Is there a European defence market?

Is there a European defence market, or are there 27 national defence markets?
The European Parliament adopted a new Defence Transfers Directive in December 2008 to harmonise the intra-Community licensing systems and a new Defence Procurement Directive in January 2009 to create a “third pillar” for public procurement alongside the general Procurement Directive 2004/18/EC and the special sectors Utilities Directive 2004/17/EC.

The intergovernmental European Defence Agency (EDA) was established by Council Joint Action
2004/551/CFSP of 12 July 2004 on the establishment of the European Defence Agency (published OJEU 17.7.2004 l 245/17) to:

· Develop defence capabilities in the field of crisis management
· Promote European armaments cooperation
· Strengthen the European defence industrial and technological base (DTIB)
· Work for the creation of an internationally competitive European defence equipment market (EDEM)

The Commission’s Defence package included a Communication on the European defence industry COM(2007) 764 final.

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Depressing results

Despite some progress, the overall assessment is that NATO, the WEU and more recently the European Union have tried for decades to improve multinational armaments cooperation with depressingly little success.

In Towards a European Defence Market (Chaillot Paper No 113, November 2008, 126 pages), published by the European Union Institute for Security Studies (EUISS), four researchers describe the current state of affairs and the prospects for progress.

The publication is available at www.iss.europa.eu and the individual contributions are:

Daniel Keohane: Introduction – Towards a European Defence Market

Erkki Aalto: Interpretations of Article 296

Christian Mölling: Options for an EU regime on intra-Community transfers of defence goods

Sophie de Vaucorbeil: The changing transatlantic defence market


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Article 296 TEC

In Interpretations of Article 296 (page 13 to 49), Erkki Aalto deals with the unclarity of the derogations offered by Article 296 of the Treaty establishing the European Community (TEC).

The Commission’s Interpretative Communication has tried to put in place some restraints on the member states’ blanket application of the derogations on essential security grounds offered by paragraphs one and two of Article 296, but even the interpretation leaves many crucial issues hanging in the air.

The provision has been left substantially unchanged since 1957 (and the Council Decision of 15 April 1958 listing the arms, munitions and war material is still officially unpublished!), but the world has changed dramatically since then.

Aalto hopes that the ECJ would use the pending customs cases brought against member states to clarify the scope of Article 296 TEC.

In my view, Aalto’s cautious interpretation is a valuable contribution to the discussion, although only his ‘internal market option’ even begins to answer the challenges posed by the rationale behind the European defence industrial and technological base (DTIB) and an internationally competitive European defence equipment market (EDEM).


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In a wider perspective, Europe is going to continue as a ‘hobbled giant’ as long as it does not create effective EU level powers and democracy in foreign and security policy and defence.



Ralf Grahn

EU Law: Defence Transfers Directive

The European Parliament adopted, with amendments, the proposed Directive on simplifying terms and conditions of transfers of defence-related products within the Community on 16 December 2008 by 545 votes to 66, with 44 abstentions. The provisional text adopted is available at the web site of the European Parliament (P6_TA(2008)0603).

The vote was based on a report (A6-0410/2008) by the EP’s Committee on the Internal Market and Consumer Protection (IMCO), prepared by the rapporteur Heidi Rühle (Greens / ALE, DE).

The new Defence Transfers Directive is awaiting formal adoption by the Council.

After publication in the Official Journal of the European Union and entry into force, the member states have 24 months to transpose the provisions of the Defence Transfers Directive into national law, by adopting the laws, regulations and administrative provisions necessary to comply with the Directive. They then have an additional 12 months to apply the measures.

The Defence Transfers Directive applies to intra-Community transfers of defence-related products (Article 1) and these products are listed in the Annex (Article 2).


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Framework

For pedagogic reasons, we position the new Directive within the treaty framework. This comprises the legal base, i.e. the powers to legislate, and the exceptions or derogations limiting the applicability of the Defence Transfers Directive.


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Legal base

The Defence Transfers Directive is based on Article 95 (ex Article 100a) of the Treaty establishing the European Community (TEC).

Article 95 TEC allows legislative measures, adopted by co-decision, for the approximation (harmonisation) of member states’ laws, regulations or administrative actions with regard to the internal market objectives, namely the free movement of goods, persons, services and capital mentioned in Article 14 TEC.


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In the consolidated Treaty of Lisbon version of the Treaty on the Functioning of the European Union (TFEU) the corresponding Articles are 114 TFEU and 26 TFEU.


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Generally applicable derogations

According to Article 1(3) of the Defence Transfers Directive its application is subject to Articles 30 and 296 TEC.

Quantitative restrictions on imports and all measures having equivalent effect are prohibited between member states according to Article 28 TEC (ex Article 30), and the corresponding prohibition on export restrictions is contained in Article 29 TEC (ex Article 34).

Article 30 TEC (ex Article 36) then offers member states the possibility to prohibit or restrict imports or exports on certain grounds. As exceptions to (derogations from) the normally applicable treaty rules (and objectives), they have to be interpreted narrowly.

These derogations or exceptions can still be called general in the sense that they can, in principle, be applied to all sorts of exports or imports, if justified:


Article 28 TEC

Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.


Article 29 TEC

Quantitative restrictions on exports, and all measures having equivalent effect, shall be prohibited between Member States.


Article 30 TEC

The provisions of Articles 28 and 29 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.


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In the consolidated Lisbon Treaty, which may enter into force before the member states have transposed or begun to apply the Defence Transfers Directive, the corresponding provisions are found in the substantially unchanged Articles 34 to 36 TFEU, with the same grounds for exceptions:

· public morality
· public policy
· public security
· the protection of health and life of humans, animals or plants
· the protection of national treasures possessing artistic, historic or archaeological value
· the protection of industrial and commercial property


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Specific derogations

The Defence Transfers Directive does not affect the existence of Article 296 TEC (ex Article 223), with its limitations on grounds of member states’ essential security interests connected with the trade in arms, munitions and war materials, although the new Directive tries to limit the application of such specific exceptions to the free flow of goods between the EU member states:

Article 296 TEC

1. The provisions of this Treaty shall not preclude the application of the following rules:

(a) no Member State shall be obliged to supply information the disclosure of which it considers contrary to the essential interests of its security;

(b) any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.

2. The Council may, acting unanimously on a proposal from the Commission, make changes to the list, which it drew up on 15 April 1958, of the products to which the provisions of paragraph 1(b) apply.


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In the consolidated Lisbon Treaty this provision appears as Article 346 TFEU, without substantive change.


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Interpretative Communication on Article 296 TEC


The difficulties arising between the free movement objectives of the treaty, the essential interests of member state security connected with the production of or trade in arms, munitions and war material and the generous practices of member states to restrict the application on security and arms trade grounds are discussed in the Commission’s Interpretative Communication on the application of Article 296 of the Treaty in the field of defence procurement, Brussels, 7.12.2006 COM(2006) 779 final, available here:

http://eur-lex.europa.eu/LexUriServ/site/en/com/2006/com2006_0779en01.pdf


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Arms, munitions and war material


The TEC and TFEU refer to the list of arms, munitions and war material drawn up by the Council on 15 April 1958. It can be changed on a proposal by the Commission by unanimous Council decision.

The Defence Transfers Directive applies to its Annex List of defence-related products.


Recital 37 of the Directive expresses the desire to update the list in the Annex of defence-related products in strict conformity with the Common Military List of the European Union (CML).

The latest version of the frequently updated CML was adopted by the Council on 10 March 2008 (equipment covered by the European Union Code of Conduct on Arms Exports) (updating and replacing the Common Military List of the European Union adopted by the Council on 19 March 2007) (CFSP), published OJEU 18.4.2008 c 98/1.

This desire is given legal force in Article 13(1) of the Defence Transfers Directive.


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National concerns


Legal materials concerning the treaty background and reflecting the objectives of the Commission and the European Parliament can now be contrasted by an example of concerns expressed at national level, in this case the United Kingdom.




The UK House of Commons European Scrutiny Committee cleared the Defence Transfers Directive from scrutiny, after discussing national prerogatives, the continued scope for Article 296 derogations as well as the updating of the Annex list to define the scope of defence-related products for the purposes of the Directive:


http://www.publications.parliament.uk/pa/cm200809/cmselect/cmeuleg/19-ii/1913.htm



Ralf Grahn

EU law: Defence procurement

Military procurement in the internal market can be divided into two groups of materials: 1) arms, munitions and war material, and 2) products not intended for specifically military purposes.

We look at how the EC (EU) Procurement Directive 2004/18/EC deals with military procurement and at the treaty level security derogations. After a look at the (historical) scope of military material and interpretation of member states’ security prerogatives, we summarise some of the latest proposals in the field of defence procurement in the internal market.

The European economic and security interests at stake are huge.



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Procurement Directive Article 10

The Procurement Directive 2004/18/EC mentions defence procurement under Specific situations. In principle, procurement in the field of defence falls within the scope of the Directive, but subject to Article 296 TEC:

S e c t i o n 2
Specific situations

Article 10
Defence procurement

This Directive shall apply to public contracts awarded by contracting authorities in the field of defence, subject to Article 296 of the Treaty.


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Article 296 TEC

Article 296 of The Treaty establishing the European Community (TEC) is problematic from a legal point of view. It constitutes a wide derogation from the treaty provisions on grounds of essential national security interests.

Each member state can refuse to supply the European Community (European Union) and the other member states information on grounds of essential security interests, but the refusal requires proper justification.

Article 296(1)(b) deals specifically with defence procurement. The provision distinguishes between the production of and trade in arms, munitions and war material on the one hand, and products not intended for specifically military purposes on the other hand. The latter would seem to be subject to normal competition rules in the internal market.

The second paragraph refers to an initial agreement on the materials covered, but for a long time the list of 15 April 1958 was not even published. In other words, the scope of a vast derogation was not even in the public domain, although it concerned the interests of private enterprises.

The Council can alter the scope of paragraph 1(b) by changing the list by unanimous decision.

Here is Article 296 TEC (ex Article 223) as it was published in the latest consolidated version of the treaties, OJEU 29.12.2006 C 321 E/173:

Article 296 TEC

1. The provisions of this Treaty shall not preclude the application of the following rules:

(a) no Member State shall be obliged to supply information the disclosure of which it considers contrary to the essential interests of its security;

(b) any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.

2. The Council may, acting unanimously on a proposal from the Commission, make changes to the list, which it drew up on 15 April 1958, of the products to which the provisions of paragraph 1(b) apply.


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Lisbon Treaty

If the Lisbon Treaty enters into force, Article 296 TEC would remain intact as Article 346 of the consolidated Treaty on the Functioning of the European Union. The provision would extend the blanket derogation to ‘the Treaties’ and the ‘internal market’ would replace the ‘common market’ according to the horizontal (general) amendments (OJEU 9.5.2008 C 115/194).

Even if shifting global security challenges would tend to emphasise the common security interests of the EU member states, the Lisbon Treaty takes a step in the opposite direction. Article 4(2) of the Treaty on European Union sets out that in particular, national security remains the sole responsibility of each member state.


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Arms, munitions and war materials

The list of 15 April 1958 was published when the Council replied to a written question in 2001 (OJEC 20.12.2001 C 364 E/85–86). This unorthodox procedure to publish acts with legal implications merits republication of the question and the reply:


(2001/C 364 E/091) WRITTEN QUESTION E-1324/01
by Bart Staes (Verts/ALE) to the Council

(4 May 2001)

Subject: Article 296(1)(b) of the EC Treaty

Pursuant to Article 296(1)(b), Member States are permitted to waive the general principle of competition (Title VI of the EC Treaty) in the case of military procurement. The Council adopted the list of products to which this applies on 15 April 1958.

What products appear on the list of 15 April 1958 to which Article 296(1)(b) refers?

Reply

(27 September 2001)

The list of the arms, munition and war materiel, including nuclear arms, to which the provisions of Article 296 paragraph 1(b) of the Treaty of Rome are applicable is given below.

1. Portable and automatic firearms, such as rifles, carbines, revolvers, pistols, sub-machine guns and machine guns, except for hunting weapons, pistols and other low calibre weapons of the calibre less than 7 mm.

2. Artillery, and smoke, gas and flame throwing weapons such as:

(a) cannon, howitzers, mortars, artillery, anti-tank guns, rocket launchers, flame throwers, recoilless guns;

(b) military smoke and gas guns.

3. Ammunition for the weapons at 1 and 2 above.

4. Bombs, torpedoes, rockets and guided missiles:

(a) bombs, torpedoes, grenades, including smoke grenades, smoke bombs, rockets, mines, guided missiles, underwater grenades, incendiary bombs;

(b) military apparatus and components specially designed for the handling, assembly, dismantling, firing or detection of the articles at (a) above.

5. Military fire control equipment:

(a) firing computers and guidance systems in infra-red and other night guidance devices;

(b) telemeters, position indicators, altimeters;

(c) electronic tracking components, gyroscopic, optical and acoustic;

(d) bomb sights and gun sights, periscopes for the equipment specified in this list.

6. Tanks and specialist fighting vehicles:

(a) tanks;

(b) military type vehicles, armed or armoured, including amphibious vehicles;

(c) armoured cars;

(d) half-tracked military vehicles;

(e) military vehicles with tank bodies;

(f) trailers specially designed for the transportation of the ammunition specified at paragraphs 3 and 4.

7. Toxic or radioactive agents:

(a) toxic, biological or chemical agents and radioactive agents adapted for destructive use in war against persons, animals or crops;

(b) military apparatus for the propagation, detection and identification of substances at paragraph (a) above;

(c) counter-measures material related to paragraph (a) above.

8. Powders, explosives and liquid or solid propellants:

(a) powders and liquid or solid propellants specially designed and constructed for use with the material at paragraphs 3, 4 and 7 above;

(b) military explosives;

(c) incendiary and freezing agents for military use.

9. Warships and their specialist equipment:

(a) warships of all kinds;

(b) equipment specially designed for laying, detecting and sweeping mines;

(c) underwater cables.

10. Aircraft and equipment for military use.

11. Military electronic equipment.

12. Cameras specially designed for military use.

13. Other equipment and material.

14. Specialised parts and items of material included in this list insofar as they are of a military nature.

15. Machines, equipment and items exclusively designed for the study, manufacture, testing and control of arms, munitions and apparatus of an exclusively military nature included in this list.


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Interpretative Communication


The Commission’s Interpretative Communication on the application of Article 296 of the Treaty in the field of defence procurement, Brussels, 7.12.2006 COM(2006) 779 final, referred to an annual defence procurement market of € 80 billion, fragmented into national markets.

The Commission recalled two proposals from 2005, saying:

(1) Adoption of an "Interpretative Communication on the application of Article 296 TEC in the field of defence procurement". This Communication will not modify, but clarify the existing legal framework;

(2) Preparation of a possible new directive on the procurement of defence equipment to which the derogation in Article 296 TEC does not apply. This directive could offer new, more flexible rules adapted to the specificities of the defence sector.

The Communication summarises the discussion and ECJ case law on how the member states can exercise their prerogative to interpret their essential security interests, and it sets out guidelines on balancing these essential security interests with fundamental principles of the internal market.


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Defence package


One of the latest developments is the Commission’s defence procurement package constisting of a Communication on strategy and two legislative proposals.


Strategy proposal


Communication A strategy for a stronger and more competitive European defence industry, Brussels, 5.12.2007 COM(2007) 764 final.

The aim of the Communication is to promote a strong defence technological and industrial base (DTIB) in Europe, as a fundamental underpinning of the European Security and Defence Policy (ESDP). In the Commission’s view, only a competitive DTIB can provide Europe with autonomy, affordability and the ability to cooperate internationally in the development and production of defence equipment.




The Communicatio was accompanied by two proposed Directives:


Intra-EU transfers

The Proposal for a Directive of the European Parliament and of the Council on simplifying terms and conditions of transfers of defence-related products within the Community, Brussels, 5.12.2007 COM(2007) 765 final.

The aim of proposal is to contribute to the emergence of a European Defence Equipment Market (EDEM) as well as the functioning of the internal market by replacing current national licensing requirements by a streamlined system of general or global licenses, to which individual licensing would remain the exception. The Directive would not affect the arms exports of member states to third countries.

On 16 December 2008 the European Parliament voted in favour of the proposed Directive, with amendments.


Defence procurement


The aim of the proposed directive on defence procurement is to enhance openness and competitiveness of defence markets in the EU taking into account specific features, such as security of supply and security of information. According to the Commission, it will reduce the regulatory patchwork in this field. It will increase competition and transparency and so aid SMEs to find, and bid for, sub-contracts. By providing new rules applicable to the procurement of arms, munitions and war material and to certain sensitive non-military security items, this initiative should further limit the use of Article 296 to exceptional cases as stipulated by the Court of Justice and build upon earlier steps taken by the Commission and the EDA to encourage greater openness of defence markets, says the Commission.


The Proposal for a Directive on the coordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security,Brussels, 5.12.2007 COM(2007) 766 final.

The Commission aims to introduce a new legal instrument tailored to the specific nature of "sensitive" purchases for which specific requirements and precautions govern the award of contracts, in these fields. The Commission argues that the Member States will then have at their disposal a common framework of procurement rules that not only ensure the application of the principles of the EC Treaty but also take into account the particular requirements of these purchases, such as security of information, security of supply and the necessary flexibility of the procedures.

The plenary of the European Parliament is expected to vote in about ten days on the Committee on the Internal Market and Consumer Protection report A6-0415/2008, generally supportive of the Commission’s aims.





Ralf Grahn