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THE EUROPEAN DEFENCE AGENCY (EDA) AND DEFENCE INDUSTRIAL COOPERATION:

IMPLICATIONS AND OPTIONS FOR ICELAND

Executive Summary

The European Defence Agency is the most serious attempt yet made to steer and rationalize defence industry development at a European level. Setting it up within an EU framework has opened the way for linking R+D and project work directly to the needs of European peace missions, and also to general technological progress, in a way that neither NATO-based nor WEU-based work could achieve. The main limit to EDA ambitions, which will not change any time soon even under the Lisbon Treaty, is the preference of big states and producers to keep actual production under their own control.

For Iceland to seek an Administrative Arrangement with the EDA before/without entering the EU, or to accept membership in the context of EU accession, would be an acknowledgement of the EU’s growing ambitions and relevance in the field of defence and security. It would give Iceland a voice – for the first time - in the development of Europeans’ positive armaments collaboration, alongside their arms control and export control endeavours.

The exact political message sent by such a move would depend on the circumstances. If Iceland accepted EDA membership once inside the EU it would signal that Iceland did not intend to be an ‘opt-out’ state (like Denmark) but to play its part even in the ‘tougher’ parts of EU work as best it could, as other small states in Central and Southern Europe have done.

If Iceland sought an Administrative Arrangement it could be seen as a continuation of the policy of getting as close as possible to EU security-relevant activities, without full membership or – if an application was being processed – while waiting for it. The burden would be on Iceland to prove that it had sufficient practical reason and capacity to interact with the EDA, and it could not expect its application to be rubber-stamped – though it would make sense to test and build support among some friendly member states in advance.

The EDA’s task is not simply to maximize weapons output. There are already elements within the EDA and among member states that would like to see it expand its role in such normative areas as the boosting of state and business compliance with export controls, the ‘greening’ of defence, or even a ‘sunset clause’ approach to weaponry that would ensure regular and cheap destruction of unwanted items. Iceland could add its voice in favour of such (or other) ’restraint’-based policies if wished.

Direct consequences for Iceland’s own defence are limited given that the EDA has no military functions and no control of the operational use of equipment. Nor can it be used as a national procurement agency. However, through the Agency Iceland could learn more about and participate in areas of military (or multi-use) research and technology development that are very much relevant to the High North defence

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environment. It could play a similar role in developing systems to boost the efficiency and closer integration of multi-functional European peace missions where its own personnel may be involved. The knowhow and contacts picked up in EDA ‘corridors’ could be helpful for potential investment decisions to be taken at the time of renewal of air defence radars in Iceland, as well as any ad hoc purchases of quasi-military equipment.

The ‘price’ to be paid in return, either for an AA or full membership after accession, is small in financial terms unless Iceland chooses to join any of the Agency’s major projects - which it would presumably do rarely and only with special benefits in view. The political ‘price’ that would have had to be paid in terms of US concerns during the first days of ESDP would not be an issue now. US/ESDP and NATO/ESDP relations are steadily improving, and for those – including Washington – who resent Turkey’s exclusion from EDA, having Iceland join after Norway would just put Turkey’s claims in an even clearer light.

Domestic objections could however be raised, as they have been in Ireland and Malta. These other governments have answered critics by pointing to the EDA’s focus on peace missions and the chance that it gives a small country to have a say – including a voice for restraint - in the development of an EU military profile

The commercial benefits of an EDA relationship for Icelandic producers are less easy to judge and do not seem overwhelming. The EDA’s Bulletin Boards publicizing contract offers are open to all and the agency is not allowed to discriminate against non-EU companies. Its new Logistics Platform could also cover many needs of this country’s producers as it is specially geared to primarily civilian producers including SMEs. The specific EDA projects of most interest to Icelandic firms would probably be R+T ones, paralleling those that Iceland already has access to in the non-military and non-traditional fields covered by the Commission. More added value, but of an intangible kind, would come from the contacts, inside information, and especially the ‘early warning’ of useful trends and projects flowing from privileged access to EDA work. Finally, if Iceland opted in to the Code of Conduct on defence procurement (which would then of course bind it in its own occasional purchase decisions) it would have a strong guarantee against discrimination against its own companies in almost all other EEA states.

Aside from minor niches for very specialized equipments which Icelandic producers are already filling successfully, the chances for this country’s profitable involvement in the European defence market are most likely to lie in the fields of pure research, specialized component and software manufacture, other outsource-able services (like data storage and analysis) making use of cheap energy and a clean environment, and the provision of civilian items and logistical services including lift.

Success in these fields will only partly be determined by Iceland’s formal status vis-à-vis the EDA. Icelandic firms could also improve their understanding of the market and chances of profiting from it, at any time, by such measures as:

- exploiting open features of the EDA such as the contract Bulletin Boards and forthcoming Logistic Services Platform (TPLS);

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- - going into partnership with large European defence and aerospace companies, as ‘niche’ product, component, software and service providers;

- - making their services better known to nations likely to lead or take a large part in ESDP missions, eg the members of the Nordic Battle Group and the UK, as well as to planners in the EU military organs;

- - increasing their efforts to enter security-related projects funded by the Commission in its Framework Programmes on R+D and in other contexts, where success often depends on joining consortia led by larger nations

- - taking advantage of the eventual implementation of the Commission’s export licensing directive within the EEA, especially to offer outsourced production and intellectual input.

An early step to these ends - which could be taken with or without an official initiative vis-à-vis the EDA - would be to promote an independent grouping of Icelandic firms interested in the ‘security support’ market at home and abroad, in partnership with SÁ or SI or both, and to establish a relationship between this group and the ASD (and perhaps also EOS) in Brussels. Since the ASD’s affiliation charges are based on the numbers of employees in a national sector the cost should be fairly low. Such a grouping could also establish direct contact with and pay visits to the EDA itself.

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Table of Contents

Page Number

Executive Summary 1

Preface 5

I. European Defence Collaboration – a historical sketch 6The Institutional Story 6The Industrial Story 8

II (A). The EU, Armaments, and the Birth of the EDA 11The Story to 1999 11ESDP and the European Convention 12Breakthrough after Iraq 13

II (B). The EDA and European Defence Developments 2004-9 15Aims, Activities and Contradictions 15What would the Lisbon Treaty change? 19Alternative Visions 21Commission Initiatives and Defence Market Governance 22

III. EDA Relations with Non-EU States 25The Norwegian Precedent 25Other Nations 27

IV. Iceland, European Defence, and Icelandic Commercial Interests 28Projects/Activities Relevant to National Security 29 Commercial Aspects: What Iceland can (and should) offer 30General Strategies for Small Producers 32How can the EDA help? 33

V. Iceland and the EDA: Options and Arguments 36Iceland as an EU Member 36An Administrative Arrangement 37Domestic Debate? 39

VI. Summary and Closing Remarks 40

Annex: Text of the Council Joint Action of 12 July 2004 43

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THE EUROPEAN DEFENCE AGENCY (EDA) AND DEFENCE INDUSTRIAL COOPERATION:

IMPLICATIONS AND OPTIONS FOR ICELAND

A study for the Icelandic Defence Agency by Alyson JK Bailes and Jón Ágúst Guðmundsson

PrefaceThis study was carried out in the months of February-May 2009 as part of a programme of sponsored research cooperation between the Icelandic Defence Agency (IDA) and the Institute of International Affairs/Centre for the Study of Small States (IIA/CSSS) at the University of Iceland.

The information reflected in it was gathered partly from published (including academic) sources, and partly from interviews carried out in Iceland, Brussels, and with Nordic experts including those of Norway – which is the only non-EU state to have obtained a special relationship with the EDA so far.

The authors wish to thank the officials of the IDA, all other contacts and interviewees, and colleagues at the IIA/CSSS and the Faculty of Political Science, University of Iceland, for their help. The views expressed here are, however, entirely the authors’ own responsibility.

The paper is structured as follows:

Section I presents a brief history of defence industrial collaboration in post-World War Two, from an institutional and then from an industrial standpoint.

Section II (A) tells the story of EU involvement with armament issues and with defence in general, leading up to the circumstances that allowed the creation of the EDA in 2004. II (B) outlines the EDA’s main features and key developments from its creation to the present, as well as other ongoing changes in EU armaments policy.

Section III looks at the EDA’s relationships with non-EU member states - with special reference to the Administrative Arrangement negotiated by Norway - and at some special issues arising with other states.

Section IV discusses the general relevance of the EDA for Iceland and surveys the extent and nature of possible Icelandic private-sector interest in European defence markets, as well as the generic challenges facing small producers.

Section V reviews Iceland’s options for forming a relationship with the EDA, under two main scenarios (with or without EU membership).

Section V offers the authors’ brief conclusions.

The Joint Action of the EU Council of Ministers that created the EDA is attached as an Annex.

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I. European Defence Collaboration – a historical sketch

I.1 Defence industry cooperation in Europe since World War Two has developed along two tracks: formal institutional efforts, and mergers or partnership deals driven by free market dynamics. Market forces have become more important over time as Western nations have privatized most defence production (aside from nuclear weapons), and many European firms have had to enter the competitive global export market in order to survive. EU nations’ views still vary quite widely, however, on whether governments should keep strong shares in the industry and should intervene actively to support their own companies (national preference) or the European defence and aerospace sector as a whole (European preference). The more they do believe in these things, the more stress they tend to put on the institutional approach and on harmonization of official policies.

I.2 The dividing line on this basic issue does not run between large and small states. Britain is more market-inclined and France more intervention-inclined, arguing especially for the need to maintain a strong European technological base. Some smaller West European producers (Spain, Greece, Denmark etc) have used a variety of political tools to maintain a ‘work-share’ for their own companies, while most Central European states joining the EU have accepted that their defence industries must shrink or, at best, survive as niche producers. However, there are some basic challenges and choices that all small state and/or smaller producers face if they want to take a profitable part in the business of defence; and they will be highlighted where appropriate in what follows.

The Institutional Story

I.3 World War Two showed how vital a part the capacity and technological prowess of ‘war industries’ could play in military success. Throughout the Cold War as well, the West had to rely on its industrial and technological edge to keep ahead of an Eastern bloc that was always stronger in numbers of men and arms. Even so, armaments issues never became central to the work of NATO. The Atlantic Alliance focused on the correct deployment of forces for effective deterrence, and on maintaining their capability standards through the process known as ‘defence planning’. It did not dictate and in practice could not have dictated – especially to Allies as powerful as the US – what particular equipment they should choose to meet these goals. Its focus was rather on interoperability, ie the need for nations to use the same or compatible systems in situations where they operated most closely together. Also, because there was a constant Cold War debate over inadequate European inputs and the amount of money European countries wasted through fragmentation, NATO’s drive for more efficient resource use – including industrial collaboration – quickly became focused above all on the European dimension.

I.4 In institutional terms, therefore, NATO’s ‘Eurogroup’ became the main Cold-War forum for talking about armaments cooperation.1 It consisted of all the European

1 In addition, the Conference of National Armaments Directors (CNADs) of all NATO countries including Canada and the USA met regularly. NATO created separate agencies to run specific programmes that needed to be very closely integrated such as the air defence system (NATINADS) and logistics support (NAMSA), plus a

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Allies who had armed forces, ie including such small states as Luxembourg and Portugal but excluding Iceland. It met yearly at the level of Defence Ministers, and regularly at official level at NATO HQ in Brussels. In 1976 it spun off a separate body, with the same membership, to focus more closely on equipment issues under the name of the Independent European Programme Group (IEPG).

I.5 The first important institutional shift came in 1993 when the IEPG was closed down and its functions transferred to the Western European Armaments Group (WEAG).2 WEAG was set up in the institutional context of the Western European Union, a relatively weak body existing since 1954 where the main European Allies could discuss defence business separately from the USA and Canada. From the mid-80s WEU had gradually revived, first as a talking shop and then as the framework for some loosely coordinated European naval operations (protection of shipping in the Gulf War, enforcement of former Yugoslavian sanctions). By the mid-1990s it was trying to groom itself as a framework where more serious peace missions (‘Petersberg tasks’) could be carried out under a European flag; and in the historic Berlin Ministerial decision of July 1996, NATO offered to help such missions indirectly through planning advice and the loan of NATO assets.

I.6 WEAG shared the same general inspiration of a stronger and more coordinated European approach to post-Cold War challenges, but it was kept institutionally distinct from the main WEU decision-making structure for reasons that are more than just technical. In WEU proper, only countries belonging both to NATO and the EU could be full members.3 In WEAG, as a condition for its peaceful transfer from NATO, Norway and Turkey had full membership as well and played a significant role – indeed, Norway provided the Chairman of one of WEAG’s three specialized panels (the one focusing on cooperation with NATO). In 1996 a separate agency, WEAO, was created to focus on the defence research side and it again offered full participation to Norway and Turkey. Only in 2000 was it decided that non-NATO members of the EU could also become full members of WEAG/WEAO if they wished, and Sweden and Finland were among those who took up the offer.4

I.7 As it was now five decades since the start of European defence collaboration work in NATO, it may well be asked what WEAG and WEAO achieved. The honest answer is that they were more like theatres for watching what was really happening in the game of defence cooperation, than like the bodies steering it – not least because they never had funds to invest, or their own research labs, or even the power to make rules and regulations for industry. In fact, from 1993 up to 2004 when the EDA was created, the most important strides were made independently by small groups of

broader 'infrastructure' programme to help fund the network of military airstrips, pipelines etc. Today infrastructure spending has been largely phased out but NATO retains an Armaments Directorate to support CNAD meetings, and maintains contact with industry through a NATO Industrial Advisory Group.

2 For information on WEAG see the preserved website at http://www.weu.int/weag/. The Eurogroup also ceased to meet in 1993.3 This would have included Denmark, but the Danes opted out because of their objections to a separate European defence and took the weaker status of ‘Observer’ together with Sweden and Finland.4 Austria also did but Ireland did not.

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countries with similar interests: France, Germany, Italy and the UK who set up OCCAR in November 1996,5 and the same group of countries plus Spain and Sweden who signed a Framework Agreement for defence industry reform at Farnborough in July 2000.6 Neither of these groups directly owns defence programmes either, but OCCAR manages a portfolio of 7 projects (involving major air. land and sea assets) that have been individually negotiated and funded among the parties. Both initiatives signalled a serious intent of the participating governments to actively seek out chances of collaboration for their shared operational needs, but also to eliminate administrative barriers to trade and the sharing of research among themselves.7

I.8 Another sign of commercial seriousness was that the OCCAR and Framework Agreement states – all large producers - were tough in resisting demands for smaller states to join these groupings. While Belgium was allowed to join OCCAR in 2003 and Spain in 2005, several smaller producers (including Finland and Sweden) were not allowed in despite contributing to individual projects. For such ‘second-tier’ nations, the best hope of eventual more equal treatment seemed to lie in the long-standing WEAG plan to design a new kind of European Armaments Agency (EAA), which would combine the serious hands-on approach of the smaller projects with the wide membership of the IEPG or WEAG. The EAA blueprint was still on the table, un-realized, in May 2005 when WEAG/WEAO dissolved itself and handed over to the EDA – but it helped at least to foreshadow some of the decisions needed over the EDA’s own design.8

The Industrial Story

I.9 In the late twentieth century and still today, the main market pressures affecting the defence industry have been a post-Cold War decline in military spending by most former NATO and Warsaw Pact countries,9 plus technological advances that push towards the use of fewer, individually more complex and more expensive major armaments systems. There is also a growing tendency for the same advances in high

5 OCCAR stands for Organisation Conjointe de Coopération en matière d’Armement, see the website http://www.occar-ea.org/.6 These countries are also sometimes referred to as the Letter of Intent (LOI) group, since the 2000 Agreement was based on an earlier Letter of Intent signed in 1998..7 An important topic here was the need to agree on a common export control code for defence goods produced jointly by several countries.8 A good source for the story up to this point, providing more detail notably on NATO aspects and OCCAR, is Jocelyn Mawdsley: 'The Gap between Rhetoric and Reality: Weapons Acqusition and ESDP', Bonn International institute for Conversion (BICC) Paper no 26 of 2002, text at http://www.bicc.de/uploads/pdf/publications/papers/paper26/paper267.pdf.9 Since 2001 this trend has been sharply reversed by the USA, which increased its defence spending by 59% in real terms from 2002-2008. In Europe as a whole there was also a certain rebound of spending in this period, by 16% in real terms, but European budget performance remains rather mixed and unreliable (eg, France and Britain spending more but Germany still going down). For full details see 'Military Expenditure' by Petter Stalenheim, Catalina Perdomo and Elisabeth Sköns, ch. 5 of SIPRI Yearbook 2008: Armaments, Disarmament and International Security, text at http://www.sipri.org/contents/milap/milex/publications/recent_publications.html.

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technology to be applicable, and applied, to both military and civilian production.10 All this has driven an ongoing ‘concentration’ of the industry, ie the creating of fewer, larger commercial units which can handle the very high R+D costs involved and still achieve some economy of scale when turning out major items. Even they typically also need sizeable export markets to break even, and it is not unknown for a particular country’s defence producers to be selling more advanced items to certain foreign clients than their own country’s armed forces can afford. Further methods being explored for company survival include combining defence and civilian (especially aerospace) production, or general hi-tech development, within one group, and – most recently – developing a sideline in the supply of defence services.11

I.10 The US defence market is still big enough to support several producer companies with almost exclusively or dominantly US business structures. In Europe, however, there is a clear if gradual trend towards the creation of multi-national enterprises – the Franco-German EADS being the most famous - plus ad hoc, but potentially long-term and large-scale partnerships to manage specific projects. These large groupings in turn may engage a wide range of specialist component producers from their own countries and others. The main exceptions, at least in the Western world, are factories producing simple items like ammunition and small arms that can continue to be linked to a purely local market. Finally, the large conglomerates can of course be built on a European-US as well as purely European basis and that is the model Britain's BAE has tried to follow, though a variety of US restrictive practices still make it difficult.

I.11 This trend towards multi-nationalism in defence business organization should not be seen as a final victory for normal market forces - still less for normal competition, and the price discipline that goes with it. The fact that there are so few suppliers to choose between (oligopoly) and that the government in principle is the only arms buyer within each country (monopsony) hampers competition to start with. Then come the political and strategic reasons - security of supply, self-sufficiency, economic and social benefits - that push governments towards favouring either their own firms or those from countries whose policies they like. Large conglomerates or cooperation projects are prone to be organized along 'diplomatic' lines with proportional country representation to ensure a balance of power, rather than along normal business lines: decision-making in EADS has notoriously suffered from this. Weaknesses of competition, the sheer scale of defence projects coupled with often scanty supervision, and the surprises involved in working with cutting-edge technology all create a chronic tendency towards cost and price inflation and timetable overruns. And even in a European setting, suspicions of corruption and other deliberate misuse of funds are never far away.12 10 Björn Hagelin, 'Science- and technology-based military innovation: the United States and Europe' in SIPRI Yearbook 2004, pp 300-30311 See J Paul Dunne and Eamon Surry, 'Arms Production', ch. 9 in SIPRI Yearbook 2006: Armaments, Disarmament and International Security, Oxford University Press, London 2008, text available at http://yearbook2006.sipri.org/chap9.12 For one critical analysis of European performance see Occasional Paper no 69 of the EU Institute of Security Studies, October 2007: ‘Lessons learned from European defence and equipment programmes’, by J-P Darnis, G Gasparini, C Grams, D Keohane, F Liberti, J-P Maulny and M-B Stumbaum, text available at http://www.iss.europa.eu.

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I.12 Where does this leave the European defence industrial effort today? Of the world’s top 100 defence companies in terms of turnover (measured in dollars), 45 are from Europe, the largest being Britain's BAE Systems (no. 3 in the table), EADS (no 7, Italy´s Finmeccanica (no 9), and France´s Thalès (no 10). The largest Nordic companies are Sweden's SAAB (no 24) and Norway's Kongsberg Gruppen (no 99).13 In general, activity is highly concentrated in a few large states with the UK, France, Germany, Italy, Spain and Sweden together accounting for over 90% of all European defence industry output. Here are the European countries with the largest reported arms production and largest arms exports in 2006:

Figure 1: European Arms Sales, Purchases and Exports 2006, by Main ProducersTotal sales by companies14 Govt.Purchases15 Total exports 16 (in billion US $, share of (billion Euro) (billion US$)world total in brackets)

UK 37.3 (11.8%) 7.5 3.8

France 19.5 (6.2%) 6.3 5.1+EADS 12.6 (4.0%)

Italy 11.0 (3.5%) 2.0 1.2

Germany 6.1 (1.9%) 3.7 1.7

Sweden 2.3 (0.7%) 0.3

Spain 1.9 (0.6%) 2.3 1.0

For comparison:USA 200.2 (63.6%) 14.0Russia 6.1 (1.9%) 6.5Japan 5.2 (1.7%)

I.13 It will be seen that most European arms production is still sold and used within the country of origin, though the proportion sent for export can vary quite widely – Germany exports a much higher share than Italy, and Spain than Sweden, for instance. Not too much should be made, however, of a single year's figures since one large 13 SIPRI Yearbook 2008 (as in note 8 above), 'Arms Production' by Sam Perlo-Freeman and Elisabeth Sköns, table 6.A.2 pp 281-288. Note that Chinese companies are not included in this ranking owing to lack of reliable data.14 Source: ibid, p 256. NB that the figure reflects total sales by companies based in each nation, so some of the output may be manufactured in factories sited abroad and sold to the local government (eg sales to the US by UK-owned plants on US soil).15 Source: Nick Witney, 'Re-energising Europe's Security and Defence Policy', European Council on Foreign Relations July 2008, text at http://ecfr.eu/page/-/documents/ESDP-report.pdf.16 SIPRI Yearbook 2008, 'International Arms Transfers' by Paul Holtom, Mark Bromley and Pieter D Wezeman, Appendix 7B pp 327-8. These figures are based on official national statistics and may not be strictly comparable.

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shipment of arms can be followed by quiet years and/or may be paid for in instalments. It may finally be noted that these figures for 2006 are higher than those for 2005 in all cases except France, and the general current tendency of the world arms trade (as well as total world military expenditure) is a rising one.

II. (A) The EU, Armaments, and the Birth of the EDA

The Story to 1999

IIA.1 The Treaty of Rome contains a clause (Article 296 in the latest consolidated EU Treaty) that allows governments to handle defence production, sales and procurement outside the normal rules of the Single Market – including the rules of fair competition - on grounds of national security. This provision does not specifically forbid EU institutions to work on defence and it could in principle have been used by governments to seek exemption only for a few most sensitive projects. In fact, from the outset countries invoked it to cover all their defence industrial operations: some more concerned to protect their native industries, some to keep freedom to work with non-EU partners, and many preferring in general to reserve any multilateral defence dealings for NATO.

IIA.2 This did not mean that the EU was completely barred from discussing arms issues before 1999. They came up in at least three contexts:- Discussions of arms control, disarmament and non-proliferation in the framework of the Common Foreign and Security Policy (CFSP) and its precursors. The EU left NATO to deal with conventional arms control in Europe but took some significant initiatives on global ‘humanitarian’ controls – strongly supporting for instance the ban on landmines; the control of trade in small arms; and a range of measures to address global and regional WMD problems;- The development of common export controls for arms and other strategic goods. Discussion of principles for restraint on arms exports (e.g., to conflict regions) took place also in the CFSP framework, culminating in the EU Code of Conduct on Arms Exports adopted as a politically binding measure in 1998,17 while the Commission drafted a legally binding Regulation on Dual Use (WMD-related) goods – adopted in 200018 - and more recently a Regulation on the export of equipment designed or suited for use in torture (adopted 2005).19 There is also an EU Council Common Position requiring member states to control private-sector arms brokering taking place from their territory.20

- The EU has also adopted many political decisions imposing arms embargoes on individual countries, the most famous being the ban on China introduced in 1989, which became the source of a US/European dispute after 2001 when France and other countries tried to lift it;

- Attempts by the Commission to address the defence industry in the context of industrial policy and of R+D development. From the 1980s onwards,

17 Text at http://www.consilium.europa.eu/uedocs/cmsUpload/08675r2en8.pdf.18 EU Council Regulation 1334/2000 .19 EU Council Regulation 1236/2005 covering goods that ‘could be used for capital punishment, torture or other cruel, inhuman or degrading treatment’, and requiring licensing for the export of certain other related goods and technical assistance.20 Council Decision 2003/469/CFSP of June 2003

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Commissioners for Industry issued papers calling for the application of at least some Single Market disciplines and common guidelines to make European defence production more efficient and competitive, and to help maintain a state-of-the art European technological base. They could point to the close technological and commercial links between defence research and production, the European aerospace industry, and European space programmes – which became a growing focus of Ministers’ interest during the 1990s. The Commission’s arguments were often supported by parliamentarians in the WEU Assembly and European Parliament: but so long as EU nations remained united on keeping defence as such out of the EU’s hands, Ministers were able to resist all pressures for defence industry-related legislation.

ESDP and the European Convention

IIA.3 The position on this basic point was transformed in December 1999, when the European Council adopted a decision creating a European Security and Defence Policy (ESDP) that allowed the use of military forces under an EU flag for various crisis management purposes.21 The decision meant the effective shut-down of the WEU, except for a skeleton staff to cover archives and the like, and the opening of direct NATO-EU relations over possible NATO support for EU actions. NATO had signalled readiness for such a relationship in its Summit decisions of April 1999; but as it turned out, Turkey’s bitterness over losing the status it had enjoyed in WEU (and fear of Greece exploiting the new arrangements) led to the blocking of most NATO-EU interaction on the new agenda for two years. Meanwhile, the EU went ahead with creating the tools needed to manage the new policy: a new Ambassadorial-level Political and Security Committee sitting permanently in Brussels to run both ESDP and CFSP; a Military Committee of senior national officers and a Military Staff considerably larger than WEU’s. Administratively the new structures were overseen by the recently created EU High Representative for CFSP, a post held to the present by Javier Solana. Under pressure from the Nordic member states, capacities for civilian interventions were built up in parallel. Once the Turkish blockage was partially removed by a political deal in December 2002 (see also section III below), the first ESDP mission was launched with the EU’s takeover of a former NATO deployment in Bosnia-Herzegovina. Up to today, a total of 23 ESDP missions – both military and civilian – have been launched and 12 are still in progress.22

IIA.4 The original ESDP decisions strongly emphasized the need for better European capabilities. The famous ‘Headline Goal’ formulation , which said the EU should have a pool of 60,000 personnel at its disposal for rapid deployment, also mentioned a number of matériel assets that should be built up jointly: notably airlift, sealift and command, control, communications and intelligence (C3I) systems. However, no specific organ was created to work on this angle, partly because many nations hoped the EU would be able to draw more fully on NATO’s defence planning help than proved to be the case (again because of Turkey). This gap was one of several problematic aspects of the infant ESDP that was addressed by the energetic Michel Barner, a French politician heading the committee that dealt with external policies 21 The details of the launch of ESDP are in Annex IV to the European Council conclusions of 10-11 Dec. 1999, text at http://ue.eu.int/uedocs/cmsUpload/Helsinki%20European%20Council-Presidency%20conclusions.pdf22 Details at http://consilium.europa.eu/showPage.aspx?id=268&lang=EN.

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during the ‘Convention’ process for drafting the European Constitution. At his inititiative and with at least the tentative support of large EU states, the following language was included in the draft Constitutional Treaty produced by the Convention on 18 July 2003:

‘Member States shall undertake progressively to improve their military capabilities. A European Armaments, Research and Military Capabilities Agency shall be established to identify operational requirements, to promote measures to satisfy those requirements, to contribute to identifying and, where appropriate, implementing any measure needed to strengthen the industrial and technological base of the defence sector, to participate in defining a European capabilities and armaments policy, and to assist the Council of Ministers in evaluating the improvement of military capabilities.’

This proposal remained in the draft Treaty after renegotiation by EU governments, with the difference that the new body's name was changed to the snappier European Defence Agency.

Breakthrough after Iraq

IIA.5 The EDA proposal, like many others in the Treaty designed to strengthen EU external action, would still be waiting today to come into force with the much-delayed Lisbon Treaty – the successor of the draft Constitution – if it were not for other things that happened in 2003. The US-led invasion of Iraq in March split the EU states politically down the middle, but also focussed minds on the urgent need to re-build European unity and credibility. Already on the day of the invasion the PSC was meeting to start work on a European anti-WMD strategy, and shortly afterwards Solana was mandated to draw up the first-ever European Security Strategy – eventually adopted by the European Council in December 2003. The pressure to demonstrate new successes extended to ESDP, and helps to explain a burst of new institution-building in 2003-4 that included the invention of EU ‘Battle Groups’ and a Civil-Military Planning Cell (for operations), as well as the first-ever ESDP mission outside Europe – launched in Bunia, Democratic Republic of the Congo, in summer 2004.

IIA.6 It was against this background that the European Security Strategy of December 2003 made the first mention of ‘the creation of a defence agency’ (authors’ italics), as an ‘action underway’ to improve the EU’s operational effectiveness and coherence. Solana’s staff were indeed working on a draft, and by 12 July 2004 the General Affairs and External Relations Council was ready to adopt a Decision on ‘Joint Action 2004/551/CFSP’ (see text at Annex to this report), creating the European Defence Agency we know today. In essence, Ministers had pulled the idea of an arms agency out of the draft Constitution for separate and rapid implementation, while somewhat changing the procedural context. A Joint Action is a form of CFSP measure that allows the application of funds, if necessary on a large scale, but still does not bring the matter concerned within the core competence of the European Community (which would imply Commission control).

Figure 2:

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A SIMPLIFIED ORGANOGRAM FOR EU SECURITY/DEFENCE WORKShowing the line of management for the EDA

European Council _______________________President of European Commission | | | |General Affairs and External _____________ Members of Commission, esp. for: Relations Council (GAERC) External Relations +Neighbourhood

(Presidency) _____________ Policy | | Justice, Liberty and Security

COREPER, PSC (and rest of | CFSP/ESDP civilian committee | EU offices abroadstructure) |

| | |__________________________

High Representative for CFSP | |(supported by Policy Unit) Military organs: | + Special Representatives Military Committee (EMC) Operational

commanders Military Staff (EMS)*

European Defence Agency Other special assets: eg *The EMS is tasked by the EMC but

SITCEN comes under the High Representative Satellite Centre for management purposes as a part

Institute of Security Studies of the Council Secretariat

IIA.7 Using this method, it was possible to create the EDA as a free-standing and sui generis inter-governmental Agency managed by a Steering Board of member states’ Defence Ministers (plus a non-voting Commission representative), who meet at least twice yearly under Solana’s chairmanship. Solana is also the formal Head (management authority) of the EDA, but its day-to-day running is in the hands of a Chief Executive appointed by the Steering Board, with a contract for three years extendable by two.23 The budget, just 2 million Euro at first but due to rise steeply to 20 million in 2005, was to be provided by ad hoc national contributions - ie outside the Community budget - using a 'GNI scale' which is also applied to ESDP operations under Article 28(3) of the EU Treaty.24

IIA.8 How does the EDA fit in to the already complicated architecture of ESDP? As the organogram in Figure 2 above shows, its line of management is purely civilian and comes down from the Council of Ministers through the PSC and Solana. In this it resembles some separate agency-type bodies created earlier such as the Institute for 23 The first Chief Executive was the British ex-MOD official Nick Witney. In January 2008 the German Alexander Weis took over, with two Deputy Chief Executives (from Italy and Poland). 24 ESDP mission funding has many other complications not relevant to the EDA, which are regulated by a mechanism known as ATHENA. Detailed rules for the EDA’s budget were laid out in Council Decision 2007/643/CFSP of 18 September 2007 which also covers the Agency’s own procurement policy [Official Journal L 269 of 12.10.2007].

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Security Studies in Paris, and a Satellite Centre inherited from WEU. It has no direct links with the Military Staff and Military Committee,25 although the Military Staff also have Solana as a management supervisor given their status as a special branch of the Council Secretariat – and in practice EDA staff can seek their technical advice when needed. Physically speaking, the EDA occupies a building in the Avenue Louise part of Brussels (rue des Drapiers), some distance away from the Avenue de Cortenbergh where the core ESDP staffs are housed.

II(B) The EDA and EU Defence Developments 2004-9

Aims, Activities and Complications

IIB.1 The EDA’s purposes are summarized on the EU’s own Portal site as: “* to develop defence capabilities in the field of crisis management. The Agency identifies the EU’s future defence capability requirements, coordinates the implementation of the European Capabilities Action Plan and the harmonisation of military requirements, proposes collaborative activities in the operational domain and provides appraisals on financial priorities; * to promote and enhance European armaments cooperation. The Agency proposes new multilateral cooperative projects, coordinates existing programmes and manages specific programmes; * to strengthen the industrial and technological base in the field of defence and to create a competitive European defence equipment market. The Agency develops relevant policies and strategies in consultation with the Commission and industry, and develops and harmonises relevant rules and regulations; * to enhance the effectiveness of European defence research and technology. The Agency promotes and coordinates research aimed at fulfilling future defence capability requirements, in liaison with the Commission.”

IIB.2 This range of tasks is reflected in the Agency’s current organizational structure, which has five directorates respectively covering Capabilities, Research and Technology (R+T), Armaments, Industry and Market, and Corporate Services.26 There is also a Director of Planning and Policy reporting directly to the Chief Executive who takes on other miscellaneous duties including audit and liaison with non-member countries.

IIB.3 At first sight the EDA’s tasks are quite coherent and in line both with the WEAG dream of an EEA, and the original notion in the draft Constitution. However in practice they may tug in different directions, towards different partners, audiences and modes of action: - The Agency’s role on capabilities brings it closest to the operational part of ESDP, as shown by the reference to its helping implement the European Capabilities Action Plan (ECAP) which is a set of targets adopted by Ministers in November 2001

25 Some sources also hint at a certain distance and rivalry, at least at the higher military level, where (for instance) national Chiefs of Defence Staff may feel that the EDA’s civilian staff are encroaching on arms issues that should be left to military judgement and are undermining part of the EU Military Staff’s role.26 See http://eda.europa.eu/genericitem.aspx?area=Organisation&id=119.

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to boost progress towards meeting the Headline Goal. ECAP is structured through panels addressing different types of assets in which nations take part according to their abilities. The EDA has now agreed its own list of the ten most important capability areas and runs its own research projects to support many of them. The net progress made, however, has been criticized by pro-ESDP insiders who complain that even the selected targets in the original Headline Goal have been watered down and sidelined by subsequent changes in ESDP planning, such as the effort devoted to Battle Groups;27

- As regards projects, the EDA is designed to operate in more or less the same way as OCCAR, ie to help develop and then administer equipment projects that are agreed by nations ad hoc and with varying patterns of participation and input. In particular, the funding rules of each project are agreed case by case among participants only, and may be very different both from the general EDA budget and the eventual ‘work-share’ (ie, the amount of commercial business gained by each party). According to its rules such projects can either be drawn up collectively and fully ‘owned’ by EDA, with an expectation that all member states will take part unless they opt out (category A); or a few states can use EDA to ‘Europeanise’ a project of their own and invite others to opt in (category B); or a few states can (if the Steering Board agrees) use EDA as a kind of agent to administer a project limited to themselves; - As a promoter of R+T (which it prefers as as more 'active' alternative to R+D) the EDA takes the place of WEAO and can also develop programmes with all, or a select number of states. Its two largest undertakings so far are known as Joint Investment Platforms, covering Force Protection (with funding of around €50 million) and 'Innovative Concepts and Emerging Technologies', respectively. In practice its room for manouevre is affected by the Commission’s large-scale engagement in research funding which also focusses on emerging technologies; includes a number of openly military-related areas such as the EU’s space programme; and can also cover multiple civilian security needs.28 (The EDA can help channel civilian and multi-use inputs to defence projects,and can develop technologies which also have non-military applications, but it cannot run projects to design non-military security equipment as such: the products it focusses on are those defined by the EU’s ‘military list’) 29. At a Steering Board meeting on 18 May 2009 Ministers took the common-sense decision to instruct the EDA and Commission simply to talk together about their division of 27 For a list of the EDA’s capability priorities and further details see http://eda.europa.eu/genericitem.aspx?area=Organisation&id=115. The critique of progress is strongly stated in the paper written by the first EDA Chief Executive, Nick Witney, for the European Council on Foreign Relations in 2008: Nick Witney, 'Re-energising Europe's Security and Defence Policy', as note 14 above.28 In September 2006, a European Security Research Agenda Board (ESRAB) set up by the Commission issued an influential report noting the wide range of new technologies that would be relevant to meeting the EU's full security needs – non-military as well as military – in future. The Commission has since included a growing number of security themes in the calls for projects and subsequent funding under its Framework Programmes for European R+D (the current one is the 7th): access to the 7th Framework is also open to EEA members. For full information on security related work sponsored by the Commission's Directorate-General for Enterprise and Industry, see the homepage http://ec.europa.eu/enterprise/security/index_en.htm.29 A list created to define the items that would be covered by the EU’s political code of conduct on conventional arm exports.

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labour and overlap, and to develop a 'European framework cooperation for synchronizing defence and civilian security-related research activities' ;30

- When working to open up the intra-EU defence market the EDA also faces a delicate coexistence with the Commission which since 2003 has gained new leeway to introduce pro-competition measures with Ministers’ support or at least tolerance. As further explained below, the EDA took an early lead in November 2005 when the Steering Board adopted a Code of Conduct on Defence Procurement designed to build transparency and reduce restrictive practices;31 but the Commission is now poised to secure adoption of the first legally binding directives that would increase competition and smooth collaboration in key aspects of the market (see below on the Commission's 'defence package');

- When offering services direct to industry, the EDA has been able to introduce some useful features such as unclassified Electronic Bulletin Boards for tenders issued by member states and commercial contract openings. But the European organization of defence producers – the ASD (AeroSpace and Defence Industries Association of Europe) 32 - are well aware that the Agency has no real cash to offer, and tend to devote at least as much or more attention to the Commission's efforts as well as to nation-driven and US/European developments.

IIB.4 Underlying these complexities is a continuing tension between different member states who lean either towards a more interventionist defence industrial policy, with a ‘European preference’ and the fostering of projects for projects’ sake – like the French – or towards making the defence market itself more free and powerful so that competition and commercial values can rule. The latter is still broadly the UK’s position, and leads to scepticism in London over public funding of broadly defined and ‘exploratory’ research projects.33 It is well known that in 2006 Britain and France clashed over the setting of the EDA’s first three-year budget framework because the UK refused to authorize future increases without a clear and properly limited vision of how the Agency’s role would develop. As a result, the Agency still 30 See GAERC Conclusions, 18.5.2009, pp 9-11, available at http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/gena/107867.pdf 31 Details including the text of this Code and the related Code on supply chain security are at http://eda.europa.eu/genericitem.aspx?id=153. As part of the same programme of market liberalization the EDA has also produced (autumn 2008) a document on phasing out Offsets – so far endorsed by 25 EU members and Norway -and a scheme for safeguarding the security of information. 32 See http://www.asd-europe.org. The ASD was formed by merging EDIG (European Defence Industries Group), the former dialogue partner of WEAG, with AECMA (European Association of Aerospace Industries) and EUROSPACE (the association of the European space industry). As of Spring 2009 it has 30 member associations in 20 Eurpean countries, covering altogether some 2000 companies, 80,000 specialized suppliers, 649,000 employees and a total turnover of €132 billion. The ASD can accept affiliates from non-EU European countries and its aims make special mention of supporting SMEs. Its activities and publications (including a recently launched ‘Focus’ magazine) also cover normative issues like export control, environmental and social impact, transparency and business probity. A separate European Organisation for Security (EOS) was created in 2007 to focus on the needs of the European civil security market: see http://www.eos-eu-com.33 For instance the UK pulled out of the Joint Investment Project on Force Protection, one of the EDA’s single largest initiatives.

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needs its budgets to be set year by year by the Steering Board, and the UK has also imposed a ceiling on the total size of the EDA staff (currently around 110). There is a widespread view that these national tensions have overshadowed the EDA’s early years and delayed its entry into serious project work.

IIB.5 Perhaps understandably against this background, the EDA spent much of its inaugural period on preparing policy documents to set goals, guidelines and norms of conduct for various aspects of armaments work. The most comprehensive one is the Long Term Vision (LTV) adopted in October 2006,34 which starts from a broad analysis of the kind of world in which the ESDP will have to operate in coming decades. It pleads strongly for a more united and integrated EU defence industry boosted by increased and better focussed research spending. In a passage important for a non-military state like Iceland, it points out that a cost-effective European defence effort 'means exploiting the abundant human capital and sources of innovation to be found in universities, SMEs, and enterprises not traditionally regarded as “defence industries” across Europe.' It also shows awareness of the importance of arms control and non-proliferation as part of the European security culture, noting the possible 'dark side' of advanced technology development. At the same time, the LTV underlines one of the EDA's most significant limitations by focussing its final list of essential capabilities closely upon ESDP operations: so long as the EU is not a full defence union, neither the EDA nor the ESDP generally has any right to advise states on what the totality of their defence postures and capabilities should be.

IIB.6 Other documents that the EDA sees as important achievements are the European Defence Technology and Industrial Base report approved in May 2007, the European Defence Research and Technology strategy endorsed in November 2008, the Capability Development Plan endorsed in July 2008 and the European Armaments Cooperation Strategy of October 2008. While these are mainly of interest to major arms producers and users - and the published versions tend to be both brief and vague - companies entering the market will them useful as sources of the current European 'Party line' on defence collaboration and as pointers to the areas most likely to attract official research funding. A further discussion of EDA projects and services that could be of special interest to Iceland is in Section IV (paras.5-7) below.

IIB.7 Since the EDA has been infected with a vengeance by the military love of acronyms, a summary may be helpful at this point:

Figure 3: EDA ‘Alphabetti Spaghetti’- Important Abbreviations and Acronyms

CAPTECH Network of technology experts in a particular field of defence capability development

CDM Capability Development MechanismCDP Capability Development PlanCoBPSC Code of Best Practice in the Supply ChainCoC Code of Conduct on Defence ProcurementDTEB European Defence Test and Evaluation BaseEBB - JC European Bulletin Board – Government ContractsEBB – IC European Bulletin Board – Industry ContractsEACS European Armaments Cooperation Strategy

34 Text at http://eda.europa.eu./genericitem.aspx?id=146.

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ECAP European Capabilities Action PlanEDRT European Defence Research and Technology strategy paperEDTIB European Defence Technology and Industrial BaseJIP-FP Joint Investment Project on Force ProtectionJIP-ICET Joint Investment Project on Innovative Concepts and Emerging

TechnologiesLTV Long Term VisionR+T Research and TechnologyTPLS Third Party Logistics Support Platform

What would the Lisbon Treaty change?

IIB.8 The Lisbon Treaty35 if and when adopted will make at least one crucial difference for the EDA: it requires the Council of Ministers to take a fresh Decision (by qualified majority vote) on the Agency’s duties, procedures, structure and site, thus converting it into a Council organ within the Treaty framework rather than a sui generis agency. As noted, this is what the original draft Constitution had in mind, so it can be seen as coming back full circle after the improvised solution used to ‘pluck out’ the agency from the Treaty draft in 2004. It will not change the fact that the Agency belongs to the Council framework in the specific context of ESDP (called Common Security and Defence Policy in the new Treaty): thus the EDA would continue to work in essentially inter-governmental style, with minimal Commission involvement,36 and it could adopt its own pattern of membership and involvement based on countries’ own opt-ins and opt-outs.

IIB.9 The Lisbon Treaty itself lays out the main future tasks of the EDA in terms very close both to the original Constitution draft and the Joint Action of 2004. It does spell out more clearly that the EDA should work directly with nations to address shortfalls in its assessment of their ESDP-relevant capabilities: this might or might not make a real difference depending on how serious the nations got about enforcing the ECAP (or some successor thereof), and also how far the lead in mission-related defence planning work might shift between the EU and NATO. However, a potentially much more important change is embodied in a separate Protocol (no 10) of the Lisbon Treaty which sets out a blueprint for ‘permanent structured cooperation’ in the European defence sphere.37 This would allow a group or groups of EU members with common aims and relevant capacities to set up their own projects for improving capabilities and streamlining their operations, and it would let them use the EDA to run these projects – bypassing the current categories and procedures that give other states a maximum chance to opt in. It is widely assumed that any such projects would be launched by the countries with the highest defence spending and strongest record of actual force deployments, which largely if not entirely coincide with those having the biggest arms industries.

IIB.10 Some analysts attach great hope to this innovation as a way of allowing the most serious performers to forge ahead, unburdened by the need for consensus and the

35 Current draft text at http://europa.eu/lisbon_treaty/full_text/index_en.htm.36 The Treaty describes the relationship with the Commission as a ‘liaison’ one which would apply mainly in areas of unavoidable overlap such as defence market liberalization.37 The Protocol’s terms are conveniently summarized in Annex A of the Nick Witney paper referred to in note 14 above.

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divergences of interest that are inevitable in a Union of nearly 30 states.38 The fact that they could do so within EU Treaty provisions and in the name of the EU – rather than in separate frameworks like the earlier OCCAR and LOI – should in principle both strengthen the EU’s own defence image, and allow schemes for similar purposes outside the Treaty to be phased out. One of the strongest advocates of making maximum use of this opening is the EDA’s first Chief Executive Nick Witney, now working as an independent consultant and still a great enthusiast for ESDP. While recognizing that there would probably have to be several ‘pioneer groups’ rather than just one – given the very diverse performance pattern even among larger states – he has argued in a recent study39 that countries unable or unwilling to join in such efforts should maybe be thrown out of the EDA altogether, allowing the Agency to focus on the most demanding operations and to move ahead at the speed of the fastest. He suggests that even within waiting for ratification of Lisbon, the EDA Steering Group could decide to re-design the entry criteria as (for example):

“…. a minimum percentage of GDP devoted to defence, and a minimum percentage of military personnel deployed on operations.If the bar were set at 1% in each case, then …. the first criterion would filter out Austria, Ireland, Luxembourg, and Malta. The second would additionally exclude Bulgaria, Cyprus, and Greece. That said, as with the Eurozone convergence criteria, Member States which commit to meet the basic criteria within a specific timeframe should be allowed in.”

IIB.11 Witney’s prescription would mean that Iceland would either not be allowed to work with the EDA at all, or might be thrown out after a certain time when the Lisbon changes had worked their way through. How seriously should this vision be taken? It is fair to say that there is scepticism in Brussels, both over how far the strong countries will in fact make use of the new cooperation formula, and over whether it is practical - or indeed fair - to re-dedicate the EDA only to the purpose of supporting their schemes.40 It is not easy to see what added value, besides the political and symbolic, strong nations would gain by setting up their exclusive groups inside the Treaty rather than outside it, given that the EDA will still have no money of its own to subsidize them. Incentives to invest heavily in this route are also limited by the continuing division of competences between the EDA, the Commission and the military staffs and by the fact that there is no obligation for NATO to recognize any special status for Allies joining such projects in the EU. As regards the overall mix of EDA work, there are many within the Agency (as well as among smaller states) who believe that its campaign for an open and efficient defence market means keeping opportunities open for all kinds of producers, including SMEs, and positively

38 One good study on the subject is Sven Biscop, ‘Permanent Structured Cooperation and the Future of ESDP: Transformation and Integration’, an Occasional Paper of the Egmont Institute, text at http://www.egmontinstitute.be/papers/08/sec-gov/080918-Biscop-Helsinki-paper.pdf.39 Nick Witney, 'Re-energising Europe's Security and Defence Policy', as note 14 above.40 For similar reservations in an academic analysis see Sven Biscop's paper cited in note 36 above. He points out that the Lisbon text does not prescribe selection criteria based on size of budgets (a blunt criterion anyway since money is so often mis-spent!), and that if the aim is to improve European performance overall, the best permanent structured cooperation would be that involving all 27 states!

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encouraging cross-over between the military and civilian hi-tech sectors. As one insider has commented, the largest firms often have the biggest problems with rigidity and waste, and the disputes that have most hampered EDA progress so far (the special Cyprus/Turkey issue aside) have always been between large states/producers rather than small ones.

IIB.12 At all events, any vision of a more exclusive EDA must find a way around the clear statement in the Lisbon Treaty that “The European Defence Agency shall be open to all Member States wishing to be part of it.” It is true that the text goes on to specify that the new Council decision on the Agency's statute, seat and operational rules will be taken by qualified majority and “should take account of the level of effective participation in the Agency's activities”. But this may simply be read to imply that the present system of varied and optional participation in actual projects, with implications also for the major funding inputs, should continue. If all small, medium and less militarily active states currently in the EDA were to oppose a Council decision excluding them, they could in fact block it: and Witney perhaps exposes a weakness in his argument when he writes that he cannot see why they would want to do so.

Alternative Visions?

IIB.13 One reason why smaller states may wish to hang on to EDA membership is that the Agency also has a potential normative and regulatory role, for which it may be particularly valuable to include nations with varying views on the military and to have some chance of small players balancing large ones. The wide and balanced membership of the Agency has already allowed it to adopt important pro-competitive measures (The Code of Conduct and associated package) that might actually have been harder for a few large producers to negotiate anong themselves. There are other general issues of principle affecting the arms industry that the EDA is starting to speculate about getting involved with, in ways that could be seen as building on the LTV’s recognition of certain virtues of restraint. One that might gather growing political support is the need to bring ‘green’values to bear upon defence activity including the manufacturing process: an area already being actively explored by the US military, and where the inclusion of defence fuels and energy sources in the EDA’s latest research mandate could provide a starting point for European work. A possible approach here would be to develop rules about deadlines for replacing old stocks, eg of ammunition or of generic vehicles, by new ones meeting stricter environmental and safety standards within a certain deadline. Another current topic of interest is the need to raise and standardize European standards of export control and enforcement, among both government organs and private firms – an issue made more pressing by an imminent liberalization of intra-European licensing rules as explained in the next sub-section. Major competences for this topic are already divided between the Commssion and CFSP’s intergovernmental machinery; but there is no prima facie reason why the EDA should not carry out consciousness-raising and best-practice activities with the private sector, or even provide a forum for new informal cooperation among governments.

Commission Initiatives and Defence Market Governance

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IIB.14 As already underlined, the EDA is very far from being the only part of the EU apparatus dealing with armaments issues. The Commission's efforts to claim a role for itself in defence industry rationalization intensified in 2003 with its paper calling for a long-term common defence equipment policy, and its 'Green Paper' published in 2004 on defence procurement. In 2006 it published the results of a consultation with the European Court of Justice over the proper – in the Commission's view, restricted! – application of Article 296 (i.e. the Treaty opt-out on coverage of defence equipment by the Single Market). Most decisively, on 5 December 2007 the Commission tabled a new 'defence package'41 containing for the first time two drafts of legally binding Single Market directives - placed in the context of free enterprise and industrial policy - which would respectively simplify the licensing system for intra-EU arms trading, and introduce more standardized and transparent procedures for states' defence procurement.42 Aside from these drafts the 'package' contained many other ideas such as a database of classified information on defence contracts, promotion of the existing European Handbook for Defence Procurement, and in the longer-term the elimination of Offset deals43 and a review of European defence investment opportunities.

IIB.15 The directive on arms transfers within the EU is of particular interest to any state seeking to promote or take part in multinational consortia – including as a minor and specialized supplier. At present, intra-EU transfers are treated exactly like ones to non-EU countries and require the issue of a separate licence each time that components as well as finished goods change hands. The Commission in a 2005 study estimated the gross costs of this regime at €3.16 billion per year including €434 million for the production of licences alone. Under the new directive, governments would be able to issue two new categories of ‘general’ and ‘global’ licences’, allowing unlimited intra-EU exchanges for up to 5 years, to any company on their territory trading with other EU countries which could meet the conditions for being ‘certified’ as a responsible actor - including its compliance with export controls. Data on the number of actual transfers would be provided to governments ex post facto. If the finished equipment ended up being exported out of the EU, the company carrying out the export would seek a licence from its own government in the usual way but

41 For a good detailed analysis of the package and its implications see the Flemish Peace Institute's online paper 'The European Defence Package: towards a liberalization and harmonization of the European defence market' (April 2008) at http://www.flemishpeaceinstitute.eu/get_pdf.php?ID=201&lang=EN. A shorter FPI 'Advice Note' (July 2008) for the Flemish Parliament brings out more clearly the possible objections to the licensing directive: text at http://www.flemishpeaceinstitute.eu/get_pdf.php?ID=242&lang=EN. 42 The licensing directive is COM(2007) 765 final and the procurement directive is COM(2007) 766 final, both of 5 December 2007. The former text is at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52007PC0765:EN:NOT and the latter at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52007PC0766:EN:NOT.43 The EDA has also recently adopted a Code on phasing out such deals, whereby Country A selling arms to Country B agrees to accept a defined set of exports from Country B's firms – which may or may not be defence-related – in lieu of part of the financial payment. Most countries and indeed companies are however still strongly attached to such deals, without which the very high cost of major defence purchases might be prohibitive especially for smaller customers.

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would also declare willingness to respect any (additional) export controls maintained by the countries whose firms had contributed to the production.

IIIB.16 The procurement directive has aroused less enthusiasm in industry, partly because it is not a great advance on commitments already made politically by EDA member states through the relevant Code of Conduct, and retains significant limitations that include exempting defence R+D contracts from the rules of transparency and fair competition. It is true that governments often want to preserve special control and confidentiality over the research phase of projects that might give them an operational and/or technological edge, but industrial spokesmen have pointed out that firms successfully completing such contracts normally expect also to be entrusted with the operational development - raising doubt over whether one can realistically enforce full competition for the latter alone. At any rate, this directive would also apply to major purchases of security-related quipment for non-military purposes, bringing it into an area that may more often be applicable to Iceland’s own actions.

IIB.17 The directives require final approval both by the Council – already given – and by the European Parliament – curently expected by end-May 2009. This would allow the licensing directive to be published in the Official Journal by end-June and the other probably a bit later. From the time of publication nations have two years to transpose the directives into national legislation, after which there will be a year for monitoring the results and a review by the Commission, which could draw attention to any national failings. The Brussels organs will now have to consider how to use this transitional period to promote best practice by all nations and –very important – also to brief and guide industry regarding its new options and enlarged responsibilities. The Commission has suggested that to start with, states could redirect officials previously working on intra-EU licensing to tackle the tougher challenges of external export decisions, controls on private brokering and monitoring of end-users. The EDA could conceivably also use this opening to get more involved in export control implementation - as suggested above – if it could provide an informal and politically acceptable forum for states and/or companies to share their best practice.

IIB.18 The final text of the directives states that both are prima facie applicable to the EEA as Single Market measures. If any or all of the EEA countries wish to implement them, there is a relatively quick and simple procedure for the EEA Joint Committee to recognize the directives, after which the identical provisions will be uplifted into the EEA acquis and the EFTA compliance authorities will become responsible for oversight. Given its record (discussed further below) of enthusiastic involvement in EU defence market measures, Norway is certain to want this although its plans are not known in detail at the time of writing. Iceland could of course also take the initiative for EEA action on the matter if wished.44 The argument for doing so would be that the smaller and more specialized a country’s suppliers are, the more they would gain by eliminating unnecessary bureaucratic barriers and expenses in the to-and-fro exchange of components and other inputs for other countries’ larger products. (See also Section IV).

44 The position of the third EEA member outside the EU, Liechtenstein, on this matter is not known but prima facie it would have no reason to stand in the way of the measures.

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IIB.19 Application of the simplified licensing regime for arms transfers throughout the EEA would be eased and justified by the fact that both Norway and Iceland have aligned themselves with the EU acquis on export (and transit) control of military items, as well as of dual-use (WMD-related) goods. Iceland has long had a policy of international cooperation on such controls as part of its efforts for peace, non-proliferation and disarmament. It belongs to several select groups of states applying controls on missiles, chemical and biological weapon materials and is currently applying to join the Nuclear Suppliers Group and the Wassenaar Arrangement (for conventional arms transfers). The Icelandic Government controls national exports through two lists, of military items and dual-use goods respectively, both of which are already in line with the latest UN Resolutions. A Bill is going through the Althingi (Bill of Law on the Control of Items, technology and Services of Strategic Significance) which will update these restrictions and bring them fully in line with the two key EU measures, namely the Military List on which the Code of Conduct for Arms Exports is based, and the EU’s Dual-Use Regulation referred ito in para IIA.2 above. If accepting the EEA licensing directive, Iceland (and also Norway) would have to further adjust national export control rules to bring the types of licences used in line with those that EU members will be introducing over the next two years.

IIB.20 Finally it should be noted that while the defence package directives have been welcomed by industry and approved by a majority in the European Parliament, the licensing directive in particular has run into criticisms from both parliamentarians and NGOs (mainly but not only on the Left).45 Critics focus mainly on the fact that the EU Code of Conduct on arms exports to third countries (para IIA.2 above) has never been given a legally binding form, largely due to French resistance: and there is much suspicion and some evidence that certain states interpret the Code’s rules more loosely than others. The risk is thus seen that the new regime would make it easier for firms to move defence production around Europe with the aim of making the final export from a country with relatively lax controls. Too much seems to rest, in this and other respects, on assurances given by the companies themselves – a shift that in effect reduces governments’ control on the whole arms transfer process. Moving key judgements into the commercial sphere also reduces transparency and democratic control, since companies do not have the same public reporting requirements and answerability to parliaments that all EU governments have accepted. If an outside export is made on questionable grounds, the governments of other states where the goods or components were originally sourced will only find out through subsequent reporting, when the harm will have been done. (The Commission had originally thought of asking for all transfer details to be placed in a central database in real time, but concluded it would be unworkable.)

IIB.21 True, the directive does allow some room for states to impose special conditions for very sensitive items produced initially on their territory: and if a state generally does not trust its companies or want to cede control to them, it could choose not to issue any general or global licences in the first place. But this could mean losing ground commercially if most competitors chose differently, while if many governments used the restraint options extensively the whole purpose of the reform could be undermined. Consideration of this dilemma explains why working with 45 For a report on EP debates, see the Brussels thinktank ‘ISIS-Europe’’s European Security Review issue no 39 of July 2008, available at http://www.isis-europe.org/pdf/2008_esr_56_esr39.pdf.

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governments and firms to ‘level up’ the standard of compliance witll be so important (see above); and it also suggests that states blocking the legalization of the CFSP Code of Conduct are going to come under steadily growing pressure.

III, EDA Relations with Non-EU States

The Norwegian Precedent

III.1 To the present, the membership of the EDA has consisted of all EU states except for Denmark – which declined to take up its option of full membership because of its general opt-out (dating from the time of the Maastricht Treaty) on ESDP activities. In March 2006, however, the EDA Steering Board agreed to implement an ‘Administrative Arrangement’ (AA) with Norway that gives it many of the same benefits full members enjoy. The arrangement was brought into effect by an exchange of letters with the Norwegian Defence Minister rather than by an international-legal process, hence its ‘administrative’ character.46 It remains open to review, amendment, or termination at any time by either side with ‘an appropriate notice period’.

III.2 The stated reasons for the arrangement are two:- - to facilitate practical cooperation on matters of shared interest: to this end

the Norwegian Defence Ministry will be assured ‘the fullest possible transparency regarding the Agency’s specific projects and programmes with a view to Norway’s participation therein as appropriate’;

- - to bring the EDA’s work closer in line with the principles and practices of its forerunner organizations WEAG and WEAO, both of which had Norway as a full member. For reasons explained in section IIA, the Joint Action creating the EDA foresaw the ‘incorporation of relevant elements’ of WEAG/WEAO in the Agency’s future work and specifically offered the non-EU members of WEAG/WEAO an chance to connect with the Agency through a special Consultative Committee.

III.3 The two main practical features of the AA are:- Norway to be represented (by a senior MOD official) in an EDA Consultative Committee (CC) chaired by the EDA’s Chief Executive, meeting at least twice a year to exchange information and documents;- A Point of Contact for non-EU members to be established in EDA, to keep up liaison in between CC meetings and ensure Norway is given maximum advance warning of new plans and opportunities; Norway on its side will appoint a Liaison Officer for the EDA.

III.4 In addition, the EDA Ministers can invite Norwegian representatives ad hoc to attend meetings where matters of common interest are to be discussed. Classified documents will be handled according to the provisions of Norway’s general security agreement with the EU. If Norway joins any projects administered by the EDA its financial contributions and other modalities will be agreed ad hoc by the EDA

46 A clause in the text states in so many words that the arrangement does nothing to infringe the decision-making autonomy either of the EU or Norway.

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Steering Board, voting by qualified majority. Norway will be represented on the committee created to manage the project in question.

III.5 How has the AA worked out in practice? From the governmental point of view, quite smoothly. Using a liaison point in the Norwegian Delegation to the EU, Norway has been invited to two top-level Consultative Committee meetings per year coinciding with the EDA’s Ministerial Steering Board (though it may send a representative lower than ministerial level itself), and also to the twice-yearly meetings at NADs level. Following the logic of the Joint Action and AA, its further involvement (including any obligation to contribute funds) depends on which practical projects and activities it commits itself to. In general terms the most important of these has arguably been the EDA programme for opening up the defence market, where Norway has committed itself since autumn 2008 to the main Code of Conduct on procurement, the Code on security of supply, and most recently (coming into effect from 1.5.2009) the Code on Offsets. As noted above, this brings Norwegian firms under the cover of non-discrimination rules that allow Oslo to complain to the Steering Board of any contract decisions where it believes its firms have been unfairly rejected by any state also subscribing to the Code.47

III.6 In terms of projects, Norway was taking part at the time of the closure of WEAG in some ten WEAG/WEAO research or development projects that were transferred to the EDA. Based on these and new EDA schemes that it has opted into, Oslo now subscribes to roughly one fifth of all projects available in the EDA, the largest being the Joint Investment Project for Force Protection (for which it was recently invited to a project Board meeting). It has generally felt most at home in R+T-oriented projects that are relevant to its own strategic and industrial situation, including those that offer openings to SMEs. Counting commercial ‘profits’ from the inputs Norway has made would be difficult as well as probably premature, since the benefits of being in at the start of a new technology development include intangible ones like being able to steer it closer to national needs and sharing in useful contacts and knowhow. In the R+T context, a Norwegian firm could claim a net profit if it won a commission under an EDA project using the EDA’s collective research funds, but this means competing with all other possible providers within the EU. Alerting Norwegian firms to such opportunities and encouraging them to compete is still a work in progress, in which Norway’s EU delegation is playing an active part.48 All this said, there is no sign that Norway regrets its decision to go for an AA49 or indeed, that there have been any bad feelings about the relationship on the EDA side.

Other Nations

III.7 Turkey, as a full member of WEAG/WEAO, was entitled to seek access to the EDA through the Consultative Committee in the same way as Norway, and has pressed to do so from the outset. An Administrative Arrangement similar to Norway’s was in fact drafted but it remains blocked at Council level by Cyprus as part of the 47 25 out of the 26 full member states of the EDA have subscribed to the Code and Romania is expected to do so.48 The key industrial player is the Norwegian defence industrial association FSI, under the umbrella of the general employers’ association NHO. 49 For example, there were no criticisms of Norway’s choice from the US side nor elsewhere within NATO.

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general Turkey/Cyprus confrontation (see also below). The EDA Steering Board when agreeing to approve Norway's application specifically agreed to 'de-link' it from the question of Turkey: though this procedural decision itself was not straightforward, and was opposed for some time by the UK.50

III.8 An Administrative Arrangement has also been drafted but not yet approved for Switzerland. It would have similar content to the other two, but would for the first time involve a state that was not a member of WEAG/WEAO. This was made possible by Article 25.8 of the original EDA Decision, which opened the way for ‘other third parties’ interested in cooperation to be accepted for a liaison relationship through the Consultative Committee. Switzerland's sizeable defence industry and its close association with the EU – including the Single Market - through sui generis Treaty arrangements are the main reasons for its being considered a credible EDA partner. The EDA is waiting for Switzerland to indicate which particular fields and projects it may be interested in.

III.9 The smallest states in the EDA at present are Malta and Cyprus who both became full members from the outset, having joined the EU in the ‘Big Bang’ of 2004, although they were not involved at all in WEU/WEAG, are not NATO members, and Cyprus has not even joined Partnership for Peace. Nor of course do they have significant defence industries. Turkey has objected strongly to Cyprus gaining access to the security and defence side of the EU so long as the government in Nicosia in effect represents only part of the divided island. A political deal that was reached between the EU and Turkey in December 2002, to overcome a Turkish veto on NATO support for EU peace missions, included an agreement that Cyprus would not take part in any ESDP operations that made use of NATO's (including Turkey's) official support. 51 This restriction has remained in place up to the present: it has not stopped Cyprus taking part in purely autonomous EU operations or (a fortiori) exercising its full rights in the EDA, but it has also made it easier for Turkey itself to join in some ESDP missions (eg in Bosnia-Herzegovina).52

III.10 Malta for its part is one of two states – the other being Ireland - that has faced considerable criticism from its domestic ‘peace’ lobby over the correctness of belonging to an arms-promoting organization like the EDA. So far, neither government has given way to the pressure to withdraw. The arguments used on both sides are discussed further in section V below.

IV. Iceland, European Defence, and Icelandic Commercial Interests

50 The blockage was finally overcome during Austria’s Presidency.51 For more details of this tangled story see Didier Billon and Fabio Liberti, 'The Relationship between NATO and the ESDP: the Cypriot/Turkish disruption', IRIS, Paris 2008, full text at http://www.affaires-strategiques.info/spip/php?article1050.52 In this situation it would seem that an obvious trade-off exists: grant Turkey's access to the EDA in return for it lifting the veto on Cypriot participation in all ESDP missions. However, the other issues at stake in the Turkey-Cyprus-Greek triangle make it unlike that such a bargain could be brokered without major movement on a Cyprus peace settlement and/or on Turkey's EU accession.

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IV.1 Iceland has had a consistent policy of opting in to EU frameworks that are open to non-members and are useful for its own economy or its non-military security: notably the EEA and Schengen, but also the Prüm Treaty on police cooperation and liaison relationships with EUROPOL and EUROJUST. In the external policy field it has associated itself with many CFSP positions including in the field of arms control, and it has contributed (with civilian assets from the Icelandic Crisis Response Unit, ICRU) to individual ESDP missions. Towards ESDP as such, however, the initial Icelandic attitude in 1999-2000 was distinctly cool, influenced by US reservations and the fear that a separate European military policy might harm NATO. As ESDP has become established, as the extent of Turkish blockages has been reduced and NATO has supported EU missions in Bosnia-Herzegovina and FYROM, this general Icelandic reservation has eased. Taken together with the country’s lack of military forces and of an arms industry, however, it helps to explain why Iceland has not felt impelled to make any move yet for any kind of official contact with the EDA. The Agency has fallen rather into the area of EU developments that are monitored by Icelandic diplomats, experts and commercial organizations.

IV.2 If we look at it from outside in this way, what does the existence of the EDA mean for Iceland? First of all, it is yet another symptom of the steady, almost organic build-up of the EU’s defence policy and mechanisms since 1999: a process that has overcome political blockages (especially French-British divides, and US suspicions) which would have looked fatal barely a decade ago. The EU still offers no alternative to NATO in terms of direct territorial defence: but it has established itself firmly as an actor in military crisis management, possessing some advantages (like the ability to deploy civilian assets) that the Alliance lacks, and able to deploy to places where the Alliance politically could not go.

IV.3 With the EDA, the EU has created the possibility of identifying, designing and building cooperatively the military equipment most suited and vital for successful crisis operations as such: something that NATO hardly attempted because of its lack of industrial competence, and WEAG attempted in vain because of WEU’s lack of operational credibility. Even the EDA’s general analyses and concepts are of interest to anyone trying to understand the future challenges of crisis management in a hi-tech, low-funds environment where the different skills and traditions of nearly thirty European nations demand to be reconciled.

IV.4 Beyond this, EDA offers a range of research projects complementing the efforts that the Commission makes across a wider security spectrum, and some of these are of direct potential interest for the Icelandic Government in terms of: i) the need for efficient operations by partners and allies in its own strategic region, ii) the technical requirements of mixed military-civil peace missions where its own personnel may take part, and iii) commercial openings for its own private sector including specialized services, research and technology development. While the full range of possibilities here could only be explored once Iceland had direct access to the EDA, the rest of this section will discuss the Agency’s prima facie relevance first for national security interests (i and ii) and then for Icelandic commercial interests (iii).

Projects/Activities Relevant to National Security

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IV.5 Since early 2008, Maritime Surveillance has been a priority area for EDA work. It includes a scheme originally launched by 6 nations and entrusted to the EDA in 2008 for Multinational Space-based Imaging Systems for military use (MUSIS), as well as exploration of the use of Unmanned Aerial Vehicles (UAVs) for maritime observation.53 As to making use of European-owned data, it may be noted that the EDA runs various courses in intelligence training including one on Open Source Intelligence Exploitation. Improvement of European capabilities in this sphere is of obvious interest for Iceland both in terms of its present needs, and in the perspective of the likely opening up of the Arctic to further extractive, transport, tourism and perhaps military activities through climate change and the melting of sea ice. It should be recalled, however, that the major EU actors in space capacity development are the separate European Space Agency (ESA) and the Commission; while the Commission also introduced in 2006 a Green Paper laying the foundation for a comprehensive Maritime Strategy that includes long-term plans for the development and safety of shipping (plus provisions on fisheries, environment, etc).54

IV.6 An example of an EDA priority project with relevance to peace operations would be the Software-Defined Radio, which is a programme heavily emphasizing interoperability not just between different national, but also military and civilian, systems. A similar case is the EDA’s work on European needs for medical support. Projects aimed at well-known areas of shortfall in European deployment capacities include the EDA’s work on developing a heavy European transport helicopter by 2020 – which Norway has opted into – and the proposals being developed for interested nations to make a declaration of intent on a future European Air Transport Fleet.55

IV.7 Mention of helicopters highlights the fact that Iceland does occasionally have to purchase airframes and vessels that may be of military manufacture, albeit destined for civilian use with the Coastguard and rescue services. Another such case would be possible upgrades to the air defence radars situated in Iceland which NATO will be considering after 2012. It is no part of the EDA’s job to advise nations on their procurement decisions and indeed it is bound by a strict rule of not favouring one firm or country of origin over another. However, if Iceland had access to related EDA discussions and documents on capability development in the associated fields, that might at least bring new knowhow and contacts that would help its authorities in making informed decisions.

Commercial Aspects: What Iceland can (and should) offer

53 This and other schemes mentioned in this sub-section are covered in the Chief Executive of the EDA’s latest report to the Council of Ministers, 18 May 2009, available at http://eda.europa.eu. MUSIS is so far supported by 6 member states and Poland has signalled a wish to join. Collaboration will be explored i.a. with the European Space Centre at Torrejon, Spain, which ESDP inherited from the WEU.54 Green Paper at http://ec.europa.eu/maritimeaffairs/pdf/greenpaper_brochure_en.pdf; the portal on maritime transport is at http://ec.europa.eu/transport/maritime/index_en.htm.55 Details at http://www.eda.europa.eu/newsitem.aspx?id=321. The Steering Board on 18.5.2009 had a first reading of the draft LOI to cover this scheme which is currently scheduled for signature in November 2009.

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IV.8 Since Iceland is not an arms purchaser itself and has not set out to be an arms supplier for anyone else – despite providing many civilian and generic services to the US forces based here up to 2006 – it cannot be said to have a 'defence industrial sector' in any normal sense. Rather, there are a range of companies, consultants and researchers focussing on civil security requirements (at home and abroad), and a smaller number whose goods, components, services or knowhow are 'dual-' or 'multi-use', giving them at least the option of also supplying a military defence market (outside the country). There has been and remains no incentive for the private sector to explore this latter possibility on any grand scale; and as will be seen, there are also normative considerations against it which businesspeople as much as politicians or ordinary voters have to take into account. On the other hand, at a time when the economic crash has created the keenest possible Icelandic interest in innovation and new growth opportunities, even a limited area for a limited growth in foreign currency earnings is prima facie worth exploring.

IV.9 It comes as no surprise that the potentially defence-related part of Icelandic business has never been surveyed in detail, but its main elements are not hard to identify. As part of the research for this paper, interviews were conducted in March-May 2009 with eight different Icelandic producers and service suppliers as well as with the two business associations SÁ and SI.56 The eight companies were chosen to represent the types of Icelandic suppliers most likely to have had, or contemplated, contact with defence users, namely:

- - producers of minor and specialized 'niche' equipments that can be adapted for certain military uses (the well-known examples in Iceland are a miniature submersible and customized heavy-duty jeeps)

- - producers of software and components especially in the communications and IT fields

- - providers of data analysis, storage, and security services- - providers of generic logistical services such as air- and sea-lift.

IV.10 A more exhaustive survey could enquire into parts of the economy where the relevance to military defence has not yet been recognized but where Iceland might have comparative advantages to offer, such as cheap energy, a clean environment, educated workforce, high quality standards, competence in English etc etc. Examples might be climatic clothing, medical supplies, rescue equipment, a wider range of component manufacture, software services, imaging technologies, and the military applications of civilian expertise in areas like data analysis (ia for meteorology), energy generation, maritime and other transport, and infrastructure safety. Another large area to explore would be the applicability in principle of Iceland's R+D strengths, including pure academic research, to the requirements of defence and comprehensive security work.

IV.11 Again not surprisingly, our survey found that even the small set of Icelandic companies who are 'defence-aware' have so far had very different patterns of connection with Europe: some having branches or subsidies within the EU, some agents, while others have no connections at all. Some have allied (to good effect) with EU-based companies, others have worked through the NATO supply agency 56 By agreement with the interviewees their individual identities, views and commercial confidentiality will be protected in this report. Further details have been provided directly to the IDA.

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NAMSA or direct with governments. Some have only or mainly explored business opportunities outside Europe, eg in the USA or Asia. The companies and associations' knowledge of the EDA as such – or of other defence and security developments in Europe – is correspondingly varied but usually quite limited. No company interviewed had explored the EDA more actively than by using its homepage.

IV.12 Nevertheless, all interviewees' responses converged on some basic points. None of them considered, or expected, defence business to be a leading part of their profile: above all because Iceland itself has no national market, but also because they well appreciated the high development costs and hyper-tough competition that characterize this field. Some of them commented that they saw plenty of European tenders but did not feel in any position to compete. Many of them saw a powerful foreign commercial partner as crucial for success. At the same time they were interested in learning more of potential markets and in exploring new growth opportunities, within the limits of two main sets of normative considerations:

- - As a NATO, EU, OSCE and UN member, Iceland should be guided by those institutions' policies and obligations (as well as national laws) when deciding which countries and customers might be acceptable partners. It would seem more justified for instance to help the forces of NATO Allied countries than others;

- - As a peaceful, non-military state it would probably not be proper for Iceland to supply lethal equipment or other items open to strategic and ethical objections.

IV.13 Some companies favoured a basically passive approach to defence contracts: they would accept them if offered under the right conditions, but not actively seek them out. Others felt there was no need to be shamefaced about doing defence work with the right partners but that it should be presented carefully and sensitively in view of Icelandic traditions and public opinion. Words like 'military' or, in some cases, even 'defence' were better avoided, whereas the vocabulary of providing support or services for security (and peace operations) would be both more accurate – in terms of what Icelanders could actually provide – and more acceptable. (See more on possible critiques in section V below.) The best results should be achieved by a pragmatic approach with government awareness and support but without a great public fanfare. No-one thought, incidentally, that such sensitivities would suddenly disappear because of the present economic pressures.

IV.14 What then of the EDA's own role? Whether they had previously thought about or not, the interviewees were pretty unanimous that it would be useful for Iceland to have more contact with the Agency and use it to learn about the European defence market, including the opportunities for R+D work. In particular, it would be a pity for Iceland not to take up EDA membership if it was offered in connection with entry to the EU. At the same time, some stressed the need to understand the costs of an EDA relationship and be sure they were not excessive. Moreover – and here the firms' instincts agreed well with our own research – working with the EDA as such would not guarantee commercial success. Companies needed to develop their own commercial strategies and relationships, to talk better together and try to share each others' connections and knowledge in this field . There was much support for the idea of an unofficial forum where interested companies could meet, with support from SA and/or SI, plus the Icelandic government and the Trade Council.

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General Strategies for Small Producers

IV.15 The problems mentioned above by a selection of Icelandic businesspeople are very much in line with those of producers in other small states, even where the military element is stronger and companies have been competing harder. It has never been easy to be a small producer in the defence market and trends since the Cold War have made it no simpler.57 A general contraction in defence spending linked with the rise in unit costs (and in necessary R+D investments) automatically favours large enterprises with large funds, creditworthiness, and access to export markets. Efforts to focus production more on the real needs of European forces, and to open up multinational competition to that end, can also squeeze out small suppliers who previously sheltered under national protection but cannot match the big boys in price and fitness-for-purpose.

IV.16 In the past, where smaller nations wanted to keep their own enterprises alive – perhaps for reasons of employment and district policy – they could help them buy their way into multinational projects in return for a guaranteed share of the work arising (‘workshare’). Alternatively, when purchasing equipment abroad they could ask the seller to accept part payment in the form of their own companies’ products rather than cash (Offset). However, neither of these devices in any way served military rationality and some small states are now finding them simply too costly to maintain. The EDA and Brussels in general frowns on them as anti-competitive – hence the EDA Code adopted last year against Offsets – while the idea that a state should only invest in European cooperation if it is at least going to get its money back in concrete benefits (‘juste retour’) has been contrary to EU ideology in many other contexts for decades. True, there are many states and firms in Europe that resist this ‘political correctness’ and are still ready to bargain openly for national benefits – a feature observed in many of the EDA’s own negotiations! – but a small supplier entering the market at this late stage would not necessarily be well-advised to follow their example. Indeed, Iceland as a non-military state would not even be able to use the ‘workshare’ or Offset approach in its conventional form.

IV.17 There are at least three other strategies small suppliers can use that are not open to the same objections. An obvious one, which at least one Icelandic company has already followed, is to ally with a large partner or set of partners by offering a niche product or component they lack. Another is to encourage large firms to ‘outsource’ parts of the production process, or services like software development and data storage, to small-country locations that can offer good quality with lower costs. Finally, a small supplier that lacks a competitive edge in purely military production may still be able to offer good value for money in the supply of civilian and/or generic, multi-use products and services that are useful for today’s multi-functional security efforts, including both security within Europe and the demands of modern peace operations abroad. All five of the options/strategies just mentioned are summarized in the table below (Figure 4), together with their possible drawbacks, and a sketch of their potential relevance to Iceland.57 This sub-section draws heavily on the article by Jocelyn Mawdesley, 'European Union Armaments Policy: Options for Small States?' in European Security Review vol 17 issue 2/3 of June 2008, pp367-385; but its conclusions have also been checked carefully with official and industrial contacts in Brussels.

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How can the EDA help?

IV.18 The EDA has from the start stressed its wish to help Small and Medium Enterprises (SMEs) play a larger role in the defence market: not just for charitable reasons, but because they are believed to bring elements of flexibility, innovation, and to dual-use or multi-use approaches that help offset the rigidity of large, oligopolistic firms. This view is entirely shared by the ASD and both organizations have trieddevelop programmes and processes that appeal to such partners, including new entrants to the defence field. The EDA’s Bulletin Boards for contracts were an earlyexample, and from early 2010 the Agency hopes to go operational with a Third Party Logistics Support Platform that will – in a similar way – highlight online the opportunities for suppliers of generic logistical services to supply the needs of defence forces and military operations. Only EDA states (including Norway) can put requests on it but companies from all states may answer, and subsequent practicalities will be handled through NATO’s NAMSA with which Icelandic firms are already familiar. In a similar vein, some at the EDA are thinking of designing a third Joint Investment Project (ie, a general R+T platform open to all states) that would focus on techniques for furthering civil-military cooperation. The relevance of these activities to the types of services that most Icelandic firms may offer is clear.

IV.19 Icelandic suppliers would also have to overcome the unfamiliarity of their origin, and from this point of view the EDA’s most important achievements may be its efforts for fair competition and non-discrimination in the defence market, headed by the Code of Conduct on procurement but including the code on security of supply –highly relevant to small firms. Of course, the more open the market, the stiffer the competition also for small players; and EDA and ASD experts are always ready to discuss new ways of evening the odds. One might be to encourage potentially long-lived partnerships between large and small firms by structuring government contracts in such a way that the large primary contractors were obliged to offer a second tier of work elements to small firms from all over Europe on a competitive basis.

IV.20 Last but not least, the EDA’s research-oriented programmes would be worth looking at carefully from an Icelandic viewpoint: first because they have room for many types of contributors including purely academic expertise, and secondly because of their favourable funding environment. The EDA, as noted, has limited amounts of its own funds to invest in the JIPs and similar R+T programmes, and in these conditions it is possible for a small state actually to take more money out of a given project - if its experts do well in the competition – than it is obliged to put in to the common costs. If Icelandic experts gained entry to projects that are directlyrelated to the country’s own security environment or to successful peace operations (see paras IV.5-7 above), there should be a national profit in strategic as well as financial terms – and even if the ideas involved did not make it all the way toindustrial development, that would be less disappointing for Iceland as an non-arms-producing country than for most.

Figure 4: SMALL STATE STRATEGIES TO WIN/MAINTAIN/INCREASE A SHARE OF DEFENCE-RELATED WORK

(Older options) PROBLEMS ICELAND’S CASE

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1. Put finance/orders Small orders do not No armed forces, onlyinto project to get work- justify large investment occasional orders for vshare (‘juste retour’) or give real leverage (+ small nos. eg for coast-

ethical objections to guard + armed police‘speculative’ investment?)

No spare money forEDA takes stand ag. ‘juste purely financialretour’ principle (‘speculative’) inputs, and

likely political/ethicalESDP/EDA trends favour objectionsbig-country projects withde facto limited entry

2. Use own market to Less choice of suppliers Same remark as above:attract suppliers and make due to industry consolid- also supply from non-them compete, i.a. to get ation and also tighter NATO defence sources may begood Offset terms + ESDP interoperability faster and cheaper for

requirements Iceland’s few needs

Small needs give limitedleverage

Growing international andinstitutional resistance toOffset; also expensive forhome state in long run

(Old and new)3. Fill a technological R+D costs to reach competi- Iceland’s familiar nichesniche to achieve direct tive threshold very high for not (obviously) defence sales, alliance with a a small state, less chance of related.strong partner + entry to useful civil spinoff in amultinational/institu- small economy Some relevant niches tional projects already taken eg by Finns

Security objections to over-specialization Pump-priming probably

needed from public +/orPartnership may be necessary foreign funds visiblebut reduces profit from initiative which may runintellectual monopoly into political objections

BUT prima facie advant-ages of EEA membership+ access to EU R+DFramework progs;also chance of jointNordic R+D projects

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(Newer)4. Attract ‘outsourcing’ Resistance to exporting Low energy costs (cfof others’ defence prod- jobs from project owner aluminium), water anduction and services by countries, esp during clean air, good work-lower costs economic crisis; BUT force

multinational projectscould be more open to Iceland should be seen as‘comparative advantage’ ‘safe’ in geostrategicthinking and political terms

Closer linkage between Central Europeanproduction and national/ states may offer sameEU operational needs advantages plus easierfavours home production transport + own militaryin more active countries experienceOR saving money by off-the-shelf Possible internal oppo-

sition eg on ‘targeting’grounds, feelings againstcertain indiv. partners

5. Find niche(s) in civil A coming theme, but Fits better with Iceland’sand dual use products, inc no clear institutional own profile and needs;products to facilitate framework or organized reflects ICRU’s relationcivil-military cooperation market yet.; traditional with ESDPon missions abroad split between civilian +and for home security military markets, limited Good area for Nordic

scope (so far) of EDA partnership

National outsourcing (Icelandic PMCs/PSCsof non-specialized probably not politicallyservices for forces so acceptable?)far overwhelminglywithin the home state Some products useable+ with clear economic for internal security/law motivation and order attract political(PMCs/PSCs a partial and ethical objectionsexception but widelyfrowned upon)

*****

IV.21 For all this, it is fair to say that the added commercial value from a new institutional relationship with the EDA is almost certainly relatively less important than other things Icelandic firms can do at any time to improve their chances, including using the EDA’s own open-access services. As the firms themselves commented, partnership with a large firm or consortium based within the EU can offer the quickest route of all. For achieving a more level playing field of competition, the Commission will ultimately overshadow the EDA’s achievement because its measures can take a legally binding and justiciable form. Iceland’s chances of getting

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work outsourced would especially be improved by the new licensing directive, if extended to the EEA. When it comes to civilian and generic products, services and research, the range and scale of funding offered by the Commission already far outclasses the EDA’s and is fully open to Iceland through the EEA. Some, indeed, would speculate that the Commission will soon be emboldened to extend its Framework Programmes to openly military fields of technology, and that the odds are much greater in the longer term of the Commjssion drawing ‘hard’ equipment issues to itself than of the intergovernmental side of the EU stealing broader security work away from the Commission.58

V . Iceland and the EDA: Options and Arguments

V.1 Two different scenarios are considered here: first what would happen if Iceland entered the EU as a full member, and secondly, the option for Iceland to follow Norway’s example in seeking an Administrative Arrangement under the terms of the EDA Joint Action. At the end of the section the possibility of debates within Iceland over the pros and cons is reviewed and some possible arguments highlighted.

Iceland as an EU Member

V.2 If Iceland acceded to the EU it would automatically be entitled to join the EDA as a full member, and indeed would have to formally opt out – like Denmark – if it did not wish to.59 Assuming no opt-out takes place, only ‘weeks or months’ would be required to fully activate EDA membership. Iceland’s only practical obligation would then be to attend EDA meetings and contribute to the EDA's separate budget, as follows:

- -- The necessary minimum of meetings are two per year, ie the meetings of the 'Steering Board' at Ministerial level to which nations generally send delegations of around 4 people (including members of their Brussels missions). Other meetings are held at the level of national armaments directors (or the equivalent) and in more specialized compositions as needed; these may be attended by just one person. A nation without a Defence Minister or national armaments director would have to choose its own equivalents; Malta for instance uses the MOD's defence policy director as a NAD-equivalent. Finally an ‘empty seat’ policy is always possible.

- -- As noted above, budget contributions from EDA member states are calculated on the basis of a 'GNI scale' which is also used for ESDP operations under Article 28(3) of the EU Treaty. The scale is based on relative (total) GDP and adjusted yearly. It results in very small payments for the smallest

58 There are some Lisbon provisions that can be cited to support such a view, for instance the added emphasis on civil protection with in the EU and the creation of a high level committee on internal security. One may also speculate on what course the further work to operationalize the ‘solidarity’ commitment of March 2004 (obliging states to help each other against terrorist attack or major disasters) will take and how the Commission might seek to consolidate its grip on the funds and tools involved. 59 The procedure for opting out is to send a written statement to the Council of Ministers, copied to the High Representative for CFSP (Article 1.4 of the constituent Joint Action).

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members, eg in 2007 Malta paid 0.04% of the EDA budget,60 Estonia 0.11%, Cyprus 0.13% and Latvia 0.14%. The total budget allocation for 2009 is Euro 30 million and mostly covers personnel and operating costs, although Euro 8 million are earmarked for research.

V.3 Iceland would not be obliged to provide any officials to work in the EDA, or even be expected to do so as the limited number of posts available are fiercely competed over by the main producer states. Financial contributions to specific EDA projects, where the really large amounts of money change hands, are shared purely among nations that participate and are negotiated ad hoc each time. (It was noted above that even ‘Category A’ projects that are designed for full EU participation allow nations to opt out if wished.) A country will generally have to pay more than its GNI share since fewer contributors are involved, but exactly how much depends on how high it wants its stake and profile to be.

An Administrative Arrangement

V.4 Iceland also has the right at any time to apply for a similar Administrative Arrangement to the one held by Norway, under Article 25.7 of the original EDA Decision which states:‘Upon request, other non-EU European NATO members [ie, ones that did not belong to WEAG/WEAO] may also participate in the Consultative Committee referred to in paragraph 6, in accordance with modalities to be agreed with them.’

V.5 Aside from Iceland, this provision could have applied to Bulgaria and Romania in the time between their entry to NATO and their entry to the EU, given that they had not been full members of WEAG/WEAO61 but had joined NATO after the EDA Decision was taken. In fact, aware of the modest size of their defence industries, they waited to enter the EDA until their EU membership was complete. Albania and Croatia, as the latest entrants to NATO, will now be in the same position.

V.6 If applying for this status Iceland would be expected not only to cite Article 25.7 – where it could remind of its NATO membership and past Associate Membership of WEU - but to show some credible capacity and willingness for 'practical cooperation on matters of shared interest' with the Agency. This is more than a mere formality: in Norway’s case there was real debate within the Steering Board on the ‘added value’ of Norwegian cooperation, with some Southern members understandably the most sceptical, before the final positive decision was reached. The obvious elements for Iceland to mention in this connection would be:

• The proven ability of its private sector to supply individual specialized equipments, knowhow, software, and services (including logistic services) for use in the defence field and for security purposes more generally, plus the

60 In 2008 the CIA Factbook calculated Iceland’s GDP to be 20% greater than Malta’s, but the economic crisis has no doubt modified this ratio.61 After 1994 Bulgaria and Romania were allowed partial access to WEAG/WEAO work, together with other Central European NATO applicants, under a special ‘Partnership’ scheme. The former Yugoslav Republics had no such institutional association with WEU although small WEU operations were carried out both in Albania (police training) and Croatia (de-mining).

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chance of further developing such inputs in future – and further exploring new forms of cooperation like outsourcing – with the benefit of information and contacts developed through EDA itself;

• The potential value of Icelandic inputs to defence- and security-related research in a number of emerging fields, notably aerial and maritime surveillance and other emerging issues in Arctic security, but also possible new energy sources, IT applications, technologies for civil-military and multi-functional interoperability….

• Iceland's past and continuing participation in ESDP missions

• Iceland's close involvement in many non-military aspects of EU security policy through its membership of Schengen, the Prüm Treaty, association with Europol and Eurojust, links with EU security-related R+D programmes etc.

• Iceland's close association and compliance with EU policies on other aspects of comprehensive and responsible arms management such as export control, global arms control, disarmament and non-proliferation.

V.7 If accepted for an AA, Iceland's obligations and costs would be limited to: - Twice-yearly high-level attendance at the Consultative Committee meetings, normally held back to back with the Ministerial Steering Board; - Appointing an Icelandic Liaison Officer for the EDA (normally in Iceland’s EU mission, which could then direct EDA messages to the appropriate point back home): - Optional participation and cost-sharing in individual projects.No budget contribution would be required and in practice, Iceland could indicate to the EDA staff whether it wanted its officials to be invited to Brussels on further occasions or not (it would not have to exactly follow the Norwegian pattern, for instance). EDA officials would be willing to visit Iceland for one or more introductory briefings at their own expense.

V.8 Since the Steering Board decided to de-link the Norwegian from the Turkish case in 2006, there appears to be no risk that Iceland's application could be blocked as part of political horse-trading involving Turkey - or indeed any other separate political problem. Iceland's seriousness and credibility regarding 'practical cooperation' ought to be the clincher. Some observers believe the application would be viewed more positively if made during a period when Iceland was negotiating for EU entry – allowing the AA to be seen as a limited-term ‘training’ measure before full EDA membership; but it is hard to say if this factor alone would settle the matter.

Domestic Debate?

V.9 As noted in section III, some nations have experienced significant domestic debate over their involvement in EDA, albeit for different reasons. In Britain the main issue has been the government’s suspicion of the EDA becoming an inflated source of subsidy for non-commercial ‘symbolic’ projects: a concern that also explains Britain’s past obstruction of other hi-tech EU development projects like satellites, and is shared by some MPs who regularly probe for information on EDA costs. In Ireland, by contrast, the Green Party raised concerns about the EDA –

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around the time of the Lisbon referendum - as a step towards EU militarization that might be both objectionable in itself from a ¨peace’ viewpoint, and incompatible with Ireland’s own neutrality. As already noted, the Government stood firm in refuting such claims, arguing that much EDA work went on improving the conditions for altruistic European peace missions where Ireland was a traditional contributor; and that Ireland could better obstruct any possible distortion of the Agency’s aims from inside than as a non-member.

V.10 If Iceland were to take a pre-entry initiative for an AA with the EDA, it is possible that domestic critics would take up some of the ‘peace’-related concerns raised earlier in Ireland (and Malta), and/or the argument often heard in Britain about wasted resources. Those with links to Brussels might also pick up some of the criticisms of EU armaments work aired in European Parliament debates, including the shortcomings of EU controls on arms exports to third parties. In the event of EU entry, there could be a debate over whether Iceland should follow the example of the Danish opt-out – from the EDA as such, and/or ESDP in general. In both cases, a likely theme would be the risk of EDA work ‘militarizing’ Icelandic approaches to security through the back door.

V.11 As discussed above, there are two main lines that could be taken in response, the first being the intention of the Icelandic government and companies to limit carefully the type of work they did and the partners they did it with. A commitment could be made for instance to avoid lethal items and exports to crisis areas, and to focus on the needs of peace missions or security sector reform. Secondly, government spokespeople could point to the possibilities for Iceland to help steer the EDA in a more normative and ‘restrained’ direction, including a stronger focus on export control and environmental concerns. It would be up to Iceland to decide whether to side with Britain on curbing EDA expansion and insisting on strict value-for-money (including no hidden subsidies to industry). As regards the more general ‘peace’ arguments, the points made in response to these criticisms by the Irish Government and during the EP debates may be summed up as follows:

Possible criticisms: Possible answers:Military nature of the EDA It is a civilian body distinct from the

military staffs (and by some seen asactually limiting their role).It is completely independent of NATO(and may supersede some of its roles)

Supporting military action EDA exists to support ESDP peacemissions and to shift industrial effortstowards them, away from heavy‘territorial’ approaches.Good equipment in pko’s is vitalboth to protect contributors (inc.civilians like ICRU) and locals.

Encouraging arms production EDA can be seen rather as managing the shrinkage and rationalization of a fast-changing European industry. Its work

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includes exploring alternative civilian solutions for defence tasks + spinoff for

civilian applications.It gives small players a voice for the first time in Europe-wide choices in these fields.

V.12 Finally, if an EDA relationship was criticized from the opposite political viewpoint as being damaging and disloyal to NATO, it could be pointed out that Norway suffered no NATO or US backlash for its similar action; that relations between the EDA and NATO counterparts have improved over the last year, with NATO positively welcoming the Agency’s attempts to improve helicopter capacities and airlift for instance; and that NATO/ESDP and US/ESDP relationships are set on an improving course in general following President Obama’s election and full French reintegration in the NATO military structure.

/VI.

VI. Summary and Closing Remarks (this text repeats the Executive Summary)

The European Defence Agency is the most serious attempt yet made to steer and rationalize defence industry development at a European level. Setting it up within an EU framework has opened the way for linking R+D and project work directly to the needs of European peace missions, and also to general technological progress, in a way that neither NATO-based nor WEU-based work could achieve. The main limit to EDA ambitions, which will not change any time soon even under the Lisbon Treaty, is the preference of big states and producers to keep actual production under their own control.

For Iceland to seek an Administrative Arrangement with the EDA before/without entering the EU, or to accept membership in the context of EU accession, would be an acknowledgement of the EU’s growing ambitions and relevance in the field of defence and security. It would give Iceland a voice – for the first time - in the development of Europeans’ positive armaments collaboration, alongside their arms control and export control endeavours.

The exact political message sent by such a move would depend on the circumstances. If Iceland accepted EDA membership once inside the EU it would signal that Iceland did not intend to be an ‘opt-out’ state (like Denmark) but to play its part even in the ‘tougher’ parts of EU work as best it could, as other small states in Central and Southern Europe have done.

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If Iceland sought an Administrative Arrangement it could be seen as a continuation of the policy of getting as close as possible to EU security-relevant activities, without full membership or – if an application was being processed – while waiting for it. The burden would be on Iceland to prove that it had sufficient practical reason and capacity to interact with the EDA, and it could not expect its application to be rubber-stamped – though it would make sense to test and build support among some friendly member states in advance.

The EDA’s task is not simply to maximize weapons output. There are already elements within the EDA and among member states that would like to see it expand its role in such normative areas as the boosting of state and business compliance with export controls, the ‘greening’ of defence, or even a ‘sunset clause’ approach to weaponry that would ensure regular and cheap destruction of unwanted items. Iceland could add its voice in favour of such (or other) ’restraint’-based policies if wished.

Direct consequences for Iceland’s own defence are limited given that the EDA has no military functions and no control of the operational use of equipment. Nor can it be used as a national procurement agency. However, through the Agency Iceland could learn more about and participate in areas of military (or multi-use) research and technology development that are very much relevant to the High North defence environment. It could play a similar role in developing systems to boost the efficiency and closer integration of multi-functional European peace missions where its own personnel may be involved. The knowhow and contacts picked up in EDA ‘corridors’ could be helpful for potential investment decisions to be taken at the time of renewal of air defence radars in Iceland, as well as any ad hoc purchases of quasi-military equipment.

The ‘price’ to be paid in return, either for an AA or full membership after accession, is small in financial terms unless Iceland chooses to join any of the Agency’s major projects - which it would presumably do rarely and only with special benefits in view. The political ‘price’ that would have had to be paid in terms of US concerns during the first days of ESDP would not be an issue now. US/ESDP and NATO/ESDP relations are steadily improving, and for those – including Washington – who resent Turkey’s exclusion from EDA, having Iceland join after Norway would just put Turkey’s claims in an even clearer light.

Domestic objections could however be raised, as they have been in Ireland and Malta. These other governments have answered critics by pointing to the EDA’s focus on peace missions and the chance that it gives a small country to have a say – including a voice for restraint - in the development of an EU military profile

The commercial benefits of an EDA relationship for Icelandic producers are less easy to judge and do not seem overwhelming. The EDA’s Bulletin Boards publicizing contract offers are open to all and the agency is not allowed to discriminate against non-EU companies. Its new Logistics Platform could also cover many needs of this country’s producers as it is specially geared to primarily civilian producers including SMEs. The specific EDA projects of most interest to Icelandic firms would probably be R+T ones, paralleling those that Iceland already has access

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to in the non-military and non-traditional fields covered by the Commission. More added value, but of an intangible kind, would come from the contacts, inside information, and especially the ‘early warning’ of useful trends and projects flowing from privileged access to EDA work. Finally, if Iceland opted in to the Code of Conduct on defence procurement (which would then of course bind it in its own occasional purchase decisions) it would have a strong guarantee against discrimination against its own companies in almost all other EEA states.

Aside from minor niches for very specialized equipments which Icelandic producers are already filling successfully, the chances for this country’s profitable involvement in the European defence market are most likely to lie in the fields of pure research, specialized component and software manufacture, other outsource-able services (like data storage and analysis) making use of cheap energy and a clean environment, and the provision of civilian items and logistical services including lift.

Success in these fields will only partly be determined by Iceland’s formal status vis-à-vis the EDA. Icelandic firms could also improve their understanding of the market and chances of profiting from it, at any time, by such measures as:

- exploiting open features of the EDA such as the contract Bulletin Boards and forthcoming Logistic Services Platform (TPLS);

- - going into partnership with large European defence and aerospace companies, as ‘niche’ product, component, software and service providers;

- - making their services better known to nations likely to lead or take a large part in ESDP missions, eg the members of the Nordic Battle Group and the UK, as well as to planners in the EU military organs;

- - increasing their efforts to enter security-related projects funded by the Commission in its Framework Programmes on R+D and in other contexts, where success often depends on joining consortia led by larger nations

- - taking advantage of the eventual implementation of the Commission’s export licensing directive within the EEA, especially to offer outsourced production and intellectual input.

An early step to these ends - which could be taken with or without an official initiative vis-à-vis the EDA - would be to promote an independent grouping of Icelandic firms interested in the ‘security support’ market at home and abroad, in partnership with SÁ or SI or both, and to establish a relationship between this group and the ASD (and perhaps also EOS) in Brussels. Since the ASD’s affiliation charges are based on the numbers of employees in a national sector the cost should be fairly low. Such a grouping could also establish direct contact with and pay visits to the EDA itself.

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/ANNEX

ANNEXText of the EU Council of Ministers Decision establishing the EDA

(Acts adopted under Title V of the Treaty on European Union)COUNCIL JOINT ACTION 2004/551/CFSPof 12 July 2004on the establishment of the European Defence Agency

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on European Union, and inparticular Article 14 thereof,

Whereas:

(1) On 19 and 20 June 2003 the European Council at Thessalonikitasked ‘the appropriate bodies of the Council toundertake the necessary actions towards creating, in thecourse of 2004, an intergovernmental agency in the fieldof defence capabilities development, research, acquisitionand armaments’.(2) The European Security Strategy endorsed by theEuropean Council identifies the establishment of aDefence Agency as an important element towards thedevelopment of more flexible and efficient Europeanmilitary resources.(3) The European Defence Agency (the Agency), whichshould be subject to the Council's authority and opento participation by all Member States, will aim atdeveloping defence capabilities in the field of crisis

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management, promoting and enhancing Europeanarmaments cooperation, strengthening the Europeandefence industrial and technological base (DTIB) andcreating a competitive European defence equipmentmarket, as well as promoting, in liaison with theCommunity’s research activities where appropriate,research aimed at leadership in strategic technologiesfor future defence and security capabilities, therebystrengthening Europe's industrial potential in thisdomain.(4) Relevant policies and strategies should be broughtforward, in consultation with the Commission andindustry as appropriate, to develop the European DTIBin a balanced fashion, taking into account the strengthsof the industrial capacities of the Member States.(5) The establishment of the Agency should contribute tothe implementation of the Common Foreign andSecurity Policy (CFSP), in particular the EuropeanSecurity and Defence Policy (ESDP).(6) Such an Agency is also envisaged in the draft Treatyestablishing a Constitution for Europe.(7) The Agency structure should enable it to respond to therequirements of the European Union and its MemberStates and, where necessary to fulfil its functions, tocooperate with third countries, organisations and entities.(8) The Agency should develop close working relations withexisting arrangements, groupings and organisations suchas Letter of Intent (LoI), Organisation de coopérationconjointe en matière d'armement (OCCAR) andWestern European Armaments Group (WEAG)/WesternEuropean Armaments Organisation (WEAO), with a viewto assimilation or incorporation of relevant principlesand practices as appropriate.(9) The Secretary-General/High Representative (SG/HR), inaccordance with Article 26 of the Treaty on EuropeanUnion (TEU), should have a leading role in the Agency’sstructure and provide the essential link between theAgency and the Council.(10) In the exercise of its role of political supervision andpolicy-making, the Council should issue guidelines tothe Agency.(11) When adopting guidelines and decisions in relation tothe work of the Agency, the Council should meet inDefence Ministers’ composition.(12) Any guidelines or decisions adopted by the Council inrelation with the Agency's work shall be prepared inaccordance with Article 207 of the Treaty establishingthe European Community.(13) The competences of the Council’s preparatory andadvisory bodies, notably those of the Committee ofPermanent Representatives under Article 207 of theTreaty establishing the European Community, thePolitical and Security Committee (PSC) and the EUMilitary Committee (EUMC) shall remain unaffected.(14) The National Armaments Directors (NAD) should, in away to be defined, receive reports and contribute onissues of their competence in preparation of Councildecisions relating to the Agency.17.7.2004 EN Official Journal of the European Union L 245/17(15) The Agency should have the legal personality necessaryto perform its functions and attain its objectives, whilemaintaining close links with the Council and fullyrespecting the responsibilities of the European Union

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and its institutions.(16) It should be provided that the budgets administered bythe Agency may, on a case-by-case basis, receive contributionstowards the non-administrative costs, from thegeneral budget of the European Union, in full respect ofthe rules, procedures and decision-making processesapplicable to it, including Article 28(3) TEU.(17) The Agency, while being open to participation by allMember States, should also provide for the possibilityof specific groups of Member States establishing ad hocprojects or programmes.(18) The Agency should have decision-making proceduresallowing it to fulfil its tasks efficiently, while respectingthe national security and defence policies of participatingMember States.(19) The Agency should fulfil its mission in accordance withArticle 3 TEU and in full respect of Article 47 TEU.(20) The Agency should act in full conformity with the EUsecurity standards and rules.(21) In conformity with Article 6 of the Protocol on theposition of Denmark annexed to the Treaty onEuropean Union and to the Treaty establishing theEuropean Community, Denmark does not participate inthe elaboration and implementation of decisions andactions of the European Union which have defence implications.Denmark has therefore not participated in theelaboration and adoption of this Joint Action and shallnot be bound by it,HAS ADOPTED THIS JOINT ACTION:CHAPTER IESTABLISHMENT, MISSION AND TASKS OF THE AGENCYArticle 1Establishment1. An Agency in the field of defence capabilities development,research, acquisition and armaments (the EuropeanDefence Agency), hereinafter referred to as ‘the Agency’, ishereby established.2. The Agency shall act under the Council’s authority, insupport of the CFSP and the ESDP, within the single institutionalframework of the European Union, and without prejudiceto the responsibilities of the EU institutions and the Councilbodies. The Agency’s mission shall be without prejudice to thecompetences of the European Community, in full respect ofArticle 47 TEU.3. The Agency shall be open to participation by all EUMember States bound by this Joint Action. Member Stateswho wish to participate immediately in the Agency shallnotify their intention to do so to the Council and inform theSG/HR at the time of the adoption of this Joint Action.4. Any Member State wishing to participate in the Agencyafter the adoption of this Joint Action or wishing to withdrawfrom the Agency shall notify its intention to the Council andinform the SG/HR. Any necessary technical and financialarrangements for such participation or withdrawal shall bedetermined by the Steering Board.5. The Agency shall have its headquarters in Brussels.Article 2Mission1. The mission of the Agency is to support the Council andthe Member States in their effort to improve the EU’s defencecapabilities in the field of crisis management and to sustain theESDP as it stands now and develops in the future.2. The Agency’s mission shall be without prejudice to the

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competences of Member States in defence matters.Article 3DefinitionsFor the purpose of this Joint Action:— ‘participating Member States’, shall mean the Member Statesof the European Union who participate in the Agency,— ‘contributing Member States’, shall mean the participatingMember States of the European Union contributing to aparticular project or programme.Article 4Political supervision and reporting arrangements1. The Agency shall operate under the authority and thepolitical supervision of the Council, to which it shall provideregular reports and from which it shall receive regularguidelines.L 245/18 EN Official Journal of the European Union 17.7.20042. The Agency shall report regularly to the Council on itsactivities, and shall notably:(a) submit to the Council in May each year a report on theAgency’s activities during the previous and the current year;(b) submit to the Council in November each year a report onthe Agency’s activities during the current year and provideinformation on the draft elements for the Agency’s workprogramme and budgets for the following year.The Agency shall provide the Council in good time with informationon important matters to be submitted to the SteeringBoard for decision.3. The Council, acting by unanimity, and with advice fromthe PSC or other competent Council bodies as appropriate, shallissue guidelines annually in relation to the work of the Agency,notably with regard to its work programme. The Agency’s workprogramme shall be established within the framework of theseguidelines.4. Every three years, the Council, acting by unanimity, shallapprove a financial framework for the Agency for the followingthree years. This financial framework shall set out agreed prioritiesand shall constitute a legally binding ceiling. The firstfinancial framework shall cover the period 2006 to 2008.5. The Agency may make recommendations to the Counciland to the Commission as necessary for the implementation ofits mission.Article 5Functions and tasks1. In fulfilling its functions and tasks, the Agency shallrespect the competences of the European Community andthose of the EU institutions.2. The Agency’s fulfilment of its functions and tasks shall bewithout prejudice to the competences of Member States indefence matters.3. The Agency shall work in the following principal fields:3.1. Development of defence capabilities in the field of crisismanagement, in particular by:3.1.1. identifying, in association with the competentCouncil bodies, and utilising the Capability DevelopmentMechanism (CDM), the EU’s future defencecapability requirements in quantitative and qualitativeterms (encompassing both forces andequipment);3.1.2. coordinating the implementation of the EuropeanCapabilities Action Plan (ECAP) and any successorplan;3.1.3. scrutinising, assessing and evaluating against criteriato be agreed by the Member States the capability

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commitments given by the Member States throughthe ECAP process, and utilising the CDM;3.1.4. promoting and coordinating harmonisation ofmilitary requirements;3.1.5. identifying and proposing collaborative activities inthe operational domain;3.1.6. providing appraisals on financial priorities forcapabilities development and acquisition.3.2. Promotion and enhancement of European armamentscooperation, in particular by:3.2.1. promoting and proposing new multilateral cooperativeprojects to meet ESDP capabilitiesrequirements as they stand now and develop inthe future;3.2.2. working for coordination of existing programmesimplemented by Member States;3.2.3. assuming, at the request of Member States, responsibilityfor managing specific programmes (throughOCCAR or other programme managementarrangements as appropriate);3.2.4. promoting cost-effective and efficient procurementby identifying and disseminating best practices.3.3. Working to strengthen the DTIB and for the creation of aninternationally competitive European Defence EquipmentMarket in particular by:3.3.1. developing relevant policies and strategies, inconsultation with the Commission and industry asappropriate;3.3.2. pursuing EU-wide development and harmonisationof relevant rules and regulations (particularly by anEU-wide application of relevant rules of the LoIFramework Agreement).17.7.2004 EN Official Journal of the European Union L 245/193.4. Enhancement of the effectiveness of European DefenceResearch and Technology (R & T), in particular by:3.4.1. promoting, in liaison with the Community’sresearch activities where appropriate, researchaimed at fulfilling future defence and securitycapability requirements and thereby strengtheningEurope’s industrial and technological potential inthis domain;3.4.2. promoting more effectively targeted joint defence R& T, drawing on the experience of relevant elementsof the WEAG and the WEAO;3.4.3. coordinating and planning joint research activities;3.4.4. catalysing defence R & T through studies andprojects;3.4.5. managing defence R & T contracts;3.4.6. working in liaison with the Commission tomaximise complementarity and synergy betweendefence and civil or security related researchprogrammes.Article 6Legal personalityThe Agency shall have the legal personality necessary toperform its functions and attain its objectives. Member Statesshall ensure that the Agency enjoys the most extensive legalcapacity accorded to legal persons under their laws. TheAgency may, in particular, acquire or dispose of movable andimmovable property and be a party to legal proceedings. TheAgency shall have the capacity to conclude contracts withprivate or public entities or organisations.CHAPTER II

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ORGANS AND STAFF OF THE AGENCYArticle 7Head of the Agency1. The Head of the Agency shall be the SG/HR for the CFSP.2. The Head of the Agency shall be responsible for theAgency’s overall organisation and functioning and shall ensurethat the guidelines issued by the Council and the decisions ofthe Steering Board are implemented by the Chief Executive, whoshall report to him/her.3. The Head of the Agency shall present the Agency’s reportsto the Council as referred to in Article 4(2).4. The Head of the Agency shall be responsible for thenegotiation of administrative arrangements with thirdcountries and other organisations, groupings or entities inaccordance with directives given by the Steering Board.Within such arrangements, as approved by the Steering Board,the Head of the Agency shall be responsible for establishingappropriate working relations with them.Article 8Steering Board1. A Steering Board composed of one representative of eachparticipating Member State, authorised to commit itsgovernment, and a representative of the Commission, shall bethe decision-making body of the Agency. The Steering Boardshall act within the framework of the guidelines issued by theCouncil.2. The Steering Board shall meet at the level of the Ministersof Defence of the participating Member States or their representatives.The Steering Board shall in principle hold at leasttwo meetings each year at the level of Ministers of Defence.3. The Head of the Agency shall convene and chair theSteering Board’s meetings. If a participating Member State sorequests, the Head of the Agency shall convene a meetingwithin one month.4. The Head of the Agency may delegate the power to chairthe Steering Board’s meetings at the level of the representativesof the Ministers of Defence.5. The Steering Board may meet in specific compositions(such as National Defence Research Directors, NationalArmaments Directors, National Defence Planners or PolicyDirectors).6. The Steering Board meetings are attended by:— the Chief Executive of the Agency or his/her representative,— the Chairman of EUMC and the NAD of the EU Presidency,or their representative.7. The Steering Board may decide to invite, on matters ofcommon interest:— the NATO Secretary-General,L 245/20 EN Official Journal of the European Union 17.7.2004— the Heads/Chairs of other arrangements, organisations orgroupings whose work is relevant to that of the Agency(such as LoI, WEAG/WEAO, OCCAR),— as appropriate, representatives of other third parties.Article 9Tasks and powers of the Steering Board1. Within the framework of the guidelines of the Councilreferred to in Article 4(1), the Steering Board:1.1. approves the reports to be submitted to the Council;1.2. approves, on the basis of a draft submitted by the Headof the Agency, and no later than 31 December of eachyear, the Agency’s annual work programme for thefollowing year;1.3. adopts the Agency’s general budget no later than 31

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December of each year within the limits set in theAgency’s financial framework as decided by the Council;1.4. approves the establishment within the Agency of ad hocprojects or programmes in accordance with Article 20;1.5. appoints the Chief Executive and his/her deputy;1.6. decides that the Agency may be entrusted by one ormore Member States with the administrative andfinancial management of certain activities within itsremit in accordance with Article 17;1.7. approves any recommendation to the Council or theCommission;1.8. adopts the Agency’s rules of procedure;1.9. may amend the financial provisions for the implementationof the Agency’s general budget;1.10. may amend the rules and regulations applicable to thecontractual staff and national seconded experts;1.11. determines the technical and financial arrangementsregarding Member States’ participation or withdrawalreferred to in Article 1(4);1.12. adopts directives regarding the negotiation of administrativearrangements by the Head of the Agency;1.13. approves the ad hoc arrangements referred to in Article23(1);1.14. concludes the administrative arrangements between theAgency and third parties referred to in Article 25(1);1.15. approves the annual accounts and balance sheet;1.16. adopts all other relevant decisions relating to thefulfilment of the Agency’s mission.2. The Steering Board shall take decisions by qualifiedmajority. The votes of the participating Member States shallbe weighted in accordance with Article 23(2) TEU. Decisionsto be adopted by the Steering Board by qualified majority shallrequire at least two thirds of the votes of the participatingMember States. Only the representatives of the participatingMember States shall take part in the vote.3. If a representative of a participating Member State in theSteering Board declares that, for important and stated reasons ofnational policy, it intends to oppose the adoption of a decisionto be taken by qualified majority, a vote shall not be taken. Thatrepresentative may refer the matter, through the Head of theAgency, to the Council with a view to issuing guidelines to theSteering Board, as appropriate. Alternatively, the Steering Board,acting by qualified majority, may decide to refer the matter tothe Council for decision. The Council shall act by unanimity.4. The Steering Board, on a proposal from the ChiefExecutive or from a participating Member State, may decideto set up:(a) committees for the preparation of administrative andbudgetary decisions of the Steering Board, composed ofdelegates of the participating Member States and a representativeof the Commission;(b) committees specialised in specific issues within the Agency’sremit. These committees shall be composed of delegates ofthe participating Member States and, unless the SteeringBoard decides otherwise, a representative of theCommission.The decision to establish such committees shall specify theirmandate and duration.Article 10The Chief Executive1. The Chief Executive, and his/her Deputy, are appointed bythe Steering Board on a proposal from the Head of the Agencyfor three years. The Steering Board may grant a two-year

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extension. The Chief Executive, and his/her Deputy, shall actunder the authority of the Head of the Agency and inaccordance with the decisions of the Steering Board.17.7.2004 EN Official Journal of the European Union L 245/212. The Chief Executive, assisted by his/her deputy, shall takeall necessary measures to ensure the efficiency and effectivenessof the Agency’s work. He/she is responsible for the oversightand coordination of the functional units, in order to ensure theoverall coherence of their work. He/she shall be the head of theAgency’s staff.3. The Chief Executive is responsible for:3.1. ensuring the implementation of the Agency’s annual workprogramme;3.2. preparing the work of the Steering Board, in particular thedraft annual work programme of the Agency;3.3. ensuring close cooperation with and providing informationto the Council preparatory bodies, notably the PSC and theEUMC;3.4. preparing the draft annual general budget to be submittedto the Steering Board;3.5. preparing the reports referred to in Article 4(2);3.6. preparing the statement of revenue and expenditure andimplementing the Agency’s general budget and the budgetsof ad hoc projects or programmes entrusted to the Agency;3.7. the day-to-day administration of the Agency;3.8. all security aspects;3.9. all staff matters.4. Within the work programme and the general budget ofthe Agency, the Chief Executive shall be empowered to enterinto contracts and to recruit staff. The Chief Executive shall bethe authorising officer responsible for the implementation of thebudgets administered by the Agency.5. The Chief Executive shall be accountable to the Board.6. The Chief Executive shall be the legal representative of theAgency.Article 11Staff1. The staff of the Agency, including the Chief Executive,shall consist of contract and statutory staff members recruitedfrom among candidates from all participating Member States onthe broadest possible geographical basis, and from the EU institutions.The staff of the Agency shall be selected by the ChiefExecutive on the basis of relevant competence and expertise andthrough fair and transparent competition procedures. The ChiefExecutive shall publish in advance details of all availablepositions and the criteria relevant to the selection process. Inall cases, recruitment shall be directed to securing for theAgency the services of staff of the highest standard of abilityand efficiency.2. The Head of the Agency, upon a proposal from the ChiefExecutive and following consultation with the Steering Board,shall appoint the staff of the Agency at senior managementlevel.3. The Agency’s staff shall consist of:3.1. personnel recruited directly by the Agency under fixedtermcontracts, selected among nationals of participatingMember States. The Council, acting by unanimity, shallapprove the regulations applicable to such staff. TheSteering Board shall, within one year of the adoption ofthis Joint Action, review and amend, as necessary, theseregulations;3.2. national experts seconded by participating Member Stateseither to posts within the Agency organisational structure

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or for specific tasks and projects. The Council, acting byunanimity, shall approve the rules applicable to suchexperts. The Steering Board shall, within one year of theadoption of this Joint Action, review and amend, asnecessary, these rules;3.3. Community officials seconded to the Agency for a fixedperiod and/or for specific tasks or projects as required.CHAPTER IIIBUDGET AND FINANCIAL RULESArticle 12Budgetary principles1. Budgets, drawn up in euro, are the acts which for eachfinancial year lay down and authorise all the revenue andexpenditure administered by the Agency.2. The appropriations entered in a budget are authorised forthe duration of a financial year which begins on 1 January andends on 31 December of the same year.3. For each budget, revenue and expenditure must bebalanced. All revenue and expenditure shall be entered in fullin the relevant budget without any adjustment against eachother.L 245/22 EN Official Journal of the European Union 17.7.20044. The budget shall contain differentiated appropriations,which shall consist of commitment appropriations andpayment appropriations and non-differentiated appropriations.5. Commitment appropriations shall cover the total cost ofthe legal commitments entered into during the current financialyear. However, commitments may be made globally or inannual instalments. Commitments shall be entered into theaccounts on the basis of the legal commitments entered intoup to 31 December.6. Payment appropriations shall cover payments made tohonour the legal commitments entered into in the currentfinancial year and/or earlier financial years. Payments shall beentered in the accounts on the basis of the budgetcommitments up to 31 December.7. The revenue of a financial year shall be entered in theaccounts for the financial year on the basis of the amountscollected during the financial year.8. Neither revenue nor expenditure may be implementedother than by allocation to a heading in the budget andwithin the limit of the appropriations entered there.9. Appropriations shall be used in accordance with the principlesof sound financial management, namely in accordancewith the principles of economy, efficiency and effectiveness.Article 13The general budget1. The Head of the Agency shall provide the Steering Boardby 30 June each year with an overall estimate of the draftgeneral budget for the following year, fully respecting thelimits set down in the financial framework.2. The Head of the Agency shall propose the draft generalbudget to the Steering Board by 30 September each year. Thedraft shall include:(a) the appropriations deemed necessary:(i) to cover the Agency’s running, staffing and meetingcosts;(ii) for procuring external advice, notably operationalanalysis, essential for the Agency to discharge its tasks,and for specific research and technology activities forthe common benefit of all participating MemberStates, notably technical case-studies and pre-feasibilitystudies;

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(b) a forecast of the revenue needed to cover expenditure.3. The Steering Board shall aim to ensure that the appropriationsreferred to in paragraph 2(a)(ii) shall represent asignificant share of the total appropriations referred to inparagraph 2. These appropriations shall reflect actual needsand shall allow for an operational role for the Agency.4. The draft general budget shall be accompanied by adetailed staff establishment plan and detailed justifications.5. The Steering Board, acting by unanimity, may decide thatthe draft general budget shall furthermore cover a particularproject or programme where this is clearly for the commonbenefit of all participating Member States.6. The appropriations shall be classified in titles and chaptersgrouping expenditure together by type or purpose, subdividedas necessary into articles.7. Each title may include a chapter entitled ‘provisionalappropriations’. These appropriations shall be entered wherethere is uncertainty, based on serious grounds, about theamount of appropriations needed or the scope for implementingthe appropriations entered.8. Revenue shall consist of:(a) miscellaneous revenue;(b) contributions payable by the Member States participating inthe Agency based on the gross national income (GNI) scale.The draft general budget shall carry lines to accommodateearmarked revenue and, wherever possible, shall indicate theamount foreseen.9. The Steering Board shall adopt the draft general budget by31 December of each year within the Agency’s financialframework. When doing so, the Steering Board shall bechaired by the Head of the Agency, or by a representativeappointed by him/her from within the General Secretariat ofthe Council, or by a member of the Steering Board invited todo so by him/her. The Chief Executive shall declare that thebudget has been adopted and notify the participating MemberStates.17.7.2004 EN Official Journal of the European Union L 245/2310. If, at the beginning of a financial year, the draft generalbudget has not been adopted, a sum equivalent to not morethan one twelfth of the budget appropriations for the precedingfinancial year may be spent each month in respect of anychapter or other subdivision of the budget. This arrangementshall not, however, have the effect of placing at the disposal ofthe Agency appropriations in excess of one twelfth of thoseprovided for in the draft general budget in course ofpreparation. The Steering Board, acting by a qualified majorityon a proposal from the Chief Executive, may authorise expenditurein excess of one twelfth. The Chief Executive may call forthe contributions necessary to cover the appropriationsauthorised under this provision, which shall be payable within30 days from dispatch of the call for contributions.Article 14Amending budgets1. In the case of unavoidable, exceptional or unforeseencircumstances, the Chief Executive may propose a draftamending budget within the limits set down in the financialframework.2. The draft amending budget shall be drawn up, proposed,and adopted and notification given in accordance with the sameprocedure as the general budget, within the limits set down inthe financial framework. The Steering Board shall act with dueaccount to the urgency.3. In the situation where the limits set down in the financial

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framework would be considered insufficient due to exceptionaland unforeseen circumstances, taking also in full account rulesset out in Article 13(2) and (3), the Steering Board will submitthe amending budget for adoption by the Council, acting byunanimity.Article 15Earmarked revenue1. The Agency may receive in its general budget asearmarked revenue for a specific purpose financial contributionsto cover costs other than those referred to under Article13(2)(a)(i):(a) from the general budget of the European Union on a caseby-case basis, in full respect of the rules, procedures anddecision-making processes applicable to it;(b) from Member States, third countries or other third parties.2. Earmarked revenue may only be used for the specificpurpose to which it is assigned.Article 16Contributions and reimbursements1. Determination of contributions where the GNI scale isapplicable1.1. Where the GNI scale is applicable, the breakdown ofcontributions between the Member States from whom acontribution is required shall be determined in accordancewith the gross national product scale as specified in Article28(3) TEU and in accordance with Council Decision2000/597/EC, Euratom of 29 September 2000 on thesystem of the European Communities’ own resources (1),or any other Council Decision which may replace it.1.2. The data for the calculation of each contribution shall bethose set out in the ‘GNI own resources’ column in the‘Summary of financing of the general budget by type ofown resource and by Member State’ table appended to thelatest budget adopted by the European Communities. Thecontribution of each Member State from whom a contributionis due shall be proportional to the share of thatMember State’s GNI in the total GNI aggregate of theMember States from whom a contribution is due.2. Schedule for payment of contributions2.1. The contributions intended to finance the general budgetshall be paid by the participating Member States in threeequal instalments, by 15 February, 15 June and 15October of the financial year concerned.2.2. When an amending budget is adopted, the necessarycontributions shall be paid by the Member Statesconcerned within 60 days from dispatch of the call forcontributions.2.3. Each Member State shall pay the bank charges relating tothe payment of its own contributions.Article 17Management by the Agency of expenditure on behalf ofMember States1. The Steering Board, on a proposal from the ChiefExecutive or a Member State, may decide that the Agencymay be entrusted by Member States, on a contractual basis,with the administrative and financial management of certainactivities within its remit.L 245/24 EN Official Journal of the European Union 17.7.2004(1) OJ L 253, 7.10.2000, p. 42.2. The Steering Board, in its decision, may authorise theAgency to enter into contracts on behalf of certain MemberStates. It may authorise the Agency to collect the necessaryfunds from these Member States in advance to honour the

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contracts entered into.Article 18Implementation of the budget1. The financial provisions applicable to the Agency’s generalbudget shall be adopted by the Council, acting by unanimity.The Steering Board shall, within one year of the adoption ofthis Joint Action, review and amend these provisions, asnecessary.2. The Steering Board, acting on a proposal from the ChiefExecutive, shall as necessary adopt the implementing rulesregarding the implementation and control of the generalbudget, notably as regards public procurement, withoutprejudice to relevant Community rules. The Steering Boardshall ensure, in particular, that security of supply and protectionboth of defence secret and intellectual property rightsrequirements are taken into account in a proper manner.3. The financial provisions and rules referred to in thisArticle are not applicable to ad hoc projects and programmesas referred to in Articles 20 and 21.Article 19Initial budget 2004 and budget for 20051. The initial general budget for the financial year 2004,focused on start-up arrangements, shall be as shown in thefinancial statement to be submitted with the Joint Action. Thefirst financial year shall begin one day after the entry into forceof this Joint Action.2. The initial general budget shall be financed by contributionsfrom the participating Member States payable as soonas possible and in any case no later than within 45 days fromdespatch of the calls for contributions by the Head of theAgency, Secretary-General of the Council of the EuropeanUnion.3. The general budget for the financial year 2005 shall beadopted by the Steering Board with the approval of the Council,acting by unanimity.CHAPTER IVAD HOC PROJECTS OR PROGRAMMES AND ASSOCIATEDBUDGETSArticle 20Approval of ad hoc projects or programmes and ad hocbudgets associated with them (Category A)1. One or more participating Member States or the ChiefExecutive may submit to the Steering Board an ad hocproject or programme within the Agency’s remit, which shallpresume general participation by the participating MemberStates. The Steering Board shall be informed of the ad hocbudget, if any, to be associated with the proposed project orprogramme, as well as of potential contributions by thirdparties.2. All participating Member States shall in principlecontribute. They shall inform the Chief Executive of theirintentions in this regard.3. The Steering Board shall approve the establishment of thead hoc project or programme.4. The Steering Board, on a proposal from the ChiefExecutive or from a participating Member State, may decideto set up a committee to supervise the management and implementationof the ad hoc project or programme. The committeeshall be composed of delegates from each of the contributingMember States and, when the Community contributes to theproject or programme, a representative of the Commission. Thedecision of the Steering Board shall specify the committee’smandate and duration.

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5. For the ad hoc project or programme, the contributingMember States, meeting within the Steering Board, shallapprove:(a) the rules governing the management of the project orprogramme;(b) where appropriate, the ad hoc budget associated with theproject or programme, the key for contributions and thenecessary implementing rules;(c) participation of third parties in the committee referred to inparagraph 4. Their participation shall be without prejudiceto the decision-making autonomy of the EU.6. Where the Community contributes to an ad hoc projector programme, the Commission shall participate in thedecisions referred to in paragraph 5, in full respect of thedecision-making procedures applicable to the general budgetof the EU.17.7.2004 EN Official Journal of the European Union L 245/25Article 21Approval of ad hoc projects, or programmes and ad hocbudgets associated with them (Category B)1. One or more participating Member States may inform theSteering Board that they intend to establish an ad hoc project orprogramme within the Agency’s remit, and where appropriatethe ad hoc budget associated with it. The Steering Board shallbe informed of the ad hoc budget, if any, to be associated withthe proposed project or programme, and details, if relevant, onhuman resources for such project or programme, as well as ofpotential contributions by third parties.2. In the interest of maximising opportunities for cooperation,all participating Member States shall be informed ofthe ad hoc project or programme, including the basis uponwhich participation might be expanded, in a timely mannerso that any participating Member State who wishes to do somay express an interest in joining. Moreover, the initiator(s) ofthe project or programme will endeavour to make theirmembership as wide as possible. Participation will be establishedon a case-by-case basis by the initiators.3. The ad hoc project or programme shall then be regardedan as Agency project or programme, unless the Steering Boarddecides otherwise within one month of receiving the informationforeseen in paragraph 1.4. Any participating Member State which, at a later stage,wishes to participate in the ad hoc project or programme shallnotify the contributing Member States of its intentions. Thecontributing Member States, within two months of receivingthis notification, shall decide among themselves, having dueregard to the basis set out when participating Member Statesare informed of the project or programme, on the participationof the Member State concerned.5. The contributing Member States shall take amongst themthe decisions necessary for the establishment and implementationof the ad hoc project or programme and, where appropriate,the budget associated with it. Where the Communitycontributes to such a project or programme, the Commissionshall participate in the decisions referred to in this paragraph infull respect of the decision-making procedures applicable to thegeneral budget of the EU. The contributing Member States shallkeep the Steering Board informed, as appropriate, of developmentsrelating to such project or programme.Article 22Contributions from the general budget of the EuropeanUnion to ad hoc budgetsContributions from the general budget of the EU may be made

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to the ad hoc budgets established for ad hoc projects orprogrammes referred to in Articles 20 and 21.Article 23Participation of third parties1. Third parties may contribute to a particular ad hoc projector programme, established in accordance with Articles 20 or21, and to the budget associated with it. The Steering Boardshall, acting by qualified majority, approve as necessary ad hocarrangements between the Agency and third parties for eachparticular project or programme.2. For projects established under Article 20, the contributingMember States meeting within the Steering Board shall approveany necessary modalities with the relevant third parties relatingto their contribution.3. For projects established under Article 21, the contributingMember States shall decide any necessary modalities with therelevant third parties relating to their contribution.4. Where the Community contributes to an ad hoc projector programme, the Commission shall participate in thedecisions referred to in paragraphs 2 and 3.CHAPTER VRELATIONS WITH THE COMMISSIONArticle 24Association with the Agency’s work1. The Commission is a member of the Steering Boardwithout voting rights and shall be fully associated with thework of the Agency.2. The Commission, on behalf of the Community, may alsoparticipate in projects and programmes of the Agency.3. The Agency shall establish the necessary administrativearrangements and working relations with the Commission, inparticular with a view to exchanging expertise and advice inthose areas where the activities of the Community have abearing on the Agency’s missions and where the activities ofthe Agency are relevant to those of the Community.4. Necessary arrangements to cover a contribution, on acase-by-case basis, from the general budget of the EU underArticles 15 and 22, shall be established between the Agencyand the Commission by mutual agreement, or between thecontributing Member States and the Commission by mutualagreement.L 245/26 EN Official Journal of the European Union 17.7.2004CHAPTER VIRELATIONS WITH THIRD COUNTRIES, ORGANISATIONS ANDENTITIESArticle 25Relations with third countries, organisations and entities1. For the purpose of fulfilling its mission, the Agency mayenter into administrative arrangements with third States, organisationsand entities. Such arrangements shall notably cover:(a) the principle of a relationship between the Agency and thethird party;(b) provisions for consultation on subjects related to Agency’swork;(c) security matters.In so doing, it shall respect the single institutional frameworkand the decision-making autonomy of the EU. Each sucharrangement shall be concluded by the Steering Board uponapproval by the Council, acting by unanimity.2. The Agency shall develop close working relations with therelevant elements of OCCAR, the LoI Framework Agreement,and WEAG/WEAO with a view to incorporate those elementsor assimilate their principles and practices in due course, as

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appropriate and by mutual agreement.3. Reciprocal transparency and coherent development in thefield of capabilities shall be ensured by the application of CDMprocedures. Other working relations between the Agency andrelevant NATO bodies shall be defined through an administrativearrangement referred to in paragraph 1, in full respectof the established framework of cooperation and consultationbetween the EU and NATO.4. With a view to facilitating their possible participation inprojects and programmes and within the framework ofarrangements referred to in paragraph 1, the Agency shall beentitled to establish working relations with organisations andentities other than those mentioned in paragraphs 2 and 3.5. With a view to facilitating their possible participation inspecific projects and programmes and within the framework ofarrangements referred to in paragraph 1, the Agency shall beentitled to establish working relations with third countries.6. The non-EU WEAG members shall be provided with thefullest possible transparency regarding the Agency’s specificprojects and programmes with a view to their participationtherein as appropriate. A consultative committee shall be setup for this purpose, to provide a forum for exchanging viewsand information on matters of common interest falling withinthe scope of the Agency's mission. It shall be chaired by theChief Executive or his/her representative. It shall include a representativeof each participating Member State and a representativeof the Commission, and representatives of the non-EUWEAG members in accordance with modalities to be agreedwith them.7. Upon request, other non-EU European NATO membersmay also participate in the Consultative Committee referred toin paragraph 6, in accordance with modalities to be agreed withthem.8. The Consultative Committee referred to in paragraph 6may also serve as a forum for dialogue with other thirdparties on specific matters of mutual interest within theAgency's remit, and may serve to ensure that they are keptfully informed of developments in matters of commoninterest and of opportunities for future cooperationCHAPTER VIIMISCELLANEOUS PROVISIONSArticle 26Privileges and immunitiesPrivileges and immunities necessary for the performance of theduties of the Agency, the Chief Executive and its staff shall beprovided for in an agreement between participating MemberStates.Article 27Review clauseThe Head of the Agency shall present no later than three yearsfrom the entry into force of this Joint Action or upon the entryinto force of the Treaty establishing a Constitution for Europe,whichever is the earlier, a report to the Steering Board on theimplementation of this Joint Action, with a view to its possiblereview by the Council.Article 28Legal liability1. The contractual liability of the Agency shall be governedby the law applicable to the contract concerned.2. The personal liability of staff towards the Agency shall begoverned by the relevant rules applying to the Agency.17.7.2004 EN Official Journal of the European Union L 245/27Article 29

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Access to documentsUpon a proposal by the Chief Executive, the Steering Boardshall adopt rules on public access to the documents of theAgency, taking into account the principles and limits laiddown in Regulation (EC) No 1049/2001 of the EuropeanParliament and of the Council of 30 May 2001 regardingpublic access to European Parliament, Council and Commissiondocuments (1).Article 30Security1. The Agency shall apply the Council’s security regulationsset out in Decision 2001/264/EC (2).2. The Agency shall ensure appropriate security and speed inits external communications.Article 31Language regimeThe language regime of the Agency shall be established by theCouncil, acting by unanimity.Article 32Transitional measuresThe SG/HR shall take the necessary measures for the operationalsetting-up of the Agency. For this purpose, he/she may alsoexercise the powers granted to the Chief Executive under thisJoint Action until his/her appointment.Article 33This Joint Action shall enter into force on the day of itsadoption.Article 34This Joint Action shall be published in the Official Journal of theEuropean Union.Done at Brussels, 12 July 2004.For the CouncilThe PresidentB. BOTL 245/28 EN Official Journal of the European Union 17.7.2004(1) OJ L 145, 31.5.2001, p. 43.(2) OJ L 101, 11.4.2001, p. 1.

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