiveness Trends European procurement reform: issues to be considered European armament / defence industrial futures 89 Scenario I: Fragmented Europe Scenario II: Core Europe Scenario III: A Vision – Integrated Europe Concluding remarks: the specificity of the defence sector and European competitiveness 101 Abbreviations 103 PREFACE This project was assigned to two of the most The second part on “Transatlantic Gaps and widely known Institutes in Europe with an European Armaments Co-operation”, assigned excellent reputation in defence and strategic to the German Institute for International and analysis. Security Affairs [Stiftung Wissenschafft und Politik (SWP)], has been written by Joachim The first part on “The European Industrial Base Rohde (Project Leader) and Markus Frenzel and ESDP”, assigned to the Fondation pour la (Project Researcher). Recherche Stratégique (FRS), has been written by Francois Heisbourg (Project Manager), Jean- This study is part of the Hellenic Presidency’s Francois Daguzan, Martin Lundmark and Hélène initiatives on the European Defence Industry, Masson (Project Participants). Research and Technology potential in the framework of the European Security and Defence Policy. INTRODUCTION The new security environment and the need for Second, bringing closer the European industrial Europe to assert its role as a global player capabilities to foster more efficient cooperation necessitate the development of an autonomous in the field of armaments. Further consolidation Security and Defence Policy within the of European defence industry involves the framework of a strategic partnership with NATO introduction of a more coherent regulatory and the United States. Addressing the military framework as well as restructuring in order to capabilities shortfalls and ensuring the exploit economies of scale and deliver cost operational readiness of the Reaction Force in effective equipment and services. Cross border 2003 are the main priorities of the Hellenic mergers, joint development of new products in Presidency during its 12-month chair, as a order to ensure standardisation and result of the Danish opt-out in defence matters. interoperability of systems, and preventing dumping and related practices are the main The issue of defence has initiated a major items on this agenda. debate within the Union, with some Member States raising doubts about the necessity and Third, harmonising and upgrading defence- scope of a Security and Defence Policy. related R&D effort in the context of the overall Different perspectives, based on the diversity of drive to strengthen Europe’s industrial and cultural and historical experiences, should, of technological base. Taking into account the course, be respected. varying levels of R&D capability, the objective would be to create an interdependent network The credibility of the nascent European defence under the umbrella of the technologically more policy relies also heavily on the competitiveness advanced Member States while encouraging of the European defence industry. Our efforts, smaller and technologically less advanced both on the government and private sector Member States to get involved in the process. side, are lagging behind those of our competitors. We spend half as much on defence The present study is one of the initiatives as the US, four times less than the US on undertaken by the Hellenic Presidency, in order defence related R&D and, moreover, in a to promote policies for coordination in the area fragmented and uncoordinated fashion. of the defence industry. The study identifies the European defence industries are continually main tendencies for consolidation and losing share in the international markets. Only development of the European defence industry in those areas where a coordinated approach and discusses the implications of an ongoing has been adopted (e.g. AIRBUS) has Europe and increased transatlantic gap in terms of succeeded in taking on the competition. Our technology and competitiveness. efforts should focus on the following: First, putting in place a European Armaments Building a united Europe with a strong Policy. Existing organisations are of an international profile requires a commitment to a intergovernmental nature (OCCAR, LoI). We common defence policy. That will mark a should take a leap forward and create a pan- substantial step towards integration while European body. Discussions in the Defence having a beneficial impact on growth, Group within the Convention give an impetus to employment and global competitiveness. armaments cooperation, especially regarding the establishment of an Armaments Agency. Primary consideration has been given to Yannos Papantoniou incorporating provisions in the revised Treaty, with respect to a European armaments policy. Minister of Defence Reinforced coordination in procurement throughout Europe is part of a fully-fledged Security and Defence Policy. SUMMARY OF PROPOSALS CONVERGENCE OBJECTIVES ALL- UNION INITIATIVES ?? setting a 0.6% of GDP target for defence acquisition spending ??establishment of a European Defence Research Agency (EDRA) to increase the level ?? monitoring organisation and efficiency of military R&T spending by the EU countries. RESTRUCTURING OF THE EUROPEAN DEFENCE INDUSTRY ??setting up of a working group to study the possibility of transferring the relevant LoI areas GENERAL OBJECTIVES into EU rules and regulations, and the legal modalities of such incorporation, involving This part focuses on the current status of the security of supply, information security, restructuring process of the European defence handling of technical information including IPR. industry and ongoing industrial policies. The analysis is divided into two sections: ??establishment of a EU-CNAD, an EU equivalent of NATO’s Conference of National ??the first section presents an overview of Armaments Directors (CNAD), answerable to European defence industrial consolidation, the EU Council of Defence Ministers (as which has been largely industry-led; proposed in the Barnier report). ?? the second section outlines the present-day ??setting up of EU-labelled programme complex operating environment of the management agencies for specific cooperative European defence industry, and how the armaments programmes, along similar lines to main defence industrial countries of Europe NATO practice and procedures. aim to establish a framework for developing concrete and practical measures in order to ENHANCED COOPERATION propel the