By Adrian Croft
BRUSSELS (Reuters) - The European Commission proposed on Wednesday to help Europe's defense industry cope with pressure from falling military budgets by funding research and helping to develop new military technologies.
The European Union's executive body, which has traditionally left defense responsibilities to its 28 member states, also raised the possibility that the EU itself could buy and operate some equipment needed for military missions.
Europe's defense industry had sales of 96 billion euros ($126.9 billion) in 2012 and employed about 400,000 people.
But EU officials fear sharp cuts in defense spending by governments in response to the economic crisis are eroding the competitiveness of the sector, dominated by companies such as Britain's BAE Systems, Franco-German EADS and Italy's Finmeccanica.
Experts say the European defense industry is too fragmented, with firms often developing many similar products, while the continent lags in key technologies such as drones, where the United States and Israel lead.
"Maintaining and developing defense capabilities to meet current and future challenges in spite of severe budget constraints will only be possible if far-reaching political and structural reforms are made. The time has come to take ambitious action," the Commission said in its 17-page paper.
The paper is part of a debate on how Europe can strengthen its arms industry and bolster a common defense policy that is set to culminate in a summit of European leaders in December.
The Commission wants to encourage spin-offs for the defense industry from civilian research carried out under the EU's Horizon 2020 research program, which has an 80 billion euro budget between 2014 and 2020.
The Commission, keen to encourage pan-European defense cooperation, said it would take a more hands-on approach in fostering some technologies with both civilian and military applications.
It said it would help fund a pre-commercial procurement scheme to acquire prototypes of some technologies.
The first candidates could be equipment to detect chemical, biological, radiological, nuclear and explosives threats, RPAS (remotely-piloted aircraft systems or drones), and radio communication equipment using software on personal computers.
The Commission said it would study what capabilities with both a military and a civilian use were needed for EU security policies. The EU has launched a number of overseas military or civilian missions, including training troops in Mali.
"On the basis of this assessment, it will come up with a proposal for which capability needs, if any, could best be fulfilled by assets directly purchased, owned and operated by the (European) Union," the paper said.
A Commission official said it was too early to say what equipment could be best operated by the EU, but suggested there might be a need for communication, transport, weapons detection or surveillance equipment, such as drones.
The Commission urged EU governments to identify a joint project in the area of key defense capabilities, where EU policies could fully be mobilized.
The Commission promised a crackdown on discriminatory practices and distortions affecting the defense market in Europe, where governments often try to keep manufacturing and skills at home by favoring companies from their own country.
The Commission said it would monitor the openness of member states' defense markets and make sure that new rules on procuring defense equipment were applied by EU governments.
European governments are exempt from the usual EU rules on giving state aid to their industries if they can prove that "essential security interests" are at stake. The Commission said it would keep a close eye on ensuring governments met the conditions when asking for exemptions from state aid rules.
The Commission wants to encourage European-wide standards and testing procedures for defense equipment to eliminate duplication and make it easier for European armies to work together. Drones and encryption technologies could be candidates for setting common European standards, it said.
($1 = 0.7565 euros)
(Editing by Jane Merriman)