European nations spend over $35 billion a year purchasing new defense goods, but there is very little cross-border competition or tendering for contracts because the EU treaty exempts the armaments industry from normal single market rules.

Until now, defense ministries have jealously guarded their right to hand lucrative contracts to national industries without having to justify their decision or open the tender up to normal procurement practices. But the pressures of the EU single market, which allows for the free flow of goods across national borders, coupled with dwindling defense budgets and a desire to pool more military capabilities at the European level, have forced ministers to tentatively open up their markets.

On Monday, at a meeting of the European Defense Agency's steering board in Brussels, all EU defense ministers with the exception of Denmark are expected to sign a code of conduct which will commit them to open up their arms industry markets to competition unless they declare that it is in their vital national interests not to do so.

"This will be a landmark decision," European Defense Agency Chief Executive Nick Witney told journalists Friday. "The desire to inject competition into this hitherto protected market has been something that has been recognized as hugely beneficial for decades, but we haven't found a way to do it."

Under the code of conduct, which would come into effect in July, EU member states would be obliged to post new tenders on an Internet notice board. European arms companies would then be free to compete for the contract.

Although the code of conduct would not be legally-binding, EU officials hope peer pressure will keep the system running smoothly. They also believe it will lead to a fundamentally different approach to tendering. Instead of defense contracts being closed to competition unless stated otherwise, they will be open to competition unless a government judges them to be highly sensitive. Even then, defense ministries would have to justify their decision to shut out competition.

"This is a huge breakthrough," said one senior EU official, speaking on condition of anonymity. "It should not only provide better value for money but help the restructuring of Europe's industrial base."

The code of conduct is likely to be welcomed by the European Commission and the European Parliament as a first step towards an internal market in the defense industry. Joachim Wuermeling, a German center-right legislator who drew up the EU assembly's response to the commission's green paper on defense procurement, told United Press International that greater competition in the industry would "save taxpayers' money, make the European defense industry more competitive and help create a European defense identity."

However, both the parliament and commission are in favor of a more binding EU directive on arms procurement that would lay down precisely what defense equipment can remain outside the scope of Article 296 -- the treaty clause that exempts the arms industry from internal market rules. "At the moment Article 296 is being abused," said Wuermeling. "What we are demanding is a stricter interpretation of the exemption to prevent misuse."

European governments, who have the final say on defense matters, are likely to resist moves to make open competition in the arms industry legally-binding. However, a European Defense Agency official said the voluntary code of conduct was only a "first step" and would be closely watched to see if it proved effective.

A senior EU diplomat said the only "disappointment" with the European Defense Agency's first year of operation was that despite the increased cooperation between European nations on defense matters, "we still haven't got member states to put their hands in their pockets. There are a number of pots simmering on the stove, but none have come to the boil."

In other words, EU governments have made all the right noises about modernizing their forces, upping defense expenditure, prising open markets and closing the 'capabilities gap' with the United States, but have so far failed to put their money where their mouths are.

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