This Green Paper develops the debate on the case for Community action to establish a European market for defence equipment. It presents the main characteristics of defence procurement markets (their fragmentation, specific features, and limits to their legal framework) to justify Community action in this field. It then puts forward some ideas which could be considered when defining actions at European level.

This Green Paper is one of the measures announced by the Commission with a view to the gradual creation of a competitive European defence equipment market (EDEM). It opens an official consultation process lasting four months from 23 September 2004 onwards.

The Green Paper emphasises three characteristics of these markets:

- the major fragmentation of markets along national lines;
- the specific features which distinguish them from other types of public procurement;
- a complex legal framework.

The particular characteristics of defence markets are not only economic and technological, but are also related to the security and defence policies of each Member State. As sole clients, States play a dominant role in defining the market. They control the arms trade by means of export licences and the granting of authorisations to tender for contracts. In addition, security of supply and confidentiality requirements in the defence sector often lead to the use of purely national procedures. Finally, arms development programmes are complex due, in particular, to their limited production volumes, high risk of commercial failure, and the length of their life cycles.

As for the applicable legal framework, Directive 2004/18/EC specifies that Community rules on public procurement apply to contracts awarded in the field of defence, subject to the exemption system laid down in Article 296 of the Treaty establishing the European Communities (EC Treaty). This system allows Member States to invoke the essential interests of their security. The case law of the Court of Justice of the European Communities has developed a restrictive interpretation of the possibility of using this derogation. However, several difficulties of implementation do remain, due mainly to the absence of a precise interpretation of these provisions and a definition of the concept of essential interests of security.

Defence procurement is still, therefore, largely covered by national legislation, most of which provides for exemptions to the rules governing public procurement, with differing degrees of transparency. This legislation displays a lack of uniformity in a number of areas: the publication of contract notices, the potential for non-publication, the criteria for selecting suppliers, the tendering procedures and the basis on which contracts are awarded.

In addition to these national systems, there are the rules arising from intergovernmental agreements relating to joint arms programmes. Since, however, these agreements have not achieved satisfactory results, the recently-created European Defence Agency should, under the authority of the Council and in consultation with the Commission, help set up a competitive European defence market.

The Green Paper identifies two possible instruments to overcome these obstacles which limit the access of European industries to Member States' defence markets:

- clarification of the existing legal framework: the Green paper proposes drawing up a non-binding instrument, such as an interpretative Communication from the Commission. This Communication could give a further explanation of the principles defined by the Court on the interpretation of Article 296 of the EC Treaty;
- the creation of a special instrument to supplement the EU's legal framework. It is proposed that a new directive be drawn up to coordinate the procedures for awarding contracts by ensuring greater legal certainty, more information on the contracts at Community level and the introduction of the necessary flexibility in awarding these contracts. The Green Paper also details the contents of such a Directive.

Whilst these instruments cannot provide exhaustive answers to all the specific aspects of defence markets, they would nonetheless constitute a useful tool for successful cooperation between Member States.

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