EU Gears Up for Tougher Competition in Arms Market

After years of discussions, defense ministers signed on to an agreement aimed at encouraging governments to give contracts to the best bid in Europe, shaking up the national favoritism that has prevailed until now in the EU arms procurement market, which is worth about 30 billion euros ($35 billion).

Hailing the "landmark decision," European Defense Agency head Nick Whitney said: "The need of a breakthrough in this area has been felt for years, actually for decades."

Although plans are for a "voluntary and non-binding regime," Whitney told journalists that "it's a crucial first step towards opening up a big segment of the defense equipment market which is not subject to the normal rules of the internal market."

Under a so-called "code of conduct," defense contracts worth more than 1 million euros would be advertized on a single electronic portal where companies in the bloc could tender for them.

Although participation in the program would be voluntary, it marks a strong commitment to allowing competition in Europe's arms market.

Current exemption

Currently, European defense contractors are largely shielded from competition by a special exemption from normal EU single-market rules on the grounds that the sector is strategic for individual countries' security.

EU governments have been mulling ways of encouraging greater European competition in arms procurement for years, but so far, governments have been reluctant to give up their favoritism for their national arms makers.

However, defense budgets have not been growing as fast as Europe's ambitions to play a bigger international role have, spurring member states to consider new ways to make them more efficient.

Although tougher competition is likely to shake up the European arms industry, defense contractors say they are more than ready.

Defense sector is for it

The initiative not only has the backing of the European defense sector but they would even like to see it binding rather than voluntary, the chairman of Aerospace and Defense Industries Association of Europe, Tom Enders, said.

"We ... think a non-binding regime without a strong monitoring role by the EDA will tend to be meaningless," said Enders, who is also the chairman of the European Aeronautic Defense and Space Company (EADS), in a letter to EU foreign policy chief Javier Solana, which was obtained by AFP.

With few exceptions, national boundaries still shape the European defense industry although pressure for consolidation at the European level has been building in recent years.

Consolidation didn't come

The EADS, which was born in 2000 from the merger of French, German and Spanish defense concerns, is the exception to the rule. EADS' emergence as Europe's biggest defense contractor fueled speculation that a wave of consolidation in the European defense industry would follow.

However, those expectations have so far proven to be ill-founded as regular outbreaks of rumored mergers have come to nothing.

Given that European defense budgets are unlikely to grow in coming years anywhere as quickly as in the United States, consolidation is broadly seen as essential if Europe is to even vaguely compete with US defense behemoths.

Meanwhile, cash-strapped European governments are eager to reap the benefits of economies of scale that pooling defense procurement can create.