What Europe could gain from a better relationship with U.S. defense

Dec. 1, 2006
U.S. military research and development spending in 2006 was the highest in history according to the influential Government Electronics and Information Technology Association (GEIA) when measured in constant dollars.

U.S. military research and development spending in 2006 was the highest in history according to the influential Government Electronics and Information Technology Association (GEIA) when measured in constant dollars. GEIA’s predictions, published in October, indicate that U.S. defense spending will reach $609.4 billion annually over the next decade-and this doesn’t include supplemental funds, which cover stuff like fighting wars in Iraq and Afghanistan.

Adjusting for future inflation, the DOD budget plus supplementals in real buying power, is expected to decline over the next decade from $565.6 billion to $473.6 billion in 2017, which represents a decline of nearly 16.3 percent. The projected 2017 budget, in real buying power, still will exceed the 2002 defense budget by 19 percent.

From a European perspective, these numbers are eye-popping and underlines a report published last year by PriceWaterhouseCoopers that predicted the U.S. defense budget would match that of the rest of the world put together within a year, up from 46 percent of the global total in 2005 (download the report free of charge from www.pwc.com/extweb/pwcpublications.nsf/docid/d0916ea815450f4185256fef0059437d).

The report, entitled “The Defence Industry in the 21st Century” says that if things go on as they are, we could end up in a situation in which the U.S. dominates the global supply of arms completely. As it is, less than 2 percent of the U.S. defense budget is spent outside its home market, according to the report, and half of that goes to contractors in the United Kingdom.

Clearly the European defense industry needs to establish a far better relationship with the U.S. market, toute suite, yet this is easier said than done. The so-called International Traffic in Arms Regulations (ITAR), created by the American government to keep technology out of Russian hands during the Cold War, is frequently criticized as being an inhibitor to trading with the U.S. A recent survey by Booz Allen Hamilton found that the situation is getting worse; even with the U.S.’s biggest partner in Europe-the United Kingdom-it took an average of 57 days to obtain an export license.

Attempts from within to reform the ITAR legislation in 2000 seem to have had little effect and relations between the European Union and the U.S. cooled further when the former wanted to lift the arms embargo the U.S. imposed on China in 2005. The good news is that the U.S. Aerospace Industries Association is chaired by Ronald Sugar, chief executive officer of Northrop Grumman, who has promised to present a strategic plan for reform to the U.S. government in 2008.

What is the European defense industry doing in the meantime? Well, our biggest defense and aerospace company, EADS, collectively is busy having a nervous breakdown about Airbus and in between bouts of tearing its hair out is consumed by internecine quarrels among its dual, mirror-image French/German senior management structure, with a class action being brought by furious French shareholders thrown in for good measure. However, Dreamliner was very nearly the end of Boeing not so long ago, which should encourage EADS’s two chief executive officers.

Soap operas aside, certain European countries have bilateral agreements with the U.S. regarding ITAR exemptions. At various times individual countries have threatened to “throw their toys out of the pram”-for instance, to pull out of the Joint Strike Fighter program unless the U.S. is more forthcoming about technology transfer.

So far, the tantrums have had no discernible effect, but the problem is festering and is likely to give Uncle Sam a royal pain in the rear sooner or later.

On the pan-European front, Javier Solana is working to build up the European Defense Agency (EDA). Following the U.S. lead, it has utterly blurred the line between domestic security and war, although attacks on home soil are hardly a new phenomenon.

The Spanish, for instance, endured atrocities by the Basque separatist movement, ETA, for decades, while the various Northern Irish paramilitary groups murdered thousands across the British Isles in the 20th century.

Most Europeans don’t buy into the all-encompassing War Against Terror and indeed, the wars in Iraq and Afghanistan have very little support among the electorates.

However, most Europeans have never heard of the EDA; so on it goes, plotting its Long-Term Vision for SWAT-like tactics warfare and design-by-committee technology.

Happily, real life carries on outside E.U. bureaucracy and a market is opening up in our own backyard. Countries in Central and Eastern Europe are spending like a sailor on shore leave to update and upgrade their defense platforms to meet their new obligations as E.U., and also in some cases, North Atlantic Treaty Organization (NATO), members. Crucially, they are no longer obliged to buy their armaments from the former Soviet Union as they had been since World War II. Ostensibly they’ve not got much money, but offset is coming to the rescue.

Offset deals are banned in all international trading-except defense. The deals are getting bigger and increasingly common in military contracts, although only a small percentage has to be defense-related. As the PriceWaterhouseCoopers report points out, in 1999 the South African government made history with a complex deal that included the purchase of Hawk jet trainers, SuperLynx naval helicopters, and Gripen combat aircraft, plus air defense systems, submarines, ships, tanks, and armored vehicles supplied by Italy and Germany.

The United Kingdom’s Financial Times put the total value of the deal at $5.2 billion and included an offset or Industrial Participation clause estimated to be worth $9.5 billion.

Put another way, that colossal sum is to be generated within South Africa by 2008 through inward investment by the supplier countries. This is the shape of things to come in cash-strapped Mitteleuropa and some compensation for exclusion from the U.S. market, although of course, the American companies too have the option of making offset deals and many have wasted no time; after all, U.S. money to help European reconstruction is a well-worn path.

Annie Turner
Chief Editor
Military & Aerospace Electronics Europe

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