Arming Europe.

• Author: Jones, Seth G.

SINCE THE end of the Cold War, Europe's defense industry has undergone important changes. There has been a marked consolidation of the defense industry and a visible increase in intra-European collaboration. In 1993 only two European defense firms--British Aerospace (BAE) and Thompson SA--were among the top-ten defense firms in the world. Today, four European firms--BAE Systems, EADS, Thales and Finmeccanica--are among the top ten. This consolidation has largely been driven by a desire to compete with U.S. defense firms on the global arms market, since, with the partial exception of UK defense companies, European firms have had difficulty penetrating the U.S. defense market.

These developments have received relatively little attention outside the boardrooms of a few U.S. defense firms. However, they raise important issues for U.S. policy, notably whether these changes will enhance transatlantic defense cooperation or hinder it.

Several factors have been responsible for the consolidation of the European defense industry since the end of the Cold War. Economic factors--the decrease in European defense budgets after the collapse of the Soviet Union, the scale of national procurement, and the rising cost of the development and production of weapons and defense equipment--clearly played a role in promoting the consolidation. But they do not give the whole story. A more important factor was the consolidation of the U.S. defense market, which created several giant defense firms led by Lockheed Martin and Boeing that threatened to dominate the global arms market. This created a notable incentive for European defense firms to compete. The decline in the U.S. defense budget in the 1990s in the aftermath of the Cold War led U.S. government leaders to push for consolidation in the U.S. defense industry. For example, Lockheed acquired the Fort Worth division of General Dynamics in 1993 and then merged with the missile manufacturer Martin Marietta in 1995 to form Lockheed Martin.

The rise of large, competitive and technologically advanced U.S. defense firms provided a major impetus for European defense firms to consolidate. As Thomas Enders, then-CEO of defense and security systems at EADS and now CEO of EADS, noted: "In view of the mega-mergers in the U.S., it was clear to European industry leaders that national consolidation and joint ventures were inadequate counters to the competitive challenge being posed by U.S. industry."

Equally important in driving the rise in intra-European consolidation and the creation of several major prime firms was a political desire for Europe--especially the EU--to play a larger and more autonomous global role. The desire among European states to build an autonomous military capability created an important incentive for consolidation. The close relationship between European states and the expectation of future cooperation meant that intra-European consolidation would preserve European security of supply, sustain a strong European defense industrial base, and maintain European technological capabilities. Indeed, major consolidation outside Europe would have decreased security of supply and would have compromised the viability of the European defense industrial base.

Two examples illustrate the rationale for consolidation. First, the establishment of EADS created a transnational European defense giant with two major benefits: the ability to compete with U.S. firms such as Boeing and Lockheed Martin; and the ability to produce a variety of advanced armaments, such as the Eurofighter combat aircraft, the Eurocopter, the A400M transport aircraft and precision-guided missiles, all of which would improve Europe's ability to act autonomously. Following the December 1997 declaration by European leaders regarding the need for regional consolidation, government and industry negotiations were initiated to create a European defense company. While British Aerospace declined to join the German aerospace company Dasa, secret negotiations in 1999 between the shareholders of Daimler Chrysler, the Spanish state holding company SEPI, the Lagardere Group, and the German, Spanish and French governments eventually led to the creation of EADS. French Defense Minister Alain Richard and Economy Minister Laurent Fabius jointly noted that the establishment of EADS "goes in line with the European policy promoting an autonomous defense industry that is globally competitive."

Second, the creation of MBDA in the late 1990s was a significant step toward consolidating European missile production under one roof and challenging U.S. missile producer Raytheon. Following negotiations between executives from British, Italian and French missile companies and their respective governments, MBDA was established in 1999, producing guided weapons for land-based, naval and airborne requirements such as the Meteor and ASRAAM air-to-air missiles and the Exocet anti-ship missile.

Alongside the merger process, there has also been an increase in intra-European defense projects. During most of the Cold War, European states tended to collaborate with American defense firms rather than with other European firms; now European defense firms are...