Brussels looks at member states’ deals as U.S. pushes Europe to shoulder more of the defense burden
BRUSSELS—The Italian navy’s newest ship is under attack—not from enemy forces but from European officials.
In 2015 Rome awarded two Italian companies a €1.1 billion ($1.37 billion) contract for the vessel, which can launch amphibious operations and ferry troops. Now the European Union is blasting the deal and several others as anticompetitive and potentially in breach of EU rules.
The EU’s executive, the European Commission, said last month it was preparing legal action against Italy and four other member states—the Netherlands, Denmark, Poland and Portugal—over defense contracts. None of the five countries targeted by the commission commented on the EU decision.
The EU’s assault on the cozy world of European defense contracting opens a new front in the bloc’s battle to get more bang from its military spending and blunt U.S. criticism. The Trump administration has amped up longstanding pressure from Washington for Europe to shoulder more of its defense burden.
The countries now have two months to reply to the commission’s concerns. The deals have a total value of more than €6 billion, according to a person familiar with the case.
If found noncompliant by the EU, contracts could be voided. Some diplomats in Brussels believe the commission is more interested in pledges of future defense-contract competition than voiding signed contracts.
For years the EU has tried to encourage cross-border cooperation among militaries and defense contractors, with limited success. Spending remains inefficient, rife with overlap and redundancy, European officials acknowledge.
Last year, Brussels unveiled a raft of new enticements, including a future €5.5 billion annual defense-industry fund for military and defense-research projects. The legal threat adds a stick to those carrots.
The commission said the deals it was looking at for possible legal action involved either no public tender, a competitive bidding process, or government disincentives for foreign suppliers.
Uncompetitive or tightly proscribed defense contracts are common around the world. The U.S. has “Buy America” rules that favor domestic suppliers. In Europe, governments have long cited a national-security exemption from EU public-procurement rules to avoid open tenders.
Now the EU wants to limit such exemptions, a move it hopes would discourage members from producing multiple national versions of similar equipment. Instead, governments and contractors should jointly develop vital military assets the bloc lacks, officials say.
European Commission President
Jean-Claude Juncker
said last year that EU countries together spend half as much as the U.S. on defense but only achieve 15% of the effective military output. “That is because around 80% of defense procurement, and 90% of research and technology investment, is done at national level with no coordination between the member states.”
EU rules allow non-EU firms to be blocked from defense contracts. That means stricter application of the EU rules wouldn’t benefit U.S. suppliers or, after Brexit, British defense firms.
Yet even internal pressure for greater EU defense integration faces resistance. Leaders of smaller EU countries don’t want their military spending devoured by defense giants from larger neighbors. EU officials have long recognized that for smaller countries to join common European defense efforts, the economic benefits must extend broadly.
“There are some fears that this will benefit the biggest defense firms already existing in Europe,” said
Alice Billon-Galland,
a research fellow at the European Leadership Network in London. “A discussion of the aim and the strategy” of EU efforts “is really needed.”
Greater integration could also threaten top weapons makers from large EU countries, which depend on steady domestic orders. While French, German and Italian firms may benefit in the longer term from more open European competition, there is a strong political incentive for governments to dish out projects at home.
The commission had warned for more than a year that it would use its enforcement powers to end a situation where, a commission report said, “a very significant share of defense procurement” was shielded from the rules.
Over the past 15 months it examined defense contracts meted out since 2013 in a dozen countries, including the U.K., Spain and France, according to people familiar with the case. Responses from several countries left the commission dissatisfied.
For Italy, Poland and Portugal, the EU was concerned with contracts awarded directly to national suppliers, the commission said. In Italy, the contracts centered on a navy modernization program worth €5.4 billion. The multirole vessel, the centerpiece of that effort, is due to enter operation in 2022.
In Denmark and the Netherlands, the commission targeted the use of offsets, a common commercial arrangement in defense deals in countries around the world.
In such deals, governments seek to offset their import spending on arms by compelling foreign suppliers to invest or spend money in the country. EU law says member governments should only use offset arrangements to protect sensitive military capabilities by keeping part of the production at home.
Write to Laurence Norman at laurence.norman@wsj.com
