EU tightens rules for defense contracts

BRUSSELS, July 1 (UPI) -- New European regulations that took effect Wednesday limit side-deals added to defense contracts.

The deals or "offsets" are totally banned in most commercial transactions by European Union member states, the EUObserver reported. But defense contracts had been an exception.

In one example, Hungary agreed to buy 14 Swedish fighter jets in exchange for Sweden making investments in Hungary equal to 110 percent of the total value of the contract. These included Electrolux building a new refrigerator-manufacturing plant in Hungary.

Under the new code, offsets will be allowed only if they involve the exchange of military research and technology. They will also be limited to no more than 100 percent of a contract's value.

Nick Witney, former head of the European Defense Association and now at the European Council on Foreign Relations, said some side deals have distorted the market, especially when countries like Austria demand offsets three times as valuable as the original contract.

"In that sort of transaction the defense equipment you're buying becomes almost unimportant," Witney said. "So people are going around at the moment in Europe, buying the wrong equipment, for the wrong reasons, simply because someone is offering to build a factory in that country or buy 100,000 pairs of shoes."