The Spanish Identity in the European Defence Industry
, 8 de marzo de 2001
(Versión inglés del Análisis nº11 'La identidad español en la industria de defensa europea')
The Spanish defence industry is on the road to integration into the emerging European defence sector. Spain could not keep out of this integration process that is indispensable both for the development of a competitive arms industry in Europe and for the strengthening itself of the incipient European defence policy. However, it is essential that this integration process should also guarantee our defence sector certain degree of national identity within the new European framework. This identity would be necessary both to safeguard our legitimate industrial, strategic and political interests, and to guarantee the success of the entire project.
The birth of a European defence industry is fostered and promoted by two main factors. On the one hand, the dynamic development of a common security and defence policy in the European Union requires as an unavoidable complement the parallel development of an industrial base that brings credibility and autonomy to this common defence policy. On the other hand, the limited demand for defence equipments after the end of the Cold War, the concentration of companies in the United States in the last years, and an stricter international arms market, inter alia, are forcing European defence industries to look for different forms of cooperation and integration in order to survive in this new and more competitive environment.
The Spanish defence industry has actively and strongly committed itself to the European integration process. The Spanish defence industry is not large, and it has gone through a particularly tough internal restructuring process. Manpower has been halved since the early 90s, companies have merged, thus reinforcing the leadership of the different subsectors, and a rationalization and privatization process is still underway. This internal restructuring process has overlapped in the last months with the dynamic mergers, alliances and takeovers triggered both in the European Union and overseas.
Due to the moderate size of its defence industrial sector and to its pro-European political vocation, Spain could not keep out of this industrial integration process. Our country will undoubtedly profit from this process that will lead to the setting up of an industrial base for European defence, as some of the cooperative ventures it has undertaken have shown. However, the integration process also entails risks and uncertainties that affect more adversely minor and technologically weaker partners. Thus, the Spanish industry faces the risk of being absorbed in this integration process, eventually becoming a mere subsidiary company to the large industrial groups of the senior partners.
In every country of the world, the defence industry has a combination of strategic, political and technological determining factors not shared by any other sector. For this reason, it would be a mistake for the European governments, particularly for the Spanish Executive, to leave this integration process to a mere financial and industrial philosophy. Whether companies are privately or publicly owned, there are legitimate political interests in this sector that must be politically protected. In this sense, to preserve a reasonable degree of national identity in the future defence industry is an essential requirement for the success of the process. Thus, every government, particularly the minor partners, should play a clearer and more active role in the defence of national identity.
A New Industrial Framework For The European Defence Industry
The strategic nature of the defence industry has kept this sector out of the European integration process since the creation of the European Economic Community. Thus, Art. 223 of the Treaty of Rome confirmed the 'exceptional nature' of the defence industry, safeguarding this sector from the European Commission guidelines for a single market. Forty years later, Art. 293 of the Treaty of Amsterdam maintains this reservation with slight variations.
The fact that the defence industry has been excluded from the Community context not only has not prevented, but has triggered several initiatives pursuing a greater transnational cooperation in this sector. Thus, particularly from the beginning of the last decade, numerous attempts have been made and numerous instruments have been established to try to promote a greater European integration also in the defence industry field.
In 1992 the WEAG (Western European Armaments Group) was created within the Western European Union with the aim of jointly defining operational requirements, promoting cooperation in R&D, laying down the principles for the opening up of national markets and drawing up a plan for the creation of an Armaments Agency. The Western European Armaments Group was definitely established in November 1996 with the mission of further increasing industrial cooperation, strengthening the European technological base, and establishing a single European arms market. The Thales, Euclid and Socrates Memoranda of Understanding were part of these cooperation instruments, as well as the Eurolongterm group.
As regards the European Union, we find initiatives like POLARM, established in July 1995 with the aim of applying Community criteria to the defence sector, and COARM, 1991, that seeks to achieve a greater harmony in the field of arms exports, leading to the drawing up of the European Union Code of Conduct on Arms Exports. Also within the European Union, but as reinforced cooperation within a small group of Member States, we find EDIG (European Defence Industries Group), OCCAR (Organization for Joint Cooperation in Armaments) and the LoI (Letter of Intent). The last two instruments are both bound to become international treaties.
NATO also has its own cooperation structures in this area with the aim of strengthening transatlantic cooperation. We could highlight CNAD (Conference of National Arms Directors) and NIAG (NATO Industrial Advisory Group), as well as numerous groups for the standardization of equipment.
The proliferation of instruments itself shows that building a real European cooperation in the field of arms is an arduous task that is far from being fully completed.
Many of these initiatives share similar aims, although integrated into different organizations. We could focus our attention on two of them: OCCAR and LoI, because of their wide-ranging and ambitious goals and the progress they have made.
OCCAR could be considered the main industrial cooperation instrument among the larger European arms manufacturing companies. It currently includes seven large European programmes with an overall budget of 17.5 billion Euro.
This organization has two important advantages over its forerunners. Firstly, as it has its own legal personality, it manages and defines its own procurement policy more effectively. Secondly, it has turned out to be a more efficient tool than its forerunners at harmonizing procurement policies among its members and at coordinating their research and development programmes.
There is a twofold idea behind OCCAR. On the one hand, it is a question of bringing together in a single permanent office the management of the different cooperation projects in the field of arms manufacturing at European level, in order to cut management costs. On the other hand, it is a question of making more flexible the juste retour (fair return) principle, so that the traditional balance between investment and returns in each programme is replaced by an overall calculation of the entire programme structure in the long term. This greater flexibility in the development and management of the programmes has substantially reduced costs in some of the projects.
In spite of the apparent success, it should be born in mind that instruments like OCCAR only provide technical support. They are intended to facilitate cooperation, but they lack political relevance when it comes to decision-making. This means that the final decision on whether to join programme or to remain in will fall on the government of each state. Therefore, OCCAR's harmonization capacity will depend on whether all members agree to equip themselves with a certain system, within a fixed period and with common operational requirements. Without the three requisites it will be impossible for the organization to set a programme in motion.
Therefore, OCCAR fully safeguards the states' autonomy, even to the detriment of its efficiency. Thus, the French-German initiative to impose economic sanctions on the states that failed to meet their contractual obligations in a bilateral programme was eventually rejected. Not even on a small scale (nowadays only four European countries are OCCAR members: Germany, France, Italy and the United Kingdom) can it be spoken of the existence of an actual armaments policy at European level.
The Defence Ministers of France, Germany, Italy, Spain and the United Kingdom decided in April 1998 to implement a new political initiative in order to progress in five large areas towards the integration of the sector:
· Guaranteeing security of supply in the event that a restructuring led to the concentration of production in a country, to the detriment of another;
· Ensuring a country the freedom to export, even if the sub-components of the system are manufactured by another country;
· Reducing duplications in R&D
· Guaranteeing the adequate security provisions to protect the information that is to be made available to newly-created companies;
· Defining a new legal framework for intellectual property issues.
Only two months later, in June 1998, the above mentioned commitments were embodied in a Letter of Intent (LoI), to which the Swedish Minister of Defence also adhered. A new and specially important goal was added to the above five, i.e. the commitment to try to harmonize as far as possible their operational requirements and procurement schedules.
The importance of this Letter of Intent lies on the fact that for the first time the Governments of the signatory states openly acknowledge their intention to integrate their defence industries. Therefore, their main objective is to establish standardized procedures that facilitate the merging of European industries into large transnational companies. It is from this point of view that the aforementioned six areas of commitment should be considered.
One of the advantages of the LoI is its immediate implementation, in spite of its being considered, and therefore having the force of, an international treaty. This immediacy is due to the fact that the entry into force of the agreement between two of the signatories is enough for the Letter to be fully applicable to both of them, without having to wait for the rest of the signatories to ratify it.
Nevertheless, the LoI is a declaration of intent rather than a technical agreement among the parties. This means that its real usefulness will depend to a large extent on the more technical and accurate Agreements of Intent to be issued under the commitments set out in the Letter. In any case, the strength of the political will underlying the LoI clearly shows in the short periods of time fixed to reach specific agreements in some of the most sensitive fields.
The LoI safeguards (and this is one of its main achievements) the movement of technical information among member states. Information security issues are regulated in detail, so that the new procedures can be implemented without much further development in law.
As regards the security of supplies, a reasonable balance can be found in the Letter between the principle of autonomy of the transnational companies to restructure their research and production centres on the basis of industrial criteria, and the reservations made by the states in order to be able to build an exceptional national supply capacity and for security reasons. The states also keep to themselves the right to maintain certain strategically essential capacities in their territory. These safeguards, which might be considered excessive, are logical if we bear in mind the specific nature of this sector, and its political and strategic consequences for national security.
In this regard there is also a commitment to simplify and harmonize internal regulations in order to facilitate and simplify supplies among the signatories of the Letter. These facilities include the commitment that, in times of crisis, supplies should be maintained, even to the detriment of a state's reserves. Lastly, there is a commitment to be promptly informed about any movements of shares that might affect the control over a company.
The LoI forecasts concerning exports and transfers regulation are still more detailed. Thus, the Letter considers the possibility of a 'global project licence' specifically authorizing the transfer of all the components and subsystems of a particular cooperation programme. As far as exports are concerned, the signatory states should agree on a list of authorized recipients. Any of them can request that an end state should be removed from the authorized list if no consensus is reached upon consultation. The principles contained in the EU Code of Conduct on Arms Exports will apply to the compilation of the lists.
As regards R&D, we could highlight some improvements contained the LoI. Firstly, the Letter adopts the globalization of the fair return principle, which means that returns are calculated neither on a programme-by-programme nor on a yearly basis, but globally. A second principle adopted for the first time is the possibility to launch a series of restricted projects; this means that some development programmes could not necessarily be open to all the signatories, but they might have been agreed upon by some of them.
However, beyond the adoption of these principles and of the obligation to share information and to coordinate R&D policies regarding transnational companies, the Letter points to the establishment of an organization with legal personality and an autonomous budget with the capacity to manage research and development programmes.
It is generally agreed that the LoI is rather a starting point than a finish line. The Letter is therefore fundamental, as it embodies a political will to pursue integration and addresses many of the problems that prevent the establishment of a real European defence industry. However, it is necessary to reiterate that in many respects the Letter does not go beyond a mere declaration of intent, and that a development through specific agreements is required in order to realize some of its main achievements. There is no doubt that many difficulties will crop up in the way that can only be overcome by means of a renewed political will.
The future framework
Parallel with the establishment of OCCAR and the drawing up of the LoI, important progress has been made towards the definition of a European security and defence policy. Thus, the appointment of the EU High Representative for Common Foreign and Security Policy, the agreement to create a European rapid deployment force of 60,000 troops, the establishment of new civil and military planning and decision-making agencies on defence and security issues within the EU, or the imminent integration of the WEU into the European Union, are decisions that have been made in a few months' time and that give shape to the political aim to build a common defence.
These facts will undoubtedly affect the process of industrial integration of the European defence sector. It is believed that the emphasis on the political aspects of defence will divert the political leaders' attention from the industrial issues, which might lead to the stagnation of the process in view of the technical difficulties it still presents. However, it is clear that the process can give an important boost to the indispensable harmonization of the operational requirements of the new weapons systems. As long as Europe moves towards a definition of a common security and defence policy, as long as there are joint decision-making organs that can summarize national positions, and as long as a common defence has no credibility without an industrial and technological base to support it, the synergy between the political and the industrial processes will be stronger than rivalry.
A second question to be considered about the future is to what extent it would be convenient to maintain a reinforced cooperation among the six main weapons systems producers and consumers, or whether it would be better if the instruments established for that special cooperation gradually integrated into the common EU structures. The question is arguable, but everything indicates that the LoI signatories are opting for a deeper industrial cooperation, rather than for an enlargement to all EU Member States. It is a logical decision if we bear in mind that the six partners accumulate 90% of the defence industry production, and considering the numerous difficulties found in the way.
However, this reinforced cooperation entails the risk of a wider gap between the EU Member States with a significant industrial capacity in the defence sector and those with virtually no presence in it. Moreover, an integration of the minor partners would offer the advantage of directing their procurement preferences towards Europe.
A possible solution to this dilemma would be the possibility that all European partners converge as armament purchasers in instruments that already exist within the EU, like WEAG, where it is possible to move towards a more integrated defence market, while further enhancing cooperation among the weapons systems producers by means of common programmes.
POLARM or COARM are added elements to the above mentioned convergence. They basically share the same objectives as OCCAR or the LoI. Thus, both POLARM and COARM are directing their actions towards the simplification of armaments procurement procedures within the EU, the establishment of a more open internal market, the extension of normal procurement systems to the sector, and the harmonization of regulations on arms exports. In this sense, it should be pointed out that in the future the Commission can play a far more active role in the regulation of public acquisitions in the defence sector.
Common research and development programmes are crucial for the definition of a wider or more restrictive cooperation framework. WEAG is preparing a new MOU known as EUROPA, that seeks to improve and to give more flexibility to the EUCLID. Insofar as EUROPA adapts to the principles established by the LoI, this new programme could persuade the new OCCAR members not to turn this agency into a R&D programmes manager, as seems to be the case at present. In spite of its rationality, it wont be easy to launch a common R&D policy in the field of defence within the EU, given that there is a considerable clash of interests between large and small countries. Thus, those countries with a weaker defence sector are more reluctant to accept the principles of a more general fair return or the restrictions on certain projects, whereas the major countries consider them essential for this policy to be really efficient.
The Spanish position
The Spanish position in this institutional network of industrial cooperation is not an easy one. Spain occupies an intermediate position between the major arms manufacturers and the rest of countries, the buyers. It is the sixth weapons systems producer and the fifth in purchasing capacity. Once more, Spain's interests are divided between two groups: the larger and the smaller countries within the EU.
On the other hand, Spain's industrial interests do not appear to be fully defined. The Spanish defence sector has traditionally been publicly owned, as in France, and even nowadays the main companies in this sector are State-owned. However, since 1996 there has been a clear will to privatize the defence industry; this privatization has already taken place in the electronics subsector, is about to take place in the land armaments subsector, and has a fixed deadline, 2003, in the aerospace sector. This transitional period leads to a paradox in the policy of the Spanish Government: in a country with a predominantly public sector, it tends to give priority to the interests of the future shareholders of these companies.
This complex position has led the Spanish Government to assume apparently contradictory positions. Thus, Spain is part of the LoI, but it still has not joined OCCAR. The Government has decidedly promoted the integration of the national space agency CASA in EADS, but SEPI is in favour of selling state-owned Santa Barbara to an American company to manufacture a German tank, while BAZAN, now IZAR, has formed a strategic association with Lockheed Martin for the manufacturing of the Frigate f-100. Finally, Spain is in favour of a greater integration at European level, but it is clearly interested in maintaining the fair return principle and in having access to the most advanced technological programmes.
To sum up, the Spanish position at present could be summarized in four main principles. In the first place, a solid support to the consolidation of a European defence sector by building the conditions and the institutional network necessary to facilitate a merging process leading to the creation a limited group of European companies able to compete with the large American corporations. Secondly, Spain opposes the building of a European defence market closed to transatlantic products, as well as the implementation of protectionist policies at European level, which have been already discarded from the Spanish markets and could damage the necessary transatlantic cohesion. Thirdly, Spain's European vocation does not automatically lead to the merger of Spanish companies with other larger European companies, but this integration should always safeguard the particular interests of each sector. Finally, it is necessary to keep a balance between the global weight of Spain in the EU, the future Spanish contribution to common defence and the participation of the Spanish defence industry in the emerging European armaments sector.
The Industrial Philoshophy Of European Integration
The political philosophy to build a European defence as the culmination of the political unity project embodied nowadays in the European Union, together with the subsequent development of an institutional framework to facilitate cooperation and industrial integration in the field of defence, has undoubtedly played an important role in the creation of the necessary conditions for business mergers and combinations, such as the ones that have shaken this sector in the last months.
However, it should be admitted that it is the companies involved in the operations, rather than direct government action, that have been behind the initiative in the incipient rationalization and combination processes affecting this sector at European level. This leading role has a twofold explanation. On the one hand, a business management philosophy has prevailed in the sector whose main principles are the protection of the shareholders' financial interests and economic profitability of the companies. This new style of private management has become widespread even in publicly owned companies. Governments have thus taken on a secondary role in order to clear up the road for companies, eliminating legal and bureaucratic obstacles, allowing them to lead the process.
A second factor that accounts for this business initiative is the fact that the financial and industrial philosophy led the companies to the combination process with even more intensity than the political one. The cuts in the defence budget after the end of the Cold War, the loss of competition in the European sector and the increasing costs of the new weapons systems, are urging the European industry to react if it wants to be able to survive in this new environment.
The decrease in demand
The end of the Cold War meant an important reduction in the defence budget of all the allied countries. Thus, between 1990 and 2000 the European members of NATO cut their defence budget in 22 billion dollars, 13.8% in real terms. This budget reduction was even more remarkable in the United States, where the budget decreased by 24%.
The fact that the cuts in military spending have not been homogeneous, the most affected item being the purchase of equipment and materials, poses a problem for the defence industrial sector. Thus, the cuts in the investment budget have risen to 46.8% in Germany, 39% in Italy, 30.8% in the US and 28.7% in the United Kingdom. The sector is therefore suffering the consequences not only of the cuts in the total spending but also of increasingly smaller budget allocations for the acquisition of equipment.
The decrease in the demand for defence equipments is strongly affecting the European defence industry. The US defence expenditures are not only 40% higher than those of its European allies, but the percentage allocated for the development and acquisition of weapons systems almost doubles Dutch, German, Italian or Spanish expenditures. Only the defence expenditures of the United Kingdom for the purchase of equipment are relatively higher than those of the United States.
On the other hand, Europe still invests more human capital in defence than the United States. Thus, the European allies maintain nearly three million soldiers in comparison with one and a half million in the United States. This means the the United States spends almost four times as much as its European allies on the equipment of soldiers.
In short, all NATO countries have reduced military spending, but the consequences have been different depending on the extent of the budget cuts in each country. Thus, the United States is the country which has reduced most its defence budget in the last decade, but a balance has been kept between the cuts in the number of troops and facilities on the one hand, and in the number of research programmes and purchases of equipment on the other hand. The United States has spent on armaments three times as much as the whole of the EU Members, in spite of the substantial overall reductions.
There are also considerable differences within the European Union. Thus, the United Kingdom has cut the budget by 29%, but it has tried to give priority to armaments procurement programmes, particularly to programmes to maintain combat capabilities. This has led to a rise in the investment allocations from 24.8% to 27.4% of the defence budget in the last decade.
Budget cuts in Germany have been similar, 29.5%. However, Germany has had to face the costs generated by the absorption of the former GDR military structures, inter alia, which has focused budget reductions on the purchase of equipment, only 14.3% of the defence budget in 2000.
Initially France seemed to be immune to this trend; however, it is currently facing cuts by up to 25-30% in the budget for the purchase of equipment and materials. Moreover, this reduction coincides with a particularly complex and costly restructuring of its defence industry.
Italy's military spending has remained constant in the last decade, although the percentage of investments within the budget has decreased from an average 20% in the years 1985-1990 to 12.5% in 2000.
Finally, Spain, that in the early 90s made drastic reductions in military spending, is nowadays the only European Union Member State that is actually increasing its defence budget. However, the growing costs of the ongoing army professionalization process can impair its already limited capacity for military investment, if a substantial increase in expenditure does not take place in the next years, either from the budget or from special revenues (sale of assets, cancellation of credits etc.)
The loss of competitiveness
The drastic reductions in budget allocations for military investment in the last decade have been an important factor, although not the only one, in the loss of competitiveness suffered by the European defence sector.
Owing to the moderate size of the sector in comparison with the United States, to the fact that it is divided in a multiplicity of national markets, and to its inability to react to impending changes, the consequences of the decreased demand for defence equipments have been disastrous for some European defence industries.
Several factors point to the structural weakness of the European armaments sector. On the one hand, the moderate size of the sector shows in the fact that the defence industry only accounts for 3% of the overall industrial production in the EU. On the other hand, there is no unified market, which is evident if we bear in mind that in the early 90s the intra-Community trade in conventional weapons systems hardly accounted for 3-4% of the overall purchases, this percentage being slightly higher as regards components and subsystems. Finally, its strong dependence on the United States is evident in the fact that at that time 75% of the conventional weapons were imported into Europe from the United States.
To the structural weakness is added the absence of a European strategy to adapt to the new situation following the end of the Cold War. By contrast, the United States Defence Department immediately launched an overall plan to rationalize and adapt its defence industrial base to the new strategic and economic situation.
In the early 90s twenty companies supplied the US Armed Forces. Nowadays they have merged into four large groups. This process has been so successful that in the last months the American Government has decided to stop the new mergers that would have led to an excessive market concentration.
On the other hand, as a consequence of the aforementioned process, we encounter nowadays the paradox that the American defence budget, which is more than twice the European budget, will provide for half or a third of the suppliers that nowadays make up the Union market. This means that Europe's current inability to compete with the American industry could become in the future an unbridgeable gap.
The consolidation of a series of large highly specialized industrial groups in the American defence sector clearly shows the growing gap between the dimension and the potential of the companies on either side of the Atlantic. They turn over up to 35-45 billion dollars per year, whereas the main European defence industries, more diversified, turn over 10-15 billion dollars, which makes it very difficult for them to compete with their American counterparts.
This superiority of the American defence industry shows in an increasingly competitive international market.The relatively substantial reduction in its internal market as a consequence of the cuts in the defence budget has led companies to look for new markets, and they are increasingly gaining control over the fastest growing markets, e.g. the Far and the Middle East, to the detriment of their European competitors.
In short, the strong restrictions imposed on the European defence market by the cuts in military spending, and the deterioration of the budgetary structure of most EU Members, together with the inability to compete in the future with the American industry, more concentrated and wide-ranging, and superior from a technological point of view, call for a deep restructuring of the sector within the EU.
The restructuring of the European defence industry
The European industry has slightly fallen behind its American competitors, but it appears to have eventually reacted to the demands of the new situation. The European reaction has not been isolated, and it would call for an analysis on a country-by-country basis in order to gain a better insight of the peculiarities of the process. However, it is possible to identify three marked trends: privatization, combination and cross-border integration.
The privatization of the defence industry has involved not only the conversion of defence companies into private ownership, but also a radical change in the business management philosophy that goes beyond ownership.
The defence industry has traditionally been considered an essential strategic sector to safeguard national sovereignty, independence and security. Profit and loss accounts were therefore secondary to the superior strategic and technological interests of the State. Thus, state ownership was not incidental, but it was part of the nature of the industrial sector itself.
This management philosophy, of a pre-eminently public nature, would break down during the 90s. Several reasons account for this change. In the first place, the absence of competitiveness in the publicly owned companies reduces the capacity of the national Armed Forces, forced to look for supplies within the national market, where they find less powerful equipments at higher costs than in the international market. Secondly, the increasingly high cost of modern weapons systems forces companies to suffer heavy losses due to their limited market. Finally, the end of the Cold War and the incipient political unification process within the European Union left virtually no reason to justify the technological and industrial self-sufficiency of the sector.
The aforementioned factors led European governments to engage in a privatization process that has culminated with the shifting of its major companies into private hands. The new private companies will basically aim to obtain good results, to protect the interests of shareholders, and to be able to compete in the international market, always without preventing governments from building a special relationship with this sector, given its special characteristics and its impact on national security.
Secondly, a combination process has taken place in each of main producers. Two different strategies have been applied. On the one hand, the United Kingdom has favoured vertical integration, where companies producing large combat systems merged with their main suppliers, particularly with electronic components manufacturers. This type of merger favours larger dimensions, economies of scale, more ambitious R&D projects and improved coordination of joint strategies. On the other hand, countries like France have witnessed horizontal mergers between companies operating in the same sector, which have built large groups according to he different subsectors. This type of merger also favours larger dimensions and competitiveness in the international market, and a wider product range; at the same time, different systems models are unified and production capacity is rationalized.
Leading national companies in the European defence sector have merged into large transnational groups in the last stage of this restructuring process. The establishment of EADS is so far the only, though significant, example. Integration is nothing but the culmination of the intense industrial cooperation in the last two decades in the aerospace sector, which had crystallized in the last years not only in the development of large common projects, but also in the appearance of specific multinational corporations for the manufacturing of specific products (helicopters, missiles, space, etc.).
As a result of this triple process of supranational privatization, combination and integration, two European companies, BAE and EADS, rank among the five largest arms manufacturing companies in the world, able to compete on account of their entity and potential with the large American corporations.
The Spanish industry and the European challenge
The Spanish defence industry has not remained outside this restructuring process. What is more, the Spanish defence sector has pioneered both the privatization of some companies and the combination of others, and their subsequent integration into the large emerging European groups.
The Spanish Government has always shown a strong will to privatize this sector since 1996. The problem is, in order to make these companies attractive to the private sector, it was necessary to previously rehabilitate their negative profit and loss accounts and complete the restructuring process, so that future profitability could be reasonably guaranteed. In some cases it was essential to integrate these companies into multinationals, as in the case of Construcciones Aeronáuticas (CASA), or even their acquisition by larger groups, e.g. Santa Barbara.
In spite of the difficulties, it should be pointed out that the electronics subsector has already been fully privatized, and the aerospace subsector will have been privatized by 2003, once it has merged with EADS, and as for the land armaments subsector, the sale of Santa Barbara is impending. In this sense, only the future of the naval subsector is yet to be defined.
The internal combination process has not been so relevant because it was already consolidated in subsectors. However, we should mention the combination process in the electronics subsector, both public and private, that culminated in the creation of INDRA, and more recently, the combining in the naval subsector of public companies into a large corporation known as IZAR.
Finally, the integration of our defence industry into the European sector has accelerated in the last years. As regards the aerospace industry, the integration was complete after CASA merged with EADS. It is also significant in the field of engines; Rolls Royce, for instance, has acquired a 46.8% stake in ITP, a representative of the young national industry. As for electronics, 10.5% of the shares of INDRA have been purchased by the French company Thomson CSF. The naval and the land armaments subsectors are not linked to other European groups, given the high degree of nationalization of these sectors. Moreover, forecasts regarding both sectors point to transatlantic links, rather than to the appearance of exclusively European groups.
To sum up, if the Spanish defence industry wishes to survive, it cannot keep out of the ongoing integration process in the EU defence sector. The active participation of CASA in the establishment of EADS, a large aeronautic and defence group that is nowadays the main exponent of this convergence process, clearly shows the right course of action to take. However, it would be a twofold mistake to consider both that after the merging of CASA with EADS the Spanish integration into the emerging European aerospace sector has come to an end, and to believe that the process ends with the aerospace industry, and that it will not affect in the future the remaining industrial sectors in the field of defence, either at continental or at transatlantic level.
Spain has not an easy role to play in this process. The indispensable integration of the Spanish defence sector into the new European network entails risks and opportunities in equal shares. From a business point of view, the Spanish sector runs the risk, given its small size, of being absorbed by larger companies, thus becoming a mere subsidiary. However, the security implications of the defence industry justify a political protection of our interests beyond the mere business philosophy.
A New Definition Of The Role Of The States
Large private multinational companies make up the new business scene, which calls for the definition of a new framework to support the relationship between the defence industry and national governments. The manufacture of arms, regardless of the private or public ownership of the companies involved, cannot be compared to the manufacture of washing machines. There are political and strategic implications and interests in this sector that states cannot ignore.
A further factor that makes necessary a new definition of the relationships between the governments and the defence industry is their new multinational dimension. This new dimension has at least two immediate effects. On the one hand, it breaks with the traditional intimacy between governments and companies, which is essential both to launch new projects and in the field of involvement abroad. On the other hand, the huge industrial dimension and technological potential of the new industries, nearly a monopoly in certain subsectors, forces states to look for new ways to cooperate with, but also to monitor, the new transnational corporations.
In this sense, it is essential that governments maintain the will to integrate their national industries into large European groups if they wish to move further in this process. However, this statement needs qualifying. On the one hand, we have already pointed out that it is the companies that should take the lead in this process, rather than the governments. The failure of EADC, the failed merger of British Aerospace with the German DASA, and the subsequent success of EADS, clearly illustrate the importance of the business leadership when it comes to effecting business mergers.
81. Secondly, the integration of the sector at European level should not be a detriment to the existence of transatlantic links and cooperation projects. Nothing would be more dangerous for European governments than the promotion of a captive market dominated by a small group of monopolistic companies in their respective subsectors. However, it will be impossible to further rationalize the European defence sector without the governments' protection and political boost.
Therefore, governments should act in this process as catalysts for potential business agreements. It is essential that a general political will exists to promote integration above limited national interests, and to abandon the traditional philosophy of self-sufficiency in every industrial and technological aspect of defence. In this case, the political will is an essential requirement, though not the only one.
Therefore, European governments are aware that they have to play a more active role than that of mere observers, confining themselves not to add more difficulties to the ones that have already cropped up on the road towards the creation of a real European defence industry. Thus, governments should be ready to set a legal framework and a common policy within the European Union to permit the emergence of the European armaments sector.
84. A difference should be made between two types of actions regarding the creation of the above mentioned legal and political requirements. The first would be part of the traditional policies towards a single market and a greater economic integration into the European Union. The second would comprise specifically designed policies for the defence sector.
The first type of actions would include, inter alia, issues like a European business statute, the harmonization of the tax systems of transnational corporations, or the gradual homogenization of labour markets at European level. It is clear that the defence sector, like any other European business sector, will benefit from any improvements in this field within a more general framework. We should mention here the positive effect on multinational companies of the definite adoption in the European Union of the single currency, the Euro.
Nevertheless, the peculiarities of the defence sector call for specific policies, among which we could highlight the need to formulate a common security and defence policy, a common policy on arms exports, and a common research and development policy.
The gradual development of a common security and defence policy is essential for the development of a defence industry at European level for two fundamental reasons. In the first place, only if we are able to develop a common defence policy will European governments feel free to give up industrial and technical self-sufficiency in relation to their national security. Secondly, only if we move towards the definition of a real common security and defence policy will it be possible to reconcile the operational requirements of the different European armies, to coordinate their procurement schedules and to synchronize the joint funding of these programmes.
A common policy on arms exports is the second essential requisite for the emergence of a real European defence sector. Even with an integrated market, the arms purchase capacity of the European Union as a whole remains below half of the American market. Therefore, exports are essential for the creation of a sector able to compete with the American industry.
However, the sales of arms abroad are strongly influenced by the interests of each state in certain regions. Moreover, there are very different positions within the European Union regarding this issue. Thus, countries like France or the United Kingdom have traditionally exported arms to the whole world. Conversely, countries like Germany maintain tougher legal and political restrictions. Harmonizing legislations on this issue, establishing joint control and decision-making instruments, and defining a common foreign and defence policy that leads to a joint policy on arms exports appear to be difficult tasks, but they are essential for the creation of a competitive European defence sector.
The last factor to be developed is a common research and development policy, which is necessary in order to bridge the existing gap between the United States and Europe as regards certain cutting-edge defence technologies of civilian application. The bridging of that gap calls for increased research efforts, and to a larger extent, for a common policy to focus and coordinate those efforts. On the other hand, the roles in the field of technological development have been reversed by the technological dynamism of the civil sector and the relative loss of research potential suffered by the military sector as a result of the budget reductions following the end of the Cold War. Nowadays the transfer of technology from the civil to the military sector appears to be more significant. It is in this new context that is essential to formulate a common R&D policy comprising both sectors.
Conclusion: Preservation Of The Spanish Identity Within The European Defence Industry
The question of how to preserve national identity within the new European defence industry is undoubtedly the most relevant issue from a political point of view. One of the main challenges faced by the European industrial integration process is how to reach a reasonable balance between the autonomous decision-making capacity of multinational companies, which is essential from a business point of view, and the leading role of the states in the demand and regulation of defence industries, which is essential from a political point of view.
The preservation of national identity is linked to the principle of fair return. This principle had been consecrated by the large European programmes of the last decades, so that the overall investments made by a particular programme would have a direct and immediate repercussions on its own industry. This principle offered a strong incentive for medium-sized countries like Spain to participate in these programmes, since they guaranteed the national industry an important turnover, and made an important contribution from a technological point of view. However, experience showed that this formula raised the costs of the programmes as a result of the scarcely rational distribution of labour and the excess of bureaucracy.
Nevertheless, the generally accepted need to give more flexibility to the principle of fair return does not mean that it has to be definitely rejected. It is vital for a country like Spain, in a new environment of industrial integration, to formulate this principle in a more flexible, rational and efficient way. The need to preserve the principle of fair return is based on two fundamental reasons. In the first place, if business efficiency is the only criterion to rule the future distribution of tasks among the national components of the large European armaments groups, minor industries like the Spanish industry, run the risk of disappearing or of becoming mere subsidiaries to more powerful industries. Secondly, the incentives for a government to acquire new projects will largely depend on the industrial and technological benefits the new programmes bring to the country. In the absence of benefits, it will be irrelevant whether to purchase within the own group or to turn to the international armaments market.
Nevertheless, the preservation of national identity is not exclusively related to the economic calculation of fair return. It is also closely related to the communication mechanisms between multinational companies and their respective governments. This communication, which is obvious in fields like labour where regulations differ from one country to another, should also be maintained in business and strategic terms. This principle, which has to do with culture, mentality and identity issues, is being generally accepted by the new transnational companies and it is essential for their future development.
Spain is a clear example of how the preservation of national identity can be vital to achieve industrial interests. On the one hand, the already mentioned limited dimensions of the Spanish industrial defence calls for a more active protection of its national identity if it does not want it to disappear under the leadership of stronger countries. On the other hand, Spain clearly illustrates how the national market is larger than the industrial sector itself; it is vital, therefore, to promote our purchase capacity as a political instrument to defend our industrial interests.