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EUROPEAN DEFENCE EQUIPMENT MARKET

EUROPEAN DEFENCE EQUIPMENT MARKET. Keith Hartley Centre for Defence Economics University of York. Seminar on European Defence Procurement, Bucharest, 13-14 November 2007. OVERVIEW. Background Defence Economics Problem Inefficiency in EU Defence Markets Improving Efficiency EU Scenarios

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EUROPEAN DEFENCE EQUIPMENT MARKET

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  1. EUROPEAN DEFENCE EQUIPMENT MARKET Keith Hartley Centre for Defence Economics University of York Seminar on European Defence Procurement, Bucharest, 13-14 November 2007

  2. OVERVIEW • Background • Defence Economics Problem • Inefficiency in EU Defence Markets • Improving Efficiency • EU Scenarios • Case study of Typhoon • Offsets • UK DIS

  3. BACKGROUND • OCCAR: F;G;It;UK;Sp;Belg: armaments agency for European collaborative projects • Industrial Restructuring: EADS; Thales; AgustaWestland; MBDA • Collaborative Projects: Typhoon; A400M; Meteor missile; JSF/F-35 • EDA (2004): EDEM; EDTIB; Offsets (?)

  4. POLICY ISSUES • EU as inefficient defence market: both Armed Forces and Equipment Markets • Economic Principles for Improving Efficiency • Role for EDA: beyond a voluntary code • USA-Europe Arms Trade: both protected markets: US DoD awarded $78 billion of defence contracts to US suppliers; and $1.9 Bn to foreign suppliers (2005)

  5. DEFENCE ECONOMICS PROBLEM • Constant/falling national defence budgets (real terms) • Rising INPUT costs: -Equipment: 10% pa in real terms = smaller numbers - Military personnel: costs of AVF RESULT: Difficult Defence Choices Cannot be Avoided

  6. Defence Economics Problem: New Dimensions • End of Cold War has made no difference- unit cost escalation has continued Example 1. UK cannot afford successor to Typhoon Example 2. By time UAVs are as capable as manned aircraft, they will be equally as expensive: hence just as unaffordable

  7. DEFENCE ECONOMICS PROBLEM Solutions • Equal Misery: gradual reduction in force effectiveness • Major Defence Review • Increased efficiency • EU Defence Policy

  8. INEFFICIENCY OF EXISTING EU DEFENCE MARKETS • EU defence markets INEFFICIENT in providing: Armed Forces Defence Equipment • Criteria: US model • Compared with USA = EU lacks: Single EU Army, Navy, Air Force Large Single EU market for defence equipment

  9. INEFFICIENT DEFENCE MARKETS • Duplication of costly R&D programmes • Small-scale production for small national markets • Protectionism • Cost-based non-competitive contracts • Domestic monopolies – some state-owned

  10. An Efficient EU Defence Industrial Policy APPLY ECONOMIC PRINCIPLES: • Rising equipment costs = independence and duplication of R&D are costly • Gains from Free Trade – based on comparative advantage • Gains from scale and learning economies • Gains from competition

  11. RULES FOR AN EFFICIENT EU DEFENCE INDUSTRIAL POLICY • Gains from Trade = 10-25% savings • Gains from scale and learning = 15% - 25%

  12. Single EU Market Scenarios Scenarios Annual cost savings EU Only Open to RoW • Competitive Market 9% 11% • Single EU Proc Agency 15% 17% • Twin Track 11% 14%

  13. COSTS OF SINGLE MARKET • Change is not costless Winners and losers • Losers will oppose change Lobby for fair/managed competition Juste Retour Protection • Fear = cartels/collusive tendering RESULT: Inefficient EDTIB ?

  14. Collaboration as EU Defence Industrial Policy: TYPHOON • Economic Benefits • Jobs = 100,000 • Technology/spin-offs = carbon fibre technology; civil aircraft/engines; cars/F-1; supply chains • Exports: Saudi Arabia (72); Austria (15)

  15. CRITIQUE • Opportunity cost question= alternative use value of resources? • Spin-offs = market value? • Are Markets Failing?

  16. OTHER POLICY ISSUES • EDA study of OFFSETS: what do we know/do not know and need to know for sensible policy formulation? • EU and UK Defence Industrial Strategy = EU moving to open markets (?) whilst UK DIS = guaranteed/protected markets

  17. EDA and OFFSETS • EDA View OFS are INEFFICIENT OFS illegal under Article 296 (at least for civil OFS) • EDA AIM: Harmonise and eventually remove OFS

  18. OFFSETS (Contd) • PROBLEMS • OFS – why do nations favour OFS – benefits? • OFS are Market Distorting BUT: They reflect major distortions caused by Article 296 and Buy US Act and Govts are major market distortions

  19. OFS: Next Steps? • Collect a decent data base on OFS in EU • Harmonisation of OFS requirements (eg at max of 100%)?

  20. UK DIS and EU Possible conflicts between DIS and: • EDEM with focus on open markets • EDTIB with an EU view of the DIB, including an appropriate regional balance.

  21. FUTURE DEFENCE FIRM ? • Future defence firm will be different - Todays defence firms differ from those of 1950 and 1900 - In 1900, Boeing did not exist

  22. Future Defence Firm • Future = global defence firms - international supplier network - suppliers= larger groups undertaking R&D for primes - Electronics firms as primes - Primes as systems integrators and not metal bashers

  23. CONCLUSION • EU defence policy is topical and dominated by politics – But economists can make sensible contributions to the policy debate • Existing EU defence markets are highly inefficient • Efficiency improvements mean benefits to Armed Forces and taxpayers but costs for EU’s inefficient defence industries

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