Integration or isolation? Restructuring Europe's defence industry

As the states of the European Union draw closer together, their inability to unite and restructure their defence industries is becoming ever more anachronistic. Britain, France and Germany currently have separate defence industries. In a united Europe, such duplication is neither necessary nor economically viable. Europe also faces a challenge from the American defence industry, which has recently undergone drastic rationalisation and is seeking new markets in direct competition with European companies.

The inaugural meeting of the Centre for European Reform's working group on the future of the European Defence Industry was held on June 19th. The group, composed of 40 senior industrialists, experts, government officials and journalists from both sides of the Atlantic, aims to produce bullet points of recommendations for governments and institutions.

An immediate consensus was reached on the need for restructuring, so that European defence equipment can remain competitive in export markets, and also to provide better value for money for national defence ministries. This must not be an exclusive process: we are not aiming to create a Fortress Europe. European companies should be free to forge partnerships with US firms while pursuing restructuring.

There is, however, considerable scepticism about achieving restructuring within a sensible timescale unless governments can first agree on common requirements and common policies. The defence industry in the United States was able to undergo rapid consolidation because it is predominantly answerable to a single customer, the US Government. In Europe, however, there are numerous national industries, each with their own principal customer. But is there sufficient political will throughout Europe to take the painful decisions that restructuring will require, such as the closure of national factories and the loss of certain national capabilities? (France, for example, currently employs about 400,000 people in the defence industry, but restructuring would significantly reduce that figure.)

Some French industrialists consider that if the European defence industry works too closely with American companies, the EU will be unable to achieve an independent common foreign and security policy (CFSP). British and German experts, however, suggest that the special position of France, whose government refuses to fully privatise its defence industry, is itself cause for concern and the major single obstacle to restructuring. They ask how far restructuring can progress without French involvement. They think, however, that Anglo-German plans for cross-border mergers might spur the French towards restructuring.

Europe's governments will play a role in defining the shape of the defence industry of the future. We believe that governments should be customers, regulators and facilitators. They can provide a catalyst for restructuring through procurement decisions and by taking enabling measures, such as co-ordinating research and development (R&D) expenditure. But governments should not themselves decide the shape of the European industry nor dictate who merges with whom.

Government-funded R&D is perceived in Europe as the great divider between the European and American defence industries. US companies appear to benefit disproportionately from higher levels of funding compared to their European counterparts. As it is technology developed today which will dominate the defence market in forthcoming decades, this may lead to a loss of European technological independence.

The so-called revolution in military affairs has positioned the US far ahead of its European counterparts in the application of information and communication technologies to defence systems. These innovations are particularly relevant in the military aircraft, guided weapons and electronics sectors of the defence industry. It is arguably more realistic for European firms to concentrate on becoming world leaders in areas such as land systems or training aircraft, and be willing to become subordinate to US companies in the design and production of combat aircraft.

Many Europeans continue to regard the US market as being closed to non-US companies: the US government is unwilling to award important contracts to foreigners. But Europe can make its presence felt in the US through joint ventures or the acquisition of smaller US companies (such as GEC's purchase of Tracor).

Our forum did not reach a consensus on whether Europe's armed forces should be free to seek equipment from industry worldwide, or if they should face political pressure to agree common requirements.But it did agree that fully harmonised joint requirements would not be feasible. We think that co-operation should be based more around common missions and technologies, than around detailed requirements. Such an approach should prevent an ossification of the procurement process and to facilitate joint missions with the US armed forces. Therefore we are encouraging European companies to foster and deepen transatlantic links while restructuring at home.