US embassy cable - 05BRUSSELS4342

C O N F I D E N T I A L SECTION 01 OF 03 BRUSSELS 004342 
 
SIPDIS 
 
DEPARTMENT FOR EUR/ERA AND EUR/RPM 
 
E.O. 12958: DECL: 12/08/2015 
TAGS: MARR, PREL, EUN, USEU BRUSSELS 
SUBJECT: BUILDING THE INTERNAL EUROPEAN DEFENSE MARKET: EU 
TAKES NEXT STEPS 
 
REF: A. BRUSSELS 4203 B. BRUSSELS 4202 C. BRUSSELS 
     3747 D. BRUSSELS 3611 
 
Classified By: USEU Political Military Officer Jeremy Brenner for reaso 
ns 1.4 (b) and (d). 
 
 1. (U) Summary. The European Union is taking steps to 
consolidate the European defense equipment market. The 
European Defense Agency has established a code of conduct for 
defense procurement, and the EU is developing plans to match 
US levels of investment in defense research and development. 
A number of decisions will be made over the next six months 
concerning the standards and rules that will applied for 
procurement. These decisions must be examined carefully 
because there is a lack of assured transparency in the 
process, and subsidies for R&D, and provisions for ad hoc 
arrangements could be detrimental to US interests. This 
message identifies the major initiatives now underway. They 
will be examined in greater detail in subsequent cables. End 
summary. 
 
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Be Careful what you wish for... 
------------------------------- 
 
2. (C) The US faces a conundrum as the European Union takes 
steps to consolidate its defense equipment market.  On the 
one hand, a number of the measures put forward by the 
European Defense Agency are necessary - if not sufficient - 
for the creation of a European Defense industry that can 
provide the effective military capabilities we have urged for 
decades. At the same time, some of these measures - if not 
closely monitored - could move the European Defense market 
away from a system that will be open and transparent toward a 
system that could be detrimental to US industry. 
 
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Building European Capabilities 
------------------------------ 
 
3. (C) In order to build, buy and employ the long-sought 
capabilities to act credibly as a strategic global partner of 
the United States,  "Europe" must overcome many internal 
challenges.  The way in which theses challenges are addressed 
will have significant implications for important US 
interests. In the defense capabilities area, the European 
Union is taking steps to harmonize European defense 
industrial output while creating a European common market for 
defense. One of the questions they face as they move ahead is 
how to create a competitive environment in which 
harmonization can take place while protecting their fledgling 
initiatives from better capitalized and more experienced 
(often US-owned) multinational defense firms?  The answer, so 
far, suggests an approach to market development that will 
inject European Union capital into essential R&D activities, 
and might set proprietary standards inconsistent with those 
currently in use in NATO and the US. The reform effort 
threatens to hinder US access to future defense contracts. 
Careful monitoring of these developments will be critical to 
preventing damaging conflict, but it will be difficult to get 
a clear picture because of a lack of transparency. 
 
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The European Defense Agency 
--------------------------- 
 
4. (U) The EDA as an institution is developing quickly. 
Beginning with a staff of 25, it has reached its full 
authorized staffing level of 80, though it can draw on 
national experts, giving it additional resources.  After its 
creation in 2004, the Agency was to establish rules governing 
access to information thereby ensuring the same amount of 
transparency as already exists for other EU institutions. To 
date, this has not occurred. Existing transparency rules 
allow EU institutions to refuse access to documents that 
would undermine the protection of defense and military 
matters.  Further, the EDA has stated that it views its role 
as "the instrument to achieve mutual transparency and 
accountability" for the implementation of the new defense 
procurement rules.  The European Commission and the European 
Parliament each have a role in overseeing the development of 
this process.  The Agency is also required to report 
regularly to the European Council. Still, the EDA is its own 
watchdog for implementation of the Code of Conduct, meaning 
that there is currently no guarantee of transparency with 
respect to substantial EDA-driven changes within the European 
defense industry. 
--------------- 
Code of Conduct 
--------------- 
 
5. (U) The EDA's  newly-announced code of conduct is broad 
and lacks specificity. It is a mutual guarantee of open 
defense markets by EU Member States that choose to 
participate on a reciprocal basis.  There is no guarantee 
that contracts issued under the Code of Conduct will be open 
to American defense companies. The EDA leaves it up to each 
individual Member State to decide whether to issue contracts 
for defense equipment to non-EU companies.  Member States 
must commit to participating in the Code of Conduct by April 
2006.  The Code is slated to go into effect in June.  Work 
has already begun on the creation of an electronic bulletin 
board, where all defense contracts will be posted. The rules 
of access to this bulletin board will be an important 
indication of the openness of the system. 
 
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Ad Hoc Projects 
--------------- 
 
6. (C) In addition to the Code of Conduct, the European 
defense equipment market will change substantially over the 
next few years by the formation of ad hoc defense projects 
within the context of the EDA. The EDA envisions that some 
projects will include all Member States and may be funded 
based on a Gross National Income scale. The Agency also 
envisions the possibility of a more selective group of ad hoc 
defense projects that would only be open to certain 
self-selected Member States with no requirement that other 
Member States be allowed to join. Further, it is unclear 
whether these "coalitions of the willing" for defense 
projects will be subject to the Code of Conduct.  Decisions 
on the ad hoc projects may be reached on a qualified majority 
basis, which will reduce the influence of many smaller, 
pro-US Member States from "New Europe." 
 
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Standards and Practices 
----------------------- 
 
7. (C) The EDA will be drafting standards such as a Code of 
Best Practices in the supply chain to allow for the 
participation of small and medium sized businesses. The 
Agency will also develop standards for the security of 
information and/or security clearances. Further, the 
development of larger ad hoc defense projects could have the 
effect of creating a de facto EU standard for defense 
equipment that may or may not be compatible with NATO and/or 
the US.  If the established standards are inconsistent with 
NATO standards, or will adversely affect the competitiveness 
of bids by US defense companies, only US political-level 
intervention is likely to be effective in altering EDA's 
course. Even at this early stage of development, it is 
unclear if US companies will have the same degree of access 
to requests for proposals/bids in the electronic marketplace 
and on electronic bulletin board that the EDA is 
establishing. 
 
---------------------------------------- 
Toward a "Cartel" of National Producers? 
---------------------------------------- 
 
8. (C) The EDA has stated that it does not intend to create a 
European preference or exclude US companies. However, the 
practical effect of the reform effort is that US defense 
companies must continue to merge or form joint ventures of 
convenience with European defense companies to remain 
competitive in Europe.  (Note: Representatives of European 
industry argue to us that European companies in the US face 
the same situation. End note).  If the Commission ensures 
that existing law is enforced, Member States will be required 
to give up the notion of supporting national or European 
champions as well as allowing politically-sensitive 
government-supported national enterprises to fend for 
themselves in the competitive marketplace.  Because the 
Member States will ultimately decide the outcome of the EDA's 
initiatives, compromises will likely emerge between the 
forward-looking ideas of EDA and the protectionist tendencies 
of the Member States.  Any lack of transparency of EDA 
defense procurement could combine with Member State 
governments' support for national suppliers to create an 
environment where cartel-like activity could be attractive to 
some. 
 
------------------------ 
Research and Development 
------------------------ 
 
9.  (U) The EU has launched an effort to increase investment 
in R&D across all sectors within the EU from 1.9% to 3% of 
GDP by 2010.  This includes a focus on developing R&D and 
common programs in civilian-military applications that will 
involve funding from multiples sources such as the 
Commission, Member States or the EDA.  The Commission has 
stated that the gap in research investment between the 
European Union and the United States is in excess of 120 
billion Euros per year.  The EU is attempting to address this 
gap with the adoption of "Lisbon-type" agenda for R&D that 
would include increasing the funding of programs with 
civilian-military overlap.  The EU believes that Commission 
funding for civilian-military R&D programs, national defense 
funds from the Member States, funds from the European Defense 
Agency (EDA) and a proposed new European Security Research 
Program of Euro 1 billion will help close the gap in security 
research.  The EU is currently laying the legal and budgetary 
groundwork to carry out its plan. The main obstacle remains 
the EU fiscal framework for 2007-2013 that has yet to be 
approved by the Member States. Despite the optimistic 
planning by EDA, under current political circumstances within 
the EU, the budget -- when approved -- is unlikely to provide 
new funding for R&D.  The EU plan also depends upon greater 
R&D spending by Member States and private enterprise, and 
while targets have been set, implementation of the program 
has not begun. 
 
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Conclusion 
---------- 
 
10. (C) Clearly, any moves toward "Fortress Europe" by the EU 
and the EDA in the sensitive area of  defense procurement 
will be detrimental to US economic and political interests. 
In anticipation of a negative US reaction, some in Europe are 
already referring to the "Buy America Act" and restrictive US 
licensing practices as justification for EDA countermeasures. 
 The European Commission and Parliament are already raising 
issues of openness, potential business impact, and possible 
effects on NATO harmonization. It is clear the political 
debate in Brussels over how to build a coherent European 
defense market is far from over. (see septels).  Still, the 
new and rapidly developing aspects of the European Union push 
to establish a more coherent European defense equipment 
market warrant close scrutiny, and may require political 
intervention in the event that the EU chooses a path that 
could damage US or NATO interests. 
 
McKinley 
.