05/02/2014 07:04 GMT | Updated 06/04/2014 06:59 BST

Industry and the Defence of Europe

The European Union should not acquire a defence identity - but continuing membership of the EU is profoundly in the interests of our security and our defence industries.

The European Union should not acquire a defence identity - but continuing membership of the EU is profoundly in the interests of our security and our defence industries.

Our national defence requirements should continue to be met through Nato, through strategic alliances with countries that share common ambitions and understandings, through occasional "coalitions of the willing" and, where necessary, through unilateral action. The creation of new mechanisms or structures would be a costly diversion and add nothing to national security.

So must the UK be the country that says "no" on all matters of European defence? In fact there is an important role for the Commission which the UK should welcome and even champion. We have a clear national interest in creating as ambitious a single market as possible for defence equipment and services, encouraged by the 2009 directive on defence and security procurement, and now incorporated into law in every EU member state.

We must be clear - there will remain a wide range of defence equipment and services that will need to be met exclusively by United Kingdom companies and nationals, to maintain both our operational advantage and freedom of action. The same will be true for other member states.

There is, therefore, a continuing need for the celebrated Article 346 exemption to protect the UK's vital national interest. The market for defence equipment and services is not just another market to be integrated fully into the EU's general single market. Liberalisation can only be accepted as far as it does no damage to our national security.

That said, many states use the Article 346 exemption to protect their industries rather than to protect their national security. The UK, with a large range of industries supplying the defence market at home and abroad, and with a significant number of SMEs, stands to gain economically from a more open defence market in Europe.

As Jay Edwards of Chatham House wrote in 2011, the aim of the directive

"... is to facilitate the development of an EU defence equipment market that will increase industrial competition, reduce duplication and lower prices."

On the other hand, I suspect that we will need to be particularly vigilant to protect our ability to sustain capabilities. We have already accepted that many items of advanced equipment such as fast jets can only be procured in international collaborations, but their sustainment in time of conflict is a vital national requirement. So, although the UK should generally press for service liberalisation, it must be much more cautious when it comes to defence support services.

We should, though, be concerned that the Commission, wrongly, seems to be developing ambitions to extend its powers to direct decisions in defence procurement.

However, while a more robust approach to Article 346 infringements may occasionally cause the UK some challenge, but overall it should bring greater opportunities for UK companies as they gain access to contracts that would not otherwise have been open to them. The UK needs to advocate a nuanced approach to these issues from the Commission but, ultimately, we must put our national security first and robustly oppose proposals that would compromise it.

The essence of the Commission's engagement with defence acquisition should be to enforce current rules and to enable pan-European cooperation on major projects. The European Defence Agency can play a significant role here, both in identifying areas of capability shortfalls where European collaboration can help the security of the region, and sustaining industrial entities of sufficient scale to compete with the US giants. Declining or at best stable defence budgets around Europe mean it is unlikely that national champions of the traditional kind can be sustained. The missed opportunity to achieve the merger of EADS (now Airbus) and BAE Systems must illustrate the perils of nationalism.

On the other hand, as defence looks more and more to innovative solutions from non-traditional suppliers, defence procurement policy must be as concerned with the needs of SMEs as prime contractors. A strong focus on the needs of SMEs must therefore feature in all aspects of any part of EU policy.

In summary, I believe through the intelligent application of Article 346 challenge, through an appropriate competition policy, and through the mechanism of the EDA, we see the right structure for EU engagement in defence acquisition. A modest, incremental approach is needed to ensure effective competition and nothing more.