Tuesday, September 07, 2004

Muddling through

The Pardee Rand Graduate School is not a name known to your average man in the street, but it is a very special institution, financed by the Rand Corporation to teach students the rigors of policy studies. Based in Santa Monica, California, each year it enrols 15 to 20 of "the world's ablest people" to take doctorates in a policy-related subject.

One of those students, Katia Vlachos Dengler, has been invited to write for the Financial Times, on the subject: "Europe must set its defence industry free". It illustrates on the one hand, how naïve are US policy wonks, and on the other how far we have to go before they get the message.

Ms Dengler's thesis is that the "European" defence industry is off track, immediately falling into the trap of identifying something that does not exist – a European industry.

She names the "Big Four" companies that dominate the market: BAE Systems, Thales, Finmeccanica and EADS - among the ten largest defence companies world-wide, with combined defence revenues of about $40bn in 2003 – but then goes on to relate them to individual countries, respectively the UK, France and Italy, with only EADS being different, a consortium comprising companies from France, Germany and Spain, ther outfits which own 80 oercent of Airbus.

Starting therefore with a false premise, she then goes on to assert that European governments – i.e., governments of individual countries in Europe – "in their desire to protect a national defence industrial base", may be “holding back the entire continent’s defence sector". There she goes again – there isn't a continental defence sector.

She notes that there has been "consolidation" in this mythical European defence market, and that it is slowing. But she then notes that further consolidation would mean countries having to "give up" a national champion and also that "European governments are not likely to initiate joint procurement soon enough to provide a stable home market for the Big Four".

In the meat of he argument, she then develops the idea that, for the future, the "Big Four" could consolidate to create two European "mega-prime" contractors, something that could be helped by "Europe" accelerating progress towards joint procurement – this helped by faster development of a common security and defence policy. These "mega-primes" would then be able to compete with large US companies for projects in both Europe and the USA

This, though, Dengler feels unlikely to happen, because it would require major policy changes in Europe.

Her second scenario is that the "industry" fragments and the reamining, smaller companies become subcontractors to, mostly American, prime contractors. The political repercussions, of course, would be significant: European countries would be increasingly dependent on US companies, and therefore on US government permission, for defence purchases.

The third and last scenario is that "European" companies "muddle through":

Consolidation slows as European groups rationalise. Joint procurement continues on an ad hoc basis. Nations provide enough orders and R&D financing to keep current players going, and thus cannot force a more radical restructuring. European technological capabilities fall behind those of the US.

Many European markets would remain closed to US suppliers because European producers would be preferred, even when they were less cost-effective. The US would lose a healthy competitive challenge to its own industry. European armed forces' inferiority to US forces would become more acute, making it tougher to mount joint operations.

Probably correctly, Dengler predicts that the "muddling through" scenario is the likeliest, and argues that this is the "least beneficial for Europe and the US". "But it is not inevitable", she adds.

European governments could become more reliable buyers by moving towards joint procurement and making progress on European security and defence policy. They could encourage the creation of supra-national "mega-primes". Mutual market access could be improved. But for this to happen, Europe would have to abandon the pipe-dream of national champions and nostalgia for individual governments controlling the defence economy.”
That is where she goes wrong. What she does not appreciate is the French-led dream of becoming a competitor to the US, developing along different lines. In her scenario, US and "European" military technology would develop down different paths, to the point where inter-operability was no longer politically or practically feasible.

Neither does she take account of the China factor where, as long as mainly German and French companies continue to support Chinese re-armament, access to key US technologies will be denied to these "mega-primes". In the fullness of time, therefore, with the industries developing their separate ways, military and political divorce would become inevitable.

Far from being a "pipe dream", therefore, only the UK’s insistence on maintaining its own "national champion" enables it to keep aligned with the United States. And, as we see with FCS project, divergence could have massive political and strategic fallout, to the detriment of both the US and the UK. That, presumably, Ms Dengler would not like, even if the Financial Times might approve.

"Muddling through" might be the best option all round.

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