THE TRANSATLANTIC DEFENSE INDUSTRIAL BASE:

RESTRUCTURING SCENARIOS AND THEIR IMPLICATIONS

Terrence R. Guay

April 2005

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iii

FOREWORD

 Today, U.S. and European defense firms are at a crossroads. 

Opportunities for the construction of a transatlantic defense sector 

are tangible, but significant obstacles may accelerate the formation 

of a bipolar industrial base. While market forces played a key role in 

the transformation and consolidation of these sectors in recent years, 

political considerations are largely responsible for a restructuring 

process that has been almost entirely among U.S. firms in the United 

States and among European Union companies in Europe.

 In this monograph, Dr. Terrence Guay examines the forces that 

have shaped the restructuring of the U.S. and European defense 

industries since the end of the Cold War, and presents factors that will 

influence further restructuring and consolidation in the short- and 

medium- terms. He contends that a transatlantic defense industrial 

base is preferable to a bipolar one, and recommends that the U.S. 

Government open its defense equipment market to more European 

firms, and that European governments reciprocate. Additionally, 

military forces should put greater effort into coordinating procurement requirements and needs, and firms should explore expanding 

transatlantic links.

 The Strategic Studies Institute is pleased to publish this work as 

part of our External Research Associates Program.

 

DOUGLAS C. LOVELACE, JR.

Director

Strategic Studies Institute 
iv

BIOGRAPHICAL SKETCH OF THE AUTHOR

TERRENCE R. GUAY is Clinical Assistant Professor of International 

Business at The Smeal College of Business, The Pennsylvania State 

University, where he teaches international business and the business 

environment of Europe. He is the author of At Arm’s Length: The 

European Union and Europe’s Defence Industry (Macmillan and St. 

Martin’s Presses, 1998), The United States and the European Union: The 

Political Economy of a Relationship (Sheffield Academic Press, 1999), and 

several academic journal articles and book chapters on transatlantic 

relations, political economy, business-government relations, and 

security. Dr. Guay holds a BS from Clarkson University, MBA 

from The Ohio State University, and MA and Ph.D. from Syracuse 

University. Previously, he was a faculty member in the Maxwell 

School of Syracuse University and the School of International Service 

at The American University.
v

SUMMARY

 This monograph compares the post-Cold War restructuring 

of the defense industries in the United States and Europe with 

the aim of understanding the implications for the transatlantic 

industrial base. We argue that different processes of industrial 

restructuring and consolidation present obstacles to transatlantic 

initiatives, and that government policies and conflicting political 

visions exacerbate the opportunities for collaboration between 

the United States and Europe. We assess the extent to which the 

restructuring of the U.S. and European defense industrial bases has 

uprooted national champions and, assisted by global competition, 

provided an industrial foundation for more extensive transatlantic 

cooperation. We conclude by suggesting factors that will shape 

further restructuring and consolidation in the short- and mediumterm, and making recommendations for assisting the development 

of a transatlantic, rather than bipolar, defense industrial base.

1

THE TRANSATLANTIC DEFENSE INDUSTRIAL BASE:

RESTRUCTURING SCENARIOS AND THEIR IMPLICATIONS

INTRODUCTION

 This monograph compares the post-Cold War restructuring of 

the defense industries in the United States and Europe with several 

objectives in mind. First, it is important to examine the process of 

restructuring and consolidation on both sides of the Atlantic, and 

the different forms that this industry has taken. This will provide 

some sense of the strategic visions of the private and public 

sectors, and the opportunities for partnerships at the corporate 

and military procurement levels. Second, it is necessary to learn 

what roles private sector and public officials have played in the 

restructuring process, and the extent to which U.S. and European 

political, industrial, and military leaders have collaborated in this 

restructuring process through formal channels such as the North 

Atlantic Treaty Organization (NATO), the European Union (EU), 

or bilateral relations, and informal channels. This will help us to 

understand the extent to which U.S. and European defense industry 

restructuring have been independent or mutual processes. Third, it 

is essential to describe the obstacles that make the armaments market 

significantly different than other markets for goods and services. 

Such political and economic obstacles in Europe and the United 

States go a long way toward explaining why a truly transatlantic 

defense industrial base has been so difficult to create. The present 

“bipolar defense industrial base,” and the lack of political will to 

change this, is responsible for much of the “capability gap” among 

NATO members. Finally, the monograph will conclude by assessing 

the extent to which the restructuring of the U.S. and European 

defense industrial bases has uprooted national champions and, 

assisted by global competition, provided an industrial foundation for 

more extensive transatlantic cooperation. It will also suggest likely 

scenarios for further restructuring and consolidation, particularly 

along the transatlantic dimension, in the short-term (0-3 years) and 

medium-term (4-10 years), and make recommendations for assisting 

the development of a transatlantic, rather than bipolar, defense 

industrial base.
2

POST-COLD WAR INDUSTRIAL DEVELOPMENTS

 The end of the Cold War forced defense firms around the globe 

to adapt to a dramatically different operating environment. With 

defense spending plummeting in almost every country, defense 

companies had few options. They could merge with or acquire other 

firms in the hope that economies of scale and scope would ensure 

their survival; find or develop new export markets; diversify into 

other sectors that depend less on government defense contracts; or go 

out of business, in effect, by selling themselves to the highest bidder. 

U.S. and European defense firms pursued each of these strategies, 

but the timing, pace, and industrial structure varied considerably.

United States.

 Historically, the engine of growth for the U.S. defense industry 

was strong domestic demand, fueled by the Cold War. Times were 

especially prosperous for the industry from the late 1970s through 

the late 1980s. By the early 1990s, however, the tide had turned. As 

the defense budget was slashed in search of a “peace dividend,” the 

U.S. defense industry realized that the golden years of President 

Ronald Reagan’s buildup were over. Military spending declined 

from $422 billion in 1989 to $290 billion in 1999 (in constant 2000 

dollars), with the steepest decline coming in the mid-1990s.1

 Prodded 

in 1993 by then Secretary of Defense Les Aspin, the industry hastened 

to adjust.2

 Layoffs by firms such as Northrop, Hughes, Lockheed, 

General Dynamics, Litton Industries, and TRW marked a spate 

of “downsizings” and acquisitions, culminating in the mergers of 

Lockheed and Martin Marietta, Boeing and McDonnell Douglas, and 

Raytheon and Hughes. A 2003 Pentagon report found that the 50 

largest defense suppliers of the early 1980s have become today’s top 

five contractors.3

 U.S. firms now dominate the global defense industry: six of the 

top ten defense companies in the world are based in the United 

States, including Lockheed Martin, Boeing, Northrop Grumman, 

Raytheon, General Dynamics, and United Technologies (see Table 1). 

The U.S. defense industry―or at least the aerospace and electronics 
3

components of it―consolidated quickly, but with the strong urging 

of the Pentagon. Most of the mergers occurred between 1993-98. 

Since the late 1990s, major defense contractors have pursued three 

strategies: buying relatively small defense units from diversified 

U.S. conglomerates (like General Motors and TRW); acquiring 

defense-related businesses outside of aerospace and electronics 

(such as information technology or shipbuilding); or expanding 

abroad by buying foreign defense firms. The first strategy has been 

just about exhausted. The second strategy is likely to continue to be 

popular, especially in a post-9/11 world where the U.S. Government 

is spending considerable sums on Homeland Security, intelligence, 

and surveillance. The third strategy is the most difficult to predict or 

pursue, especially since most of the smaller European defense firms 

now have been acquired by larger European or U.S. companies. The 

next step for U.S. firms would be to acquire or merge with large 

European companies―a much more significant development than 

the ad hoc alliances and collaborations that often arise with large 

multination weapons systems. But, as will be made clear below, the 

obstacles to this strategy are formidable.

U.S. 

RANK

WORLD

RANK

COMPANY DEFENSE

REVENUE1

 TOTAL

REVENUE1

 FROM

DEFENSE

1 1 Lockheed Martin $30,097 $31,824 95

2 2 Boeing 27,360 50,500 54

 3 3 Northrop Grumman 18,700 26,200 71

4 5 Raytheon 16,896 18,100 93

5 6 General Dynamics 12,782 16,617 77

6 10 United Technologies2 5,300 31,034 17

7 11 L-3 Communications 4,369 5,062 86

8 12 Honeywell 4,200 23,100 18

9 13 Computer Sciences 

Corp.3

 3,818 14,800 26

10 14 Science Applications4 3,735 6,720 56

1

 Figures are in US$ million.

2

 U.S. Government sales only.

3

 For fiscal year ending 3/31.

4

 For fiscal year ending 1/31.

Source: Figures derived from Defense News Top 100 (http://www.defensenews.com/content/features/

2004chart1.html).

Table 1. Top Ten U.S. Defense Companies (2004).
4

Europe.

 Europe’s defense industry began the 1990s as a collection of 

national defense fiefdoms. While the U.S. defense industry was rapidly 

consolidating during the first half of the decade, most European 

firms continued to look inward. European consolidation at this time 

took the form of large national defense champions acquiring small 

domestic firms (a strategy pursued by Germany’s Daimler-Benz), 

or big companies acquiring targets in countries with minor defense 

industries (e.g., France’s Thomson-CSF purchasing the defense 

electronics business of Dutch Philips). Transnational collaborations 

that did exist generally took the form of joint ventures (for products 

like missiles) or multinational consortia (like the Eurofighter)―

both of which enabled defense firms to maintain their national 

independence. Large-scale cross-border mergers were hindered by 

the reluctance to see a domestic company acquired by a foreign firm. 

This concern was most evident in the political realm, as national 

governments worried about the loss of sovereignty (particularly 

the insecurity that armaments may not be readily available) and 

the political consequences of restructuring-induced job losses that 

might accompany such an acquisition. France’s dirigism was (and 

remains) the most recognizable form of government involvement 

in the defense sector, but all European countries employed similar 

policies to some degree. However, defense firms resisted industrywide rationalization almost as much. Many executives feared the 

uncertainty that would follow mergers with respect to the cozy 

relationships they had cultivated through the years with their 

“home” defense ministry. The extent to which these links would be 

weakened by Europe-wide industrial restructuring was unclear. The 

status quo was the safest option for both government and business.

 By the late 1990s, this situation became untenable. Given the 

consolidation in the United States and the political impetus for a 

European Security and Defense Policy (ESDP) within the European 

Union (EU), European defense firms found themselves under 

political and economic pressure to consolidate. The first major 

consolidation occurred in the United Kingdom (UK) in January 1999, 

when General Electric Company (GEC) agreed to sell its defense 

arm (Marconi Electronic Systems) to British Aerospace. The new 
5

entity was renamed BAE Systems. Nine months later, a European 

defense giant was born. The first step, as in the UK, was national 

consolidation. As part of its privatization in June 1999, France’s 

Aérospatiale joined with Matra to create an aerospace and defense 

electronics powerhouse. Four months later, this combined entity 

merged with Dasa to form European Aeronautic Defence and Space 

Company (EADS). Construcciones Aeronauticas Sociedad Anomina 

(CASA), Spain’s leading aerospace and defense firm, also merged 

into EADS.

 Similar consolidation occurred in related sectors. In October 

1997, the French government announced that it would privatize 

Thomson-CSF, and bring Dassault Electronique, the space and 

defense electronics businesses of Alcatel, and the satellite businesses 

of Aérospatiale within the company. Thomson-CSF acquired Racal 

Electronics of the UK in June 2000 and was renamed Thales. Two 

companies now account for Europe’s helicopter business: Eurocopter 

(a division of EADS) and AgustaWestland (which combined the 

helicopter interests within Italy and the UK). MBDA, the world’s 

second-largest maker of missiles (behind Raytheon), was formed in 

2003 by merging the missile interests of EADS, BAE Systems, and 

Finmeccanica.

 Table 2 shows that BAE Systems dominates Europe’s defense 

industry, while Thales and EADS each have roughly half the defense 

revenues of BAE Systems. As described above, the paths of these 

mergers appear to represent two different strategies of consolidation. 

BAE Systems is the result of the consolidation of much of the UK’s 

national defense infrastructure into one company, without any 

major cross-border ties. EADS, on the other hand, was formed via 

a “merger of mergers,” thereby producing a company that would 

be in a stronger position to negotiate transnational ventures. It is 

significant that the momentum to create EADS was driven not so 

much by national leaders, but by corporate executives who made a 

conscious and calculated decision to keep their respective national 

leaders uninformed of the plans, until the advanced stage of the 

negotiation.4 By such unusual discretion, political meddling in what 

was essentially a business decision was kept to a minimum.
6

EU

BANK

WORLD 

BANK

COMPANY COUNRTY 2003

DEFENSE

REVENUE 1

2003

TOTAL

REVENUE 1

% OF

REVENUE

FROM

DEFENSE

1 4 BAE Systems2 UK $17,159 $22,359 77

2 7 Thales France 8,476 13,310 64

3 8 EADS3 Multiple 8,037 37,797 21

4 9 Finmeccanica4 Italy 5,896 10,857 54

5 18 Rolls Royce UK 2,490 9,960 25

6 20 DCN France 2,085 2,085 100

7 22 Rheinmetall Germany 2,014 5,334 38

8 23 Dassault Aviation France 2,009 4,144 49

9 24 Snecma France 1,846 8,037 23

10 26 Smiths Industries5 UK 1,778 4,235 42

1

 Figures are in US$ million. Currency conversions calculated using prevailing rates at the end of 

each firm’s fiscal year.

2

 Does not include 2004 Alvis acquisition.

3

 EADS is 30.2 percent owned by DaimlerChrysler (Germany), 30.2 percent by SOGEADE (a French 

holding company comprised of Lagardère and the French state), and 5.5 percent by SEPI (Spanish 

state holding company). Approximately 34 percent of EADS shares are held by the public. EADS is 

registered in the Netherlands.

4

 Purchase of AugustaWestland shares from GKN pending.

5

 Fiscal year ending 7/31.

Source: Figures derived from Defense News Top 100 (http://www.defensenews.com/content/features/

2004chart1.html).

Table 2. Top Ten European Union Defense Companies (2004).

 BAE Systems, which may at first glance look like a “national 

champion,” instead may be a test case of a new breed of firm: a 

genuine transatlantic defense company. One reason British Aerospace 

opted to merge with GEC rather than Dasa was to own Tracor, 

GEC’s largest subsidiary in the United States. As discussed below, 

merger talks between BAE Systems and U.S. firms have intensified 

in recent months. British firms have long enjoyed preferential access 

to U.S. firms and technology. Such access is critical today, as U.S. 

officials after September 11, 2001, are even more anxious about the 

possibility of sophisticated technology falling into enemy hands by 

way of European defense contractors. The British are trusted with 

technology, and are allowed to buy into the U.S. market, in a way 

that the French and Germans are not.5
7

 In the case of both EADS and BAE Systems, the Europeans have 

formed defense titans that can finally match their U.S. counterparts. 

With the notable exception of shipbuilders, land vehicles producers, 

and aircraft engine makers, there is little left to consolidate within 

Europe. Directions des Constructions Navales (DCN), the French 

shipmaker, is likely to be controlled by the state for some time. 

However, Noelle Lenoir, France’s European minister, suggests that 

the project of creating a pan-European shipbuilder along the lines 

of EADS is important to the French and German governments.6

 But 

U.S. and European firms so dominate the global armaments market 

that few opportunities remain for nonorganic revenue growth.

 The global trend is toward consolidation among national defense 

firms or developing strategic alliances with U.S. or European 

companies. In 1990, the world’s 10 largest defense companies 

comprised just 37 percent of global weapons sales. By 2000, the 

world’s 10 largest defense firms were responsible for 58 percent of 

international arms sales.7

 Significant steps have been taken toward 

cross-border rationalization only within the European region. Much 

of this can be explained by the wider economic restructuring that 

Europe has experienced over the past 20 years.8

 The EU’s Single 

European Act (SEA) was a driving force in the efforts to make 

European firms more competitive at the global level, and the results 

spilled over into the defense sector. But economics can only go so far 

in shaping an industry whose foundation is ultimately political.

POLITICAL ENVIRONMENT

 While the economic environment may be ripe for transatlantic 

opportunities, political considerations pose formidable obstacles in 

both the United States and Europe.

United States.

 As indicated in Table 3, U.S. defense spending dipped by more 

than 31 percent between 1989 and 1999. However, in just 4 years, 

spending has returned to 1989 levels. Today, the Pentagon accounts 

for almost half of global defense spending.9

 This figure may increase 

if budgetary projections hold up. Congress approved a $416 billion 
8

fiscal 2005 defense funding measure, which contained a record $70 

billion for research and development (R&D)―20 percent above 

the peak levels of President Reagan’s historic defense buildup in 

the 1980s.10 Tens of billions more out of $78 billion allocated for 

procurement will go for big-ticket weapons systems. Financing the 

activities of U.S. troops in Iraq and force modernization are expected 

to push defense spending to nearly $500 billion in 2005, above the 

inflation-adjusted Cold War average, and $50 billion above 2004. 

The Congressional Budget Office estimates that the long-term price 

tag for all the planes, ships, and weapons the military services want 

will be at least $770 billion above what the Bush administration’s 

long-term defense plan calls for.

COUNTRY 1989 1994 % CHANGE 

FROM 1989

1999 % CHANGE 

FROM 1989

2003 % CHANGE 

FROM 1989

United 

States

$422,133 $334,539 -20.8% $290,480 -31.2% $417,363 -1.1%

EU-15 180,319 159,176 -11.7% 153,561 -14.8% 154,909 -14.1%

France 38,807 37,438 -3.5% 34,209 -11.8% 35,030 -9.7%

Germany 38,128 30,214 -20.8% 28,744 -24.6% 27,169 -28.7%

United 

Kingdom

 46,746 40,268 -13.9% 35,171 -24.8% 37,137 -20.6%

European 

“Big Three”

Total

123,681 107,920 -12.7% 98,124 -20.7% 99,336 -19.7%

Note: Figures are in U.S.$ million, at constant 2000 prices, and exchange rates are for calendar year.

Source: Figures derived from the Stockholm International Peace Research Institute (SIPRI),

http://first.sipri.org/non_first/result_milex.php.

Table 3. Defense Spending―United States and Europe.

 Industrial consolidation within the United States is virtually 

complete. The five largest defense firms so dominate Pentagon 

procurement that further consolidation among them would weaken 

the competitive bidding process to an unacceptable level. Some 

critics argue that consolidation has already gone too far and has 

eliminated the virtues of competition. The logical next step would 

be to include more non-U.S. firms in the procurement process and 

to permit transatlantic mergers. Yet, the obstacles are significant. 
9

Ron Sugar, chairman and chief executive of Northrop Grumman, 

probably reflects the view of many government, military, and industry 

officials when he says, “We’re not just making toothpaste, we’re in 

the business of national security. National borders do matter.”11

 Had U.S. defense industry consolidation been pursued to its 

logical conclusion, Northrop Grumman would have been acquired by 

Lockheed Martin or Boeing. In fact, Lockheed Martin and Northrop 

Grumman agreed to a merger in 1997, and it was widely assumed 

that the U.S. Government would approve, it being the last logical 

step in the Defense Department’s goal of industry consolidation. 

With one acquisition following another, however, both the Defense 

and Justice departments had become increasingly worried about 

the lack of competition in the defense marketplace.12 In 1998, the 

U.S. Government announced that it would oppose the merger on 

the grounds that consolidation was beginning to compromise 

competition in the contracting process. However, this conclusion 

was based almost entirely on an understanding of the defense sector 

as a national market. Certainly, plenty of capable non-American 

suppliers existed, particularly in Europe. But the political obstacles 

to viewing military contractors from a global or even transatlantic 

perspective are daunting.

 How one defines the size of the market is critically important. While 

leery of more domestic mergers, some officials (in both government 

and industry) have been quietly floating the idea of an Atlantic 

partnership.13 Such an Atlantic merger would need to be supported 

by the White House, Congress, and the Pentagon, and would have to 

ensure the safety of key U.S. technologies. Nevertheless, by expanding 

the geography of the market, the number of possible competitors is 

also simultaneously expanded, allowing firms to wring more savings 

out of consolidation while still allowing the benefits of competition. 

BAE Systems is a prime candidate for an intercontinental merger, 

although Northrop Grumman is also known to be on the menu of 

some European firms. BAE Systems, moreover, already has put in 

place many of the safeguards U.S. officials would require when 

it assumed Tracor as part of GEC’s defense business, and when it 

acquired Lockheed Martin’s aerospace electronics systems business 

in 2000.
10

 The environment for consolidating a transatlantic defense 

industrial base is currently being poisoned by some U.S. politicians 

who seem to be going out of their way to antagonize European 

countries and their defense firms. Part of this stems from a decadesold interest in protecting weapons manufacturing jobs in the United 

States, while a more recent justification is to punish European firms 

for not supporting the Iraq War. In September 2003, the U.S. House of 

Representatives Armed Services Committee drafted a controversial 

bill barring the Pentagon from using overseas suppliers in purchasing 

parts for essential weapons systems. Additionally, the U.S. content 

requirement for Pentagon purchases would increase from 50 to 65 

percent.

 The bill provoked a storm of protests from numerous corners.14

Defense Secretary Donald Rumsfeld opposed the measure on the 

grounds that it would reduce the Pentagon’s supplier base and cost 

the Defense Department and its U.S. contractors billions of dollars to 

replace foreign-made machine tools. Senate Armed Services chairman 

John Warner also was opposed, fearing it would lead to retaliation by 

other countries and jeopardize America’s approximately $50 billion 

annual trade surplus in aerospace products. U.S. defense firms and 

trade groups, including the Aerospace Industries Association (AIA), 

resisted the bill on the grounds that it would wreak havoc by barring 

foreign subcontractors in product supply chains and hamper foreign 

sales by U.S. defense firms. In a letter sent to Senator Warner by the 

AIA and the European Association of Aerospace Industries, the 

trade groups said such a provision “would undermine cross-Atlantic 

defense industry relationships.”15 Compliance costs, certifying that 

U.S. defense contractors did not use foreign parts, also would be 

burdensome.

 The European Commission warned Congress that adoption of 

legislation urging the Pentagon to buy all essential weapons parts 

from U.S. manufacturers could spark a new transatlantic trade 

dispute.16 The Commission threatened to take their case to the World 

Trade Organization (WTO) if the final bill contained provisions 

contrary to WTO rules. A requirement to purchase only U.S.-

made machine tools, for example, would likely violate WTO rules 

governing government procurement. Under current laws, 50 percent 
11

of a U.S. weapons system must be American-made.17 The Pentagon 

fought attempts in 2003 to make the laws more stringent, arguing 

that would anger allies and increase the cost of some programs. Just 

4.1 percent, or $8.6 billion, of the $209 billion that the Pentagon spent 

on procurement in fiscal 2003 went to foreign entities.

 Given the fragile state of U.S.-Europe economic relations, which 

have been strained in recent years by disputes over geneticallymodified organisms, steel, merger approvals, and aid to Airbus and 

Boeing, another high-profile trade controversy would not be helpful 

for transatlantic relations. In the end, Congress kept a Buy America 

provision in the defense bill, but it does not require the Pentagon to 

favor U.S. manufacturers.18 It now only directs the Pentagon to assess 

the ability of U.S. manufacturers to produce military systems and 

creates a fund to support them. It also creates an incentive program 

to encourage defense contractors to use U.S. machine tools.

 In the post 9/11 “Global War on Terror” (GWOT) era, the 

Pentagon is shifting its spending priorities in ways that probably will 

not help European defense firms. With an emphasis on information 

technology, intelligence, surveillance, communications, and related 

technologies requiring high levels of security, foreign firms―even 

European ones―are at a competitive disadvantage for Pentagon 

contracts, even at the subcontractor level. Some defense firms are 

making the necessary changes to fill the needs for anti-terrorism and 

homeland security.19 Northrop Grumman expects sales to the U.S. 

Government related to homeland security of at least $500 million. The 

U.S. Department of Homeland Security has a faster growing budget 

than the military defense budget, with investments expected to grow 

more than 10 percent each year until 2009. But most European firms 

will not be trusted to supply these needs.

 Some Pentagon and military officials are more interested in 

including European defense firms in the procurement process than 

Congress or U.S. defense companies. In June 2004, then Air Force 

Secretary James Roche warned that consolidation among U.S. 

contractors had left the Pentagon overdependent on a small number 

of key suppliers in certain sectors.20 He said the main way to correct 

this is to encourage overseas manufacturers to compete for Defense 

Department spending. He even has encouraged EADS to compete 
12

if a controversial Air Force tanker refueling contract (originally 

awarded to Boeing, but rescinded after an ethics scandal) is reopened, 

especially after the European firm’s victories over Boeing in tanker 

competitions in the UK and Australia. EADS has suggested that the 

company would consider opening production lines in the United 

States, particularly if it were allowed to compete for major U.S. 

defense contracts.21 But until there is evidence of this in Washington, 

production facilities will remain within their respective borders.

Europe.

 As mentioned above, only the United States among the major 

transatlantic powers has returned to Cold War levels of defense 

spending. While most European countries cut their defense spending 

by a smaller percentage than the United States between 1989 and 

1999, few have increased spending by any significant amount in 

response to recent terrorist threats (see Table 3). Germany and the UK 

account for a disproportionate amount of spending cuts in Europe. 

In the UK, the defense industry lost about 160,000 jobs between 1990 

and 1998, when it employed just 260,000. The drop in Sweden went 

from 22,782 workers in 1990 to just 14,810 in 2002. The French sector 

had 250,100 workers in 1990, but 84,100 fewer in 2000. However, in 

the United States, approximately 3 million people were employed in 

arms production in 2003―just 115,000 less than 1990.22

 The EU continues to move toward a common defense policy, 

although the significance and tangibility of agreements varies 

considerably. An analysis of the European Security and Defense Policy 

(ESDP) requires far more space than is available in this monograph.23

Suffice it to say that progress toward an ESDP of any meaning will 

influence trans-European defense industry consolidation positively, 

but may not be helpful for NATO. We highlight here those aspects 

of ESDP that have the potential for significant impact on this sector.

 Cooperation in weapons procurement will be a key test for 

the successful fusion of ESDP and defense industry consolidation. 

In September 1998, France, the UK, Germany, and Italy signed an 

agreement giving a legal identity to the Joint European Armaments 

Organizations (commonly known by its French acronym―OCCAR). 
13

OCCAR’s largest managed project to date is Europe’s first indigenous 

antiballistic missile defense system. The €3 billion tri-nation 

production program was awarded funding by OCCAR in November 

2003. In October 2003, EU defense ministers backed ambitious plans 

to have their armed forces capable of working together by 2010.24

The plans were a response to EU Common Foreign and Security 

Policy (CFSP) Secretary General Javier Solana’s long-standing view 

that the EU needs improved security and defense capabilities. For 

the EU to have armed forces that are agile, flexible, deployable, and 

sustainable, member states would need to combine forces and focus 

on quality and increasing military spending.

 In June 2004, EU foreign ministers approved the creation of the 

European Defense Agency (EDA), designed to improve Europe’s 

military capabilities and support its security and defense policies. 

The aim of the EDA is to help member states improve cooperation 

on R&D, develop defense capabilities, foster armaments cooperation, 

and coordinate Europe-wide purchasing and contracting of 

weapons systems. Its small first year budget of €2 million will rise 

to €25 million in 2005. Although the agency budget will require 

unanimity, Secretary General Solana managed to secure agreement 

from ministers that as many decisions as possible will be taken by 

majority voting.25 As in most of the EU’s defense-related initiatives, 

Britain and France played instrumental roles in establishing the 

EDA. For France, the EDA is a platform to create a European defense 

manufacturing base, supported by more spending on R&D and with 

contract preferences for European firms. In a sense, the EDA transfers 

France’s statist approach to business-government relations to the EU 

level. For Britain, the EDA is a forum less for industrial policy than 

for improving the military capabilities of member states―an objective 

shared by NATO. Unfortunately, this divergence in views may not 

be healthy for the EDA’s long-term viability.

 While BAE Systems, EADS, and Thales have supported the 

creation of such an agency, arguing that only through consolidating 

spending and research budgets can EU countries compete with an 

ever-rising U.S. defense budget, their chief executives issued a joint 

statement warning that the agency risks becoming “a fig leaf to cover 

the nakedness of any real efforts to improve European defence” 

unless it is given real power from the outset.26 The firms would like 
14

the EDA to identify holes in military capabilities and push member 

states to increase funding to fill the shortfalls. In addition, they want 

the EDA to have a modest budget to coordinate research spending, 

and to have the authority to break down internal barriers to the 

defense trade. More controversially, they also call on the EDA to 

help protect Europe’s defense industrial base. While not advocating 

a “Fortress Europe,” they also do not want “indigenous defence 

technology overtaken or dependence on foreign technologies [to] 

become a necessity, especially where technology transfer terms are 

very restrictive”―a clear reference to U.S. export regimes. Still, many 

European executives understand the benefits of gaining access to 

U.S. defense technologies. In November 2003, Philippe Camus, joint 

chief executive of EADS, called on European governments to step up 

R&D in advanced technologies by pressing forward with a European 

defense procurement and research agency, and to foster greater 

transatlantic cooperation in the defense industry.27 He also said 

that both the European and North American industry associations 

were now united in encouraging their governments to open up 

“the playing field for cooperation and competition,” adding that 

transatlantic allies should foster an environment in which industrial 

partners can focus on delivering the most advanced systems in the 

most cost-efficient manner. This is particularly important to Camus, 

since a consequence of the wave of consolidations and mergers in 

the late 1990s is that now fewer players of true global scale exist, 

thereby making it more important to promote industrial cooperation 

and strategic partnerships for competition to be maintained and for 

innovation to push the sector forward.

 While the EU does not have any equivalent to the proposed 

“Buy America” defense procurement rules, member states have 

kept weapons procurement and other purchases related to the 

production of war material outside of the EU’s open procurement 

rules governing virtually every other area of national government 

purchases. The UK and France, which are home to the bulk of 

Europe’s defense industrial base, traditionally have been the most 

adamant that these are national issues, although France’s recent 

initiatives in this area (e.g., ESDP, EDA, and OCCAR) appear to be 

attempts to mold the EU in France’s image. The EU’s competition 

and trade policies also have been circumscribed to some extent when 
15

applied to the defense sector (e.g., dual-use goods). On the political 

side, member countries have pledged themselves to creating a rapid 

reaction force that could deploy troops for humanitarian or crisis 

intervention. Such initiatives have influenced national government 

procurement decisions, particularly the interest in developing cargo 

and troop transport capacities.

 European governments are showing a growing inclination to 

procure from European companies, which is upsetting some U.S. 

defense firms that often could rely on steady sales to U.S. allies. 

Airbus’s military subsidiary beat Boeing and Lockheed Martin to win 

a €20 billion contract to supply seven European countries with 180 

new military transport aircraft―the A400M.28 But the most important 

test came in January 2004, when the UK Ministry of Defence opted 

to spend $23 billion on refueling aircraft from EADS.29 The 27-year 

contract was a major blow to Boeing, which has a near monopoly on 

tanker aircraft, and to BAE Systems, which had teamed up with the 

U.S. firm in the expectation that they would win the competition. 

The EADS-headed consortium included Rolls-Royce, which will 

manufacture the tankers’ engines, and Thales, which will produce 

much of the avionics in factories in Britain. Losing the UK contract 

effectively would have shut Airbus and EADS out of the tanker 

market. While the actual factors determining the outcome of the 

decision may never be known, it is likely that national industrial 

issues played a major role. The Airbus-led team, AirTanker, 

emphasized that its A330s are partly built in the UK and half of all 

new planes and 90 percent of conversions of the old aircraft used for 

their bid will be built in the UK. AirTanker claimed that 7,500 jobs 

would be added or sustained if their bid was picked, while Boeing’s 

team could claim just 5,000. In another example, the British Ministry 

of Defence in 2003 selected Thales, instead of BAE Systems, to design 

a new aircraft carrier. Perhaps as a consequence, France and Britain 

agreed in June 2004 to cooperate in building their next generation 

aircraft carriers.30

 As has been their practice since the SEA, the European Parliament 

and especially the European Commission have tried harder than the 

Council to develop a European industrial base.31 In its most recent 

statement on the subject, the Commission argues that, “Strengthening 

the industrial and market situation of European defence companies 
16

will greatly improve the EU’s ability to fulfill the Petersberg tasks in 

the accomplishment of ESDP. It will also benefit collective defence 

by strengthening Europe’s contribution to NATO.”32 To achieve this 

goal, the Commission proposed action in the areas of standardization; 

monitoring of defense related industries; intracommunity transfers; 

competition policy; harmonized procurement rules; closer cooperation on the export control of dual-use goods; and R&D.

 At the political level, then, European governments have a mixed 

record. On the one hand, they seem more willing to see Europe’s 

defense industry strengthen vis-à-vis U.S. firms, but they are less 

committed to institutionalizing these goals within the EU, OCCAR, 

or NATO. It is too early to say whether EDA will have a significant 

impact on Europe’s industrial base, but prior EU attempts in this 

area have been disappointing.

TRANSATLANTIC OR BIPOLAR?

 Both political and economic factors will determine the direction 

of transatlantic collaboration in the defense sector. The level and 

form of defense spending is one of the most critical factors (see 

Table 3). While the Bush administration increased U.S. defense 

spending to among the highest amounts since the end of World War 

II (although not nearly as high when measured as a percentage of 

gross domestic product), it is not clear that this amount of spending 

can continue. Gradually rising interest rates, large federal budget 

deficits, and, perhaps most importantly, a shift in public opinion 

away from spending on defense may push Washington to reduce 

military spending. Meanwhile, Europe has slashed defense spending 

since 1989, and has done little to increase it since 9/11 or the Iraq 

War. Advocates of ESDP, as well as U.S. officials, have called on 

European governments to increase defense spending for several 

years. An increase in spending would serve to strengthen Europe’s 

defense industry, assuming the additional funds were allocated 

toward equipment purchases and wisely spent by OCCAR and 

EDA. European firms would then be in a better position to negotiate 

with U.S. firms, should they opt for enhanced transatlantic ties. 

Alternatively, they might find it more attractive to focus on Europe, 

especially if EDA gives preferences to European firms.
17

 One indication that Europe may be opting for the bipolar path 

is the political capital expended on the Galileo project―a joint 

undertaking by the EU and the European Space Agency.33 Galileo, 

Europe’s alternative to the U.S. Global Positioning System (GPS), 

was given the go-ahead in May 2003 by European governments 

who agreed to fund the €3.6 billion project. The target is to have 

27 satellites fully operational by 2008. Galileo is not a solely 

European project, as China has agreed to invest €230 million in the 

collaboration, and India and Israel, among other countries, are also 

lobbying to participate. Such countries are barred from collaboration 

on GPS since it is largely a military system run by the Pentagon. 

While it certainly has technological merits and provides economic 

benefits, Galileo’s foundation lies in the politics of the EU and 

ESDP. The EU views Galileo as a move away from dependence on 

the Pentagon’s GPS, and a step towards a common defense. It is 

telling that non-European countries have been included in, or may 

yet join, Galileo. Their involvement reduces funding requirements 

from European defense budgets. The U.S. GPS system is closed to 

outsiders for security reasons. The perception that the U.S. stresses 

security concerns over economics in its arms production, whereas 

the Europeans are struggling to finance core military capabilities, 

contains a good deal of credence in the case of satellite navigation.

 Outright transatlantic mergers may be difficult to pull off, but 

more traditional collaborations on large weapons systems are still 

viable. While it has been long common for companies to team up 

when submitting bids, especially as a means to gain access to a market 

that for political reasons would otherwise be closed, transatlantic 

alliances contain their own set of problems. The most serious is 

technology transfer. The Pentagon does not trust many non-U.S. 

defense firms with state-of-the-art technologies, fearing that such 

know-how may end up in the hands of enemies. Another problem 

with such collaborations is the demand by governments participating 

in such projects that companies in their countries should get a certain 

proportion of the associated work. For example, Norway, one of 

eight countries partnering on the $244 billion F-35 fighter jet project, 

has threatened to pull out if project manager Lockheed Martin does 

not help Norway’s local industries secure work on the aircraft.34 By 

contributing funds for developing the plane in its early stages, the 
18

expectation of participating countries like Norway is that they will 

gain access to technology and production.

 Blame for letting political tensions spill over into defense 

industrial matters does not rest entirely with the United States. The 

EU is considering ending its arms embargo on China. Imposed after 

the 1989 Tiananmen Square massacre, France and Germany, among 

others, would like to see arms sales to the world’s largest weapons 

importing country resumed. However, in May 2004. the U.S. House 

of Representatives Armed Services Committee approved legislation 

that would impose new export restrictions on sales of U.S. defense 

and sensitive technologies to any country selling arms to China.35

In addition, the committee adopted an amendment that would bar 

the Pentagon for 5 years from doing any business with a company 

that sells arms to China, a prohibitive penalty for European defense 

firms.

 U.S. administration officials find themselves in a difficult 

situation.36 An easing of restrictions on the sales of military 

equipment to close U.S. allies would enhance the interoperability of 

U.S., NATO, and other allied forces―a goal that U.S. officials have 

set since discovering the weaknesses of European forces during the 

1991 Gulf War. On the other hand, the United States is sensitive 

to the security concerns of Taiwan and other East Asian countries, 

and opposes any initiative that would strengthen China’s military 

capabilities significantly. House Republicans in particular are 

putting pressure on the administration’s efforts to ease controls on 

sales of military goods to Europe, and any weakening of European 

restrictions on arms sales to China would strengthen their position. 

While this case can be viewed on one level as a domestic dispute 

between the legislative and executive branches, the fact that U.S. 

policy on transatlantic arms production and sales is so fractured 

and contentious hampers efforts to promote collaboration and is a 

harbinger of continued confrontation in the short term.

 Despite these formidable obstacles, signs are that a transatlantic 

defense industrial base is feasible. General Electric announced in 

November 2003 that it planned to buy a minority stake in Snecma, 

once the French government launches its partial privatization 

of the company.37 Still, acquisitions in the short term are likely to 
19

remain small. The main developments in transatlantic acquisitions 

in 2003 were the acquisition of two European producers of aircraft 

engines, FiatAvio and MTU Aero Engines, by U.S. companies (The 

Carlyle Group and Kohlberg Kravis, respectively), and General 

Dynamics’ acquisition of the Austrian producer of military vehicles, 

Steyr Spezialfahrzeug.38 Most of the investment flows have gone 

from the United States to Europe. European acquisitions of U.S.-

based companies were much smaller deals, primarily by British 

companies.39

 The pattern in recent years often has been characterized by high 

expectations of an impending union between key U.S. and European 

defense firms that falls just short of consummation. General Dynamics 

considered a merger with BAE Systems in 2003, as Boeing and 

Lockheed Martin had previously.40 For BAE Systems, such a merger 

would have allowed the company to expand its business with the 

U.S. Government, where it already generates almost a quarter of its 

revenues, and gain greater access to U.S. technologies. For General 

Dynamics, a union with BAE Systems would fill in its military 

aerospace and shipbuilding businesses. However, the negotiations 

broke down after BAE Systems refused to sell its profitable and fastgrowing North American operations. This suggests the difficulty 

that General Dynamics would have had to sell a full-blown merger 

to U.S. Government officials, who might be wary of technologies 

slipping beyond their full control.

 For U.S. firms looking for opportunities abroad, European 

companies seeking to protect markets can be a bigger problem than 

European politicians. General Dynamics boldly tried to acquire the 

UK’s armored-vehicle maker, Alvis PLC, in early 2004.41 The U.S. 

firm had received regulatory approval from the EU and Britain’s 

Department of Trade and Industry. But in June, BAE Systems 

offered to pay almost $100 million more than General Dynamics’s 

$556 million bid, and the Alvis board withdrew its recommendation 

to shareholders that they accept the General Dynamics bid. With 

the Alvis acquisition, General Dynamics would have been one of 

the top three armor vehicle makers in Europe, along with GIAT of 

France and Germany’s Krauss-Maffei. For General Dynamics, the 

acquisition was about a strategic plan to broaden the company’s 
20

global presence.42 Although in the end this case turned out to be 

another example of national rather than transnational consolidation, 

it is significant that Nick Prest, Alvis chairman, could say that Alvis 

executives briefed the Ministry of Defense of the likely General 

Dynamics acquisition “as a matter of courtesy.” This is an indication 

that firms―not governments―are calling many of the shots at this 

stage of transatlantic dealmaking.

FUTURE SCENARIOS

 Given the above summary of defense industry restructuring in 

Europe and the United States, and the opportunities and obstacles 

that this sector faces, it is possible to sketch scenarios for future 

developments in the transatlantic defense industrial base.

Short-term (0-3 years).

 The key factors that will affect developments in the near term 

include the political and industrial decisions made by the UK; U.S.-

Europe relations during the second Bush administration; the GWOT; 

and opportunities for further consolidation outside of defense 

aerospace and electronics. Perhaps the most important factor will be 

the decisions made by UK defense firms and their government. The 

British government is the pivotal actor (some might say “mediator”) 

in U.S.-Europe relations. The current government has been a 

strong supporter of the United States in the GWOT and Iraq War, 

and numerous reports suggest that Prime Minister Tony Blair and 

President Bush share a close personal relationship. At the same time, 

this UK Prime Minister is much more cooperative than any of his 

predecessors in EU matters, with his backing of ESDP perhaps most 

relevant to this discussion. In military procurement, the UK purchases 

more from Thales than from any U.S. defense firm, and uses the 

French company as a counterweight to its largest contractor―BAE 

Systems. With his Labour Party very likely to win a third election in 

May 2005, Prime Minister Blair and his cabinet colleagues may play 

a decisive role in nudging the UK defense sector toward Europe or 

the United States.
21

 British firms also will be key players in the near term. As 

mentioned above, BAE Systems sells more to the U.S. Government 

than any other non-U.S. company, which would make it a valuable 

acquisition for a U.S. defense contractor. Yet, while the U.S. defense 

market is extremely important to BAE Systems, so are the European 

defense and civilian markets. With the recent ascent of Airbus in 

the global aerospace industry, now surpassing Boeing in aircraft 

orders and production, it would be extremely awkward for a U.S. 

defense company to become a part of the consortium as a result of 

acquiring BAE Systems (unless, of course, BAE’s stake in Airbus was 

sold to EADS). Publicly, BAE Systems claims that it is not interested 

in selling its North American business unit. Certainly, a U.S. firm 

could make an offer that BAE Systems could not reasonably refuse, 

but negotiations by Northrop Grumman and Boeing have yielded 

no results, and the premium that BAE Systems would demand is too 

costly for any U.S. company at this time.

 By almost every account, U.S.-Europe relations have worsened 

over the past 4 years. Shortly after his re-election, President Bush 

announced that he would work during his second term to improve 

transatlantic relations, beginning with a tour of Europe in early 

2005.43 Certainly, European leaders (particularly France’s President 

Jacques Chirac and Germany’s Chancellor Gerhard Schroeder) also 

must do their part if they wish to reverse the damage in U.S.-Europe 

relations. However, it is difficult to separate the defense dimension 

of U.S.-Europe relations from the economic, political, and cultural 

dimensions. Trade and economic disputes still play a central role in 

the U.S.-EU link. On the political front, the U.S. and many European 

governments disagree on policies toward Iraq, Iran, China, and Israel, 

among other countries. And Robert Kagan’s quip that “Americans 

are from Mars and Europeans are from Venus” contains more than 

a grain of truth.44 Such a range of differences and disagreements 

does not present an environment conducive to transatlantic defense 

industrial mergers and acquisitions or collaboration on military 

procurement between the United States and Europe on a bilateral 

basis or even within NATO.

 The third factor, the GWOT, will affect industrial restructuring 

in two ways. First, the conduct of and results against the GWOT will 

affect the U.S.-Europe relationship just described. A smooth transfer 
22

of authority in Iraq, the capture of leading international terrorists, 

and a reduction of terrorist acts should enhance U.S. prestige and 

improve transatlantic relations. As underscored by the March 2004 

train bombings in Madrid, Spain, and the discovery of terrorist plots 

in the UK, Europe is not immune from terrorism and has every 

interest in the successful prosecution of the GWOT. However, poor 

handling of these issues by the United States, at least in the perception 

of Europeans, will accelerate ESDP and European initiatives to 

handle military and counterterrorism activities on their own. The 

Galileo satellite communications project may be a harbinger of more 

European-based projects.

 The second way in which the GWOT will affect defense industry 

restructuring is in the types of products that defense firms will 

develop. As shown in Table 1, three of the top ten U.S. defense 

contractors (L-3 Communications, Computer Sciences Corp., and 

Science Applications) are “nontraditional” defense firms, in the sense 

that they produce intelligence, surveillance, and communications 

products rather than planes, tanks, ships, or missiles. Also as 

mentioned above, the budget for the Department of Homeland 

Security presents opportunities for these nontraditional companies, 

as well as for the likes of Lockheed Martin and Northrop Grumman. 

One consequence of this trend is that more traditional defense firms 

may seek to acquire these recent additions to the list of top defense 

suppliers. Such acquisitions will almost certainly be among U.S. 

firms or among European companies, since it is hard to imagine 

U.S. officials approving European purchases of U.S. firms while this 

sector is still regarded as important to nurture while conducting the 

GWOT.

 The final factor that will influence short-term restructuring is the 

condition of firms producing primarily land vehicles and naval ships. 

This is less of a problem in the United States than it is in Europe, 

where further consolidation among or between French and German 

companies in particular would make financial and industrial (if not 

political) sense. In the United States, two naval shipbuilders operate 

six yards, while Europe has 21 firms with 23 yards.45 Whereas U.S. 

defense firms have made a fair number of acquisitions in Europe in 

these particular sectors, European governments likely have reached 

the limits in their willingness to allow this trend to continue. In 
23

October 2004, two of Germany’s biggest shipbuilders, Howaldtswerke Deutsche Werft (HDW) and ThyssenKrupp, merged their 

assets. The next logical step would be a merger with France’s DCN, 

although some in the French government would like to include 

Thales in the mix―an addition that the Germans feel would give 

the resultant company too much of a French orientation.46 Given the 

strong hand that the French government has to influence this sector, 

it would be virtually impossible for shipbuilders to consolidate on 

their own accord. Other than land vehicles and shipbuilding, there 

likely will be few instances of defense mergers and acquisitions. One 

exception may be Saab. BAE Systems announced in December 2004 

that it planned to sell 10 percent of its 35 percent stake in Sweden’s 

largest defense company.47 This may present an opportunity for 

EADS or for a U.S. defense or specialty firm (like The Carlyle Group) 

to take over all of BAE Systems’ interests in Saab.

 To sum up, in the near term, we can expect further consolidation 

among European producers of land vehicles and naval ships (once 

agreement is reached between national governments), and an 

increased prominence of nontraditional defense firms on both sides 

of the Atlantic. Mergers among the largest defense firms essentially 

will depend on the direction chosen by UK politicians and business 

leaders. U.S.-Europe relations, broadly defined, will determine 

whether these sectoral changes will be transatlantic or bipolar in 

nature.

Medium-term (4-10 years).

 In the medium term, we are likely to see fairly significant 

developments in the transatlantic defense industrial base. Five 

factors will play important roles. The first is a change in military 

equipment procurement, which will affect industrial developments 

in at least three ways. Unless the United States and Europe experience 

a horrific terrorist act, it is likely that defense spending will level out 

or even decline. As discussed above, Europe’s defense spending is 

far below levels at the end of the Cold War and, short of a series of 

terrorist acts in European cities, it is unlikely that it will rise much 

in most countries. The implication for European defense firms is 

that further consolidation may be the best bet for cutting costs and 
24

increasing competition. A second aspect of procurement changes is 

an emphasis on systems integration rather than weapons platforms.48

This trend started with the Pentagon, but has now been adopted by 

the Europeans, too. A company that can integrate systems that link 

ships, aircraft, tanks, and satellites into a seamless network will have 

an edge in winning contracts, as Thales has discovered. A third aspect 

of procurement is an even greater pressure to “buy domestic.” In 

the current political environment, it is hard to envision the Pentagon 

purchasing any significant amount of weapons systems from nonU.S. suppliers (BAE Systems excepted for reasons already discussed). 

The EU-15 countries dramatically have cut their purchases of U.S. 

weapons in recent years (see Table 4). These countries bought $1.4 

billion in arms from the United States in 2003, down from $3.5 billion 

in 2000. Central and Eastern European countries that joined the EU 

in 2004, particularly Poland, have a greater export potential for U.S. 

defense companies. However, even this market may prove difficult 

if EU membership, and the obligations and policy harmonization 

that accompanies it, results in “New Europe” becoming more like 

“Old Europe.”49 At the same time, the share of the international arms 

market held by U.S. firms has shrunk from 47 percent in 1999 to 

under 24 percent in 2003 (see Table 5). Given the decline in European 

and global purchases of U.S.-made weapons, the U.S. Government 

is going to be very reluctant to increase its spending on Europeanmade equipment.

 Second, within a decade it should be clear whether ESDP and 

other EU-initiated defense and defense industrial policies will 

amount to anything substantial. It will be an immense challenge 

for an institution of 25 members to reach agreement on important 

foreign, security, and defense policy matters, let alone whether and 

how military force should be used. It will require a political will that 

the EU could not muster in the Iraq War to address many of the 

challenges in the medium-term future (GWOT, relations with Russia 

and China, and regional stability in North Africa and the Middle 

East, to name a few). The opportunities on the defense economics 

front appear more manageable, but by no means assured. One of 

the next big steps that the EU could take in achieving a truly single 

economic market would be to apply such liberalizing principles to 

the market for defense equipment. EU treaties currently exempt arms
25

RECIPIENT

COUNTRY

FY2000 FY2001 FY2002 FY2003

Austria 8,036 15,271 4,923 5,703

Belgium 36,739 85,732 48,580 68,358

Denmark 15,496 47,200 94,980 22,734

Finland 12,535 89,215 7,216 4,950

France 84,580 268,878 229,626 45,598

Germany 295,329 93,982 161,365 319,314

Greece 2,080,834 809,797 335,514 54,128

Ireland - 4 9 12,510

Italy 160,300 805,387 168,158 154,119

Luxembourg 345 573 2,823 2,037

Netherlands 420,630 263,099 156,047 97,969

Portugal 5,795 20,383 160,843 7,908

Spain 92,369 65,439 122,966 119,889

Sweden 4,366 3,232 6,731 2,090

United Kingdom 328,345 678,009 247,146 464,913

TOTAL EU-15 3,545,699 3,246,201 1,746,927 1,382,220

Czech Republic 11,073 9,581 20,544 8,805

Hungary 6,772 3,197 12,797 5,365

Poland 20,549 27,974 65,489 3,570,226

Turkey 386,191 141,567 205,868 440,042

Note: Figures are in U.S.$ thousand and represent foreign military sales agreements.

Source: Figures derived from Defense Security Cooperation Agency (DSCA), http://www.dsca.osd.

mil/programs/biz-ops/2003_facts/Facts_Book_2003_Oct04_FINAL.pdf.

Table 4. U.S. Arms Sales to Selected European Countries.
26

SUPPLIER 1999 2000 2001 2002 2003 1999-

2003

United States 9,977 6,071 4,887 4,279 4,385 29,599

Russia 3,731 4,003 5,521 5,963 6,980 26,198

France 1,457 743 1,095 1,324 1,753 6,372

Germany 1,282 1,261 575 573 1,549 5,240

United Kingdom 967 1,105 968 639 525 4,204

Ukraine 770 327 631 233 234 2,195

Italy 426 174 260 511 277 1,648

China 207 160 347 410 404 1,528

Netherlands 318 195 188 257 268 1,226

Canada 130 102 80 316 556 1,184

World Total 21,257 15,549 16,611 16,143 18,680 88,240

US % of Total 46.9% 39.0% 29.4% 26.5% 23.5% 33.5%

Note: Figures are in U.S.$ million at constant (1990) prices.

Source: Figures derived from the Stockholm International Peace Research Institute (SIPRI), 

http://www.sipri.org/contents/armstrad/app12A2004.pdf.

Table 5. International Arms Sales: Top Ten Suppliers of Major 

Conventional Weapons (1999-2003).

production and procurement from EU rules, such as antitrust and 

open procurement policies. While the EDA and OCCAR described 

above may go some way toward opening weapons procurement, 

treaty revisions would be the best way to forge a single market 

for defense-related material. The pursuit of such political and 

economic policies discussed here face huge obstacles from mostly 

large European countries (particularly France and the UK) that still 

cling to the notion that preserving an indigenous defense industry 

is essential for national security. Until this concern is ameliorated by 

greater political integration, including an ESDP that the rest of the 

world takes seriously, countries like France, Germany, and the UK 

will continue to swim against the tide of market forces and corporate 

decisionmaking.

 Third, U.S.-Europe relations will again play a prominent role. 

While we do not know what the geopolitical and geoeconomic context 
27

of the medium term will be, we can surmise the issues that will 

shape it. They include the evolution of the GWOT; developments in 

Europe’s “near abroad,” which would include the countries bordering 

Europe to the east (particularly Russia) and in northern Africa and 

the Middle East; the addition to the EU of new members, including 

Turkey; the rise of new economic powers such as China and India; the 

trade and financial influence of the United States and EU, including 

the global acceptance of the Euro; and the ability to address social 

issues, such as immigration and aging populations. Most of these 

issues have the potential to drive a wedge in transatlantic relations 

or, just as bad, lead to more inward-looking or unilateral policies. It 

follows, then, that if these issues push Europe and the United States 

to work together to resolve them, the transatlantic defense industrial 

base will benefit. On the other hand, if they serve to further political 

estrangement, we can expect the completion of a bipolar defense 

industry.

 Finally, the economics of sectoral consolidation will continue 

to play themselves out. While political obstacles will no doubt 

continue to slow European defense industrial consolidation from 

a more market-oriented approach, it would be difficult to believe 

that the status quo would remain unchanged 5-10 years from now. 

Consolidation in naval shipbuilding will be slow and messy, but 

almost certainly will happen. The same is true for the tank, armored 

vehicle, and other land armaments companies. The largest piece of 

the transformation puzzle again may come down to the British and 

BAE Systems. Its access to the Pentagon makes it attractive to U.S. 

suitors, as well as to EADS. However, a merger between BAE Systems 

and EADS could “kill the goose that lays the golden eggs,” if the 

U.S. Government then deems the combined entity not trustworthy 

enough for the most sophisticated (and profitable) technologies.

RECOMMENDATIONS

 Based on the above summary and analysis, we propose the 

following recommendations, which are based on the assumption 

that a transatlantic defense industrial base is preferable to a bipolar 

one, and that it should be strengthened.
28

U.S. Government.

 Europeans often have complained that the transatlantic arms 

trade is not a “two-way street,” and in recent years have taken 

steps to obstruct incoming traffic. This is not in U.S. interests. For 

this reason, and the equally important recognition that relying on 

competition among indigenous firms has significant limitations, the 

U.S. Government should open its defense market to more European 

firms, while simultaneously encouraging and pressuring (and 

negotiating with, if necessary) European governments to do likewise. 

One step likely to yield considerable benefits for the United States 

and its defense firms is to persuade the EU to implement legislation 

that would apply the benefits corresponding to the current single 

market in civilian goods and services to the market for defense 

material. The U.S. Government also should seek to enhance the 

contract-awarding and procurement-coordinating authority of 

NATO, with the objective of promoting transatlantic collaboration 

at the industrial and procurement levels.

U.S. Military.

 The U.S. armed services need to work more closely with their 

European counterparts, either bilaterally or through NATO, to 

coordinate procurement requirements and needs. This may be difficult 

if ESDP becomes so successful as to undermine NATO. However, 

the benefits are two-fold. First, it will improve the interoperability 

of U.S. and European military forces, thereby reducing the financial, 

human, and other costs associated with the deployment of troops. 

Second, it will reduce the cost of weapons systems. This will become 

an even more important consideration when U.S. defense spending 

levels off, as is becoming increasingly likely.

U.S. Defense Companies.

 U.S. defense firms should continue to explore opportunities in 

Europe on two levels. The first is for possible acquisition targets, 

with the understanding that there may be considerable reluctance 

and opposition on the part of European business, government, 
29

and society. The second strategy would be to subcontract more 

technologically sensitive production to European defense companies. 

This will require persuading U.S. Government officials that European 

companies and countries can be trusted with such technologies, but 

may result in a change in perceptions of European defense ministries, 

who may then be more willing to “Buy American”―an action that 

many European governments have been less willing to do in recent 

years.

Conclusions.

 Promoting transatlantic defense industry links is not a panacea 

for the larger issue of establishing a defense industrial base that 

can develop new technologies and sell them to the Pentagon and 

European defense ministries at competitive prices. That can in all 

likelihood be achieved more easily by opening procurement to all 

bidders. That means persuading the Pentagon (and Congress) to 

award more contracts to European firms. It also means giving the EU’s 

EDA real responsibilities and decisionmaking powers in procuring 

weapons systems for member states―a move which would curb the 

dirigiste traditions of certain governments. Such recommendations 

will face significant opposition on both sides of the Atlantic.

 A possible problem for U.S. defense firms is that Bush 

administration foreign policy actions have caused anti-American 

sentiment in some markets. In Europe, countries that opposed the 

Iraq War will very likely opt for European-produced weapons 

systems over U.S. products whenever possible. U.S. laws that already 

strongly favor domestic defense firms now are being used by U.S. 

companies to fend off foreign competition.50 Sikorsky employed 

such a strategy in its competition with Augusta-Westland to replace 

the President’s fleet of helicopters. Although Sikorsky’s strategy 

proved unsuccessful, such tactics could prove risky if European 

governments retaliate by limiting purchases of U.S. defense exports. 

On the other hand, Control Risks, a UK-based international security 

consultancy, claims that U.S. defense companies were important 

business winners in 2003 due to the success of their products during 

the first month of the Iraq War.51 The lesson here is that, despite the 

superiority of many U.S. military items, politics may trump sound 

economics.
30

 Within the EU, a growing chorus of voices is calling for a single, 

competitive market in armaments that is treated in much the same 

way as other economic sectors. As the European Commission 

succinctly put it, “[T]he survival of a European defence industrial 

base able to support the ESDP will depend on successful national 

and trans-European consolidation of the industry as well as 

transatlantic partnerships between companies.”52 But it will be the 

intergovernmental Council―not the supranational Commission―

that will have the final word on this subject, particularly on how 

ESDP will shape the EU’s relationship with NATO.

 At the national level, key European governments remain 

relatively hostile to acquisitions by U.S. firms. For example, the 

German government opposes takeovers of German military vehicles’ 

producers by U.S. companies.53 The 2002 acquisition of the German 

shipyard HDW by One Equity Partners (OEP), a U.S. institutional 

investor, led to fears of a sellout of the German arms industry. These 

fears were ameliorated somewhat in 2004, when HDW was merged 

with the shipyards of Thyssen Krupp, with OEP’s stake reduced 

to 25 percent. In France, partial ownership by the state and trusted 

shareholders (noyau dur) of defense companies makes acquisitions 

by U.S. firms virtually impossible. Consequently, such concerns―on 

both sides of the Atlantic―will be difficult to overcome in the nearterm.

 NATO’s position in this issue is ambiguous. Currently, the 

alliance plays a relatively minor role in shaping the transatlantic 

defense industrial base. Occasionally, NATO is responsible for 

awarding contracts, as it did in April 2004 when it awarded its largest 

defense contract in decades, a multi-billion euro fleet of surveillance 

aircraft, to a consortium led by EADS and that included Northrop 

Grumman.54 But for the most part, NATO can do little at the moment 

to shape corporate restructuring, except indirectly by, for example, 

setting weapons performance goals and interoperability standards. 

The more important question is whether NATO and the EU will 

conflict with each other over institutional mission and responsibility. 

At a summit in London in November 2003, Prime Minister Blair and 

President Chirac said a European defense policy with its own military 

capability was perfectly compatible with NATO.55 The concern 

that many U.S. policymakers have is whether an EU operational 
31

command cell would duplicate NATO structures. Not only would 

this be a waste of the already limited budgets of European defense 

ministries, but it also would affect negatively NATO’s capabilities.

 In any case, the outcome ultimately will depend mostly on 

Europe. European efforts to develop a common defense policy will 

have a large impact on how that region’s industry develops. If EDA 

is successful, for example, in procuring common weapons systems 

from European arms producers, it will be difficult to break the 

bipolar orientation of the transatlantic defense sector. In fact, it could 

even put the capabilities of Europe’s defense firms on a par with the 

U.S. industrial base. But if the EU fails to build any substance into 

ESDP, and a membership of 25 countries will most certainly make 

this increasingly difficult, then the chances are good that European 

defense firms will, one by one, look to U.S. companies to help build 

their future.

ENDNOTES

 1. Stockholm International Peace Research Institute (SIPRI), “The SIPRI Military 

Expenditure Database,” 2004, http://first.sipri.org/non_first/result_milex.php?send. 

 2. Norman Augustine, “Reshaping an Industry: Lockheed Martin’s Survival Story,” 

Harvard Business Review, May-June 1997, pp. 83-94; John J. Dowdy, “Winners and Losers in 

the Arms Industry Downturn,” Foreign Policy, Vol. 104, 1997, pp. 88-101.

 3. Greg Schneider and Renae Merle, “Reagan’s Defense Buildup Bridged Military 

Eras,” Washington Post, June 9, 2004, p. E1.

 4. John Rossant, “Airbus: Birth of a Giant,” Business Week, International Edition, July 10, 

2000, http://www.businessweek.com/2000/00_28/b3689015.htm.

 5. “A Survey of the Defence Industry,” The Economist, July 20, 2002.

 6. Uta Harnischfeger, Kirsten Bialdiga, and Jean-Pierre Neu, “Thales in Bid for German 

Submarine Maker,” Financial Times, September 3, 2003, p. 19.

 7. SIPRI, “Concentration Ratios,” 2004, http://web.sipri.org/contents/milap/milex/aprod/

concentration_ratios.htm.

 8. Terrence Guay and Robert Callum, “The Transformation and Future Prospects of 

Europe’s Defence Industry,” International Affairs, Vol. 78-2, 2002, pp. 757-776.

 9. SIPRI, “Recent Trends in Military Expenditure,” 2004, http://web.sipri.org/contents/

milap/milex/mex_trends.html.

 10. Dan Morgan, “Congress Backs Pentagon Budget Heavy on Future Weapons,” 

Washington Post, June 11, 2004, p. A23; http://emissary.acq.osd.mil/inst/share.nsf/HouseAndSena

teRatify?openpage.

 11. Christopher Bowe, “US “Unlikely to Back Mergers,” Financial Times, October 6, 

2003, p. 18.
32

 12. Thomas E. Ricks and Jeff Cole, “How Lockheed Martin Misread the Radar on 

Northrop Merger,” The Wall Street Journal, June 19, 1998, p. A1.

 13. Anne Marie Squeo and Jeff Cole, “Defense Firms Mull Trans-Atlantic Deals,” 

The Wall Street Journal, July 19, 1999, p. A2; Thomas E. Ricks, Anne Marie Squeo, and Jeff 

Cole, “Pentagon Discussing with Europeans Possibility of Mergers with U.S. Firms,” The 

Wall Street Journal, July 7, 1999, p. A2; Jeffrey Becker, “The Future of Atlantic Defense 

Procurement,” Defense Analysis, Vol. 16-1, 2000, pp. 9-32.

 14. Peter Spiegel and Edward Alden, “’Buy America’” Arms Plan Watered Down after 

Talks,” Financial Times, September 27-28, 2003, p. 3.

 15. Tobias Buck and Marianne Brun-Rovet, “Europe Warns Over “Buy America” Bill,” 

Financial Times, October 2, 2003, p. 1.

 16. Ibid.

 17. Renae Merle, “In Defense Bidding, Yankee Doodle Does It,” Washington Post, March 

18, 2004, p. E1.

 18. Marianne Brun-Rovet, “”Buy America” Dropped from U.S. Arms Bill,” Financial 

Times, November 8-9, 2003, p. 2.

 19. Christopher Bowe, “Homeland Defence to give Boost to Northrop,” Financial Times, 

May 17, 2004, p. 16.

 20. Christopher Bowe, Dan Roberts, and Peter Spiegel, “US Air Force Chief Backs More 

Deals for Europe,” Financial Times, June 10, 2004, p. 17.

 21. Mark Odell, “Dollar Fall Could Cost EADS €3 billion,” Financial Times, January 12, 

2004, p. 19.

 22. SIPRI, 2004, http://projects.sipri.se/milex/aprod/nationaldata/uk.pdf, http://projects.sipri.

se/milex/aprod/nationaldata/sweden.pdf, http://projects.sipri.se/milex/aprod/nationaldata/france.

pdf, http://projects.sipri.se/milex/aprod/nationaldata/usa.pdf.

 23. Jolyon Howorth and John T. S. Keeler, Defending Europe: The EU, NATO, and the Quest 

for European Autonomy, Houndmills: Palgrave Macmillan, 2003; Esther Brimmer, The EU’s 

Search for a Strategic Role: ESDP and its Implications for Transatlantic Relations, Washington, 

DC: Center for Transatlantic Relations, Johns Hopkins University-SAIS, 2004.

 24. Judy Dempsey, “EU Looking to Defence Harmony by 2010,” Financial Times, 

October 4-5, 2003, p. 2.

 25. Judy Dempsey, “UK and France Disagree on Role of Arms Agency,” Financial Times, 

May 18, 2004, p. 4.

 26. Judy Dempsey and Peter Spiegel, “EU Defence Agency Approved,” Financial Times, 

June 15, 2004, p. 4.

 27. Paul Betts, “European Governments Urged to Push ahead with Defence Research 

Agency,” Financial Times, November 5, 2003, p. 4.

 28. Peter Spiegel, “Boeing’s Main Rival Decides the best Offence is Defence,” Financial 

Times, November 19, 2003, p. 16.

 29. Mark Odell, Peter Spiegel, and Caroline Daniel, “Boeing to Lose out on $23bn Deal,” 

Financial Times, January 2003, p. 1.

 30. Peter Spiegel and Martin Arnold, “UK and France Co-operate on Warships,” 

Financial Times, June 5-6, 2004, p. 8.
33

 31. Terrence Guay, At Arm’s Length: The European Union and Europe’s Defence Industry, 

Houndmills, UK: Macmillan, 1998.

 32. Commission of the European Communities, European Defence-Industrial and Market 

Issues, COM(2003), 113 final, March 11, 2003, p. 3.

 33. Clive Cookson, “Galileo: Finally, it is all Systems Go,” Financial Times Special Report: 

Satellite Industry, October 27, 2003, p. 2.

 34. Renae Merle, “Norway Threatens to Revoke Support for Strike Fighter,” Washington 

Post, April 16, 2004, p. E3.

 35. Edward Alden, “US Threat to Restrict Arms Sales to Europe,” Financial Times, May 

14, 2004, p. 4.

 36. Alden, “US Threat to Restrict Arms Sales to Europe.”

 37. Paul Betts, “GE Plans to Buy a Stake in Snecma,” Financial Times, November 24, 

2003, p. 16.

 38. SIPRI, “Trends in Arms Production,” 2004, http://web.sipri.org/contents/milap/milex/

aprod/trends.htm. 

 39. Daniel Michaels, “European Defense Firms Lock in on U.S.,” The Wall Street Journal, 

November 11, 2003, p. B2.

 40. Peter Spiegel, “General Dynamics Breaks Off Merger Talks with BAE,” Financial 

Times, October 22, 2003, p. 1.

 41. Renae Merle, “General Dynamics Loses Bid for Britain’s Alvis,” Washington Post, 

June 4, 2004, p. E2.

 42. Peter Spiegel, “General Dynamics to Buy UK Defence Rival,” Financial Times, March 

11, 2004, http://news.ft.com/s01/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=

StoryFT&cid=1078381690171&p=1012571727088.

 43. Nicholas Kralev, “Bush Vows to ‘Deepen’ Ties with European Allies,” Washington 

Times, November 13, 2004, http://washingtontimes.com/world/20041112-093019-6633r.htm. 

 44. Robert Kagan, “Power and Weakness,” Policy Review, Vol. 113, June-July 2002, pp. 

3-28.

 45. “Naval Shipyards: Pipe Dreams Aboard,” Economist, October 29, 2004, http://

economist.com/displaystory.cfm?story_id=3337009.

 46. Martin Arnold, “France to Allow DCN/Thales Merger,” Financial Times, October 

26, 2004, p. 24.

 47. Mark Odell and Rupini Tingstrom, “BAE Begins to Pull Apart Saab Links,” Financial 

Times, December 8, 2004, p. 22.

 48. Peter Spiegel, “Procurement Undergoes a Sea Change,” Financial Times Special 

Report: Defence Industry, December 1, 2004, p. 1.

 49. Ian Manners and Richard Whitman, eds., The Foreign Policies of European Union 

Member States, Manchester, UK: Manchester University Press, 2001.

 50. Merle, “In Defense Bidding, Yankee Doodle Does It.”

 51. Stephen Fidler and Mark Huband, “Bush Foreign Policy is Creating Risks for U.S. 

Companies,” Financial Times, November 11, 2003, p. 11.
34

 52. Commission of the European Communities, European Defence-Industrial and Market 

Issues, p. 6.

 53. Hannes Baumann, “The Consolidation of the Military Vehicles Industry in Western 

Europe and the United States―Background Paper for the SIPRI Yearbook 2003,” 2004, http://

www.sipri.org/milex/aprod/mv_background.pdf. 

 54. Peter Spiegel, “European-led Group to Win $4.8bn,” Financial Times, April 15, 2004, 

p. 1.

 55. James Blitz and Robert Graham, “Blair and Chirac in Pledge on EU Defence 

Capability,” Financial Times, November 25, 2003, p. 5.