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Felix Rohatyn on U.S.-European Defense Industry
Issues
(
Reprinted from the USIA website)
15 April 1999
Paris - Improved cooperation among the defense industries
of NATO countries should be one of the top priorities of the
NATO alliance as it looks to its future, according to U.S.
Ambassador to France Felix Rohatyn.
Rohatyn discussed the issue in an April 15 Paris speech at
the Les Echos Defense Industry Conference.
While there are important restraints on defense industry
cooperation, such as the desire to protect sensitive national
defense technologies, there also are strong motives for cooperation
and for there structuring that will accompany it, he said.
He noted recent warnings that U.S. and European forces might
not be able to fight alongside each other in the future because
of a rapidly expanding technology gap.
The United States currently is spending three times as much
as its NATO allies in Europe on military research and development,
and twice as much on defense procurement, Rohatyn said. He
said the United States encourages NATO members to increase
defense spending to meet the Alliance's common goals.
The United States, Rohatyn said, sees both economic and political
advantages to European defense restructuring and transatlantic
cooperation: maintaining price competition and technological
innovation in the arms market, and maintaining "public support
for a European defense identity, based on jobs and a strong
industrial base." Restructuring also would help to limit weapons
proliferation by reducing pressures to ship arms to "questionable
destinations," he argued.
Following is the prepared text of Ambassador Rohatyn's remarks:
(begin text)
EUROPEAN DEFENSE INDUSTRY RESTRUCTURING AND
TRANSATLANTIC COOPERATION
Remarks by Ambassador Felix Rohatyn
Les Echos Defense Industry Conference
Paris, France, April 15, 1999
Next week in Washington Presidents Chirac and Clinton will
sit down with 17 other Heads of State to commemorate the signing
of the North Atlantic Treaty, which founded NATO nearly 50
years ago to the day.
Europe was a very different place in those days. Berlin was
under blockade, and Europe was devastated by war. But the
winds of change were blowing. The Marshall Plan to rebuild
Europe was already underway, and two visionary Frenchmen,
Jean Monnet and Robert Schumann, formulated a far-reaching
proposal to pool the steel and coal industries of Europe into
a single economic community.
Today, the launch of the Euro, the war in Kosovo, and the
Asian financial crisis all have shown how critical it is for
the Transatlantic Partnership of Europe and the United States
to provide a stable platform for security in the world as
well as a stable platform for the global economy. We are reminded
every day, whether in the Balkans or in the Persian Gulf,
in Southeast Asia or in Northeast Asia, that peace and prosperity
come at a price and that the United States and Europe must
share that burden.
The cooperation among NATO allies in the operations in Kosovo,
following our joint actions in Bosnia, bodes well for the
capacity of the Alliance to do what is necessary to maintain
peace on the continent and to defend our fundamental values
of freedom and human rights, without which democracies cannot
survive. In this regard, I must acknowledge France's firm
commitments in Kosovo, including political, diplomatic, military,
and humanitarian initiatives. These commitments are both profoundly
European and profoundly oriented toward our Atlantic Alliance.
The recent statements by the French President and Prime Minister
on Kosovo have resonated deeply in my country.
This is also the reason why the U.S. welcomes the St. Malo
accords as the first step towards a European Security and
Defense Identity, firmly anchored within NATO, just as we
welcome the launch of the Euro, firmly anchored to the global
financial system. Both of these initiatives will strengthen
the identity and cohesion of the new Europe and make our transatlantic
partnership more effective and more balanced.
Ten years ago, when the Berlin Wall fell, my country made
a strategic decision to remain engaged in the world economically,
politically, and militarily, and not to retreat again into
a new form of isolationism.
We took that decision because we were convinced that an open
U.S. economy in an open world economy would generate greater
prosperity for Americans and our trading partners. At the
same time, we adjusted our security posture to reflect the
new post-Cold War security environment. We reduced the overall
size of our forces, but retained a substantial forward presence,
and the capability to rapidly deploy new forces if necessary.
Similarly, we have reassessed and adjusted our export control
and industrial security policies to focus on keeping essential
military technologies from a core group states which do not
share our democratic values and principles. The new post-Cold
War environment is not without risks, but the remarkable economic
growth we have experienced has demonstrated the soundness
of the fundamental strategic choices we made.
As I have indicated many times, we wish the Euro to succeed
because what is good for Europe is good for the U.S., and
vice-versa. Overall, despite sharp disputes over specific
commercial issues, there is little disagreement either in
my country or in Europe that the world's prosperity depends
on prosperity both in Europe and in the U.S. The same argument
holds, in the security area, for mutual support of NATO, for
a European defense identity and capability which reinforces
our mutual security. I have heard a great deal of concern
here about American hegemony and unilateralism, as well as
about American tendencies toward isolationism and protectionism.
These are understandable, but exaggerated, concerns. A strong
sentiment exists in America for the idea that "shared leadership"
with a strong, stable and democratic Europe, is in the greater
interest of the United States. While there are certainly voices
in the U.S. somewhat nervous about a future European Security
and Defense Identity, most of our leaders and opinion makers
support the idea, provided it strengthens rather than weakens
NATO. Like the Euro, your success will be in our interest.
To many in Europe, the consolidation and restructuring of
European defense industries is the next big step in building
a unified Europe, with the tools needed for a Common Foreign
and Security Policy. Today Europe has over 750 defense companies,
compared to about 250 in the United States, and with defense
expenditures only one-half as large. For defense companies
on both sides of the Atlantic, the end of the Cold War and
greater openness to transnational defense trade and investment
are bringing new opportunities and risks.
In the United States, our Pentagon has worked hard to break
out of the old Cold-War model wherein defense companies were
tied to the government, inefficiencies were legendary, and
innovation was slowed. As you know, approximately 40 companies
were merged into Lockheed Martin, Boeing, Raytheon and Northrop
Grumman. In this decade alone the restructuring of the American
defense industry has reduced employment by nearly 2 million
jobs. This was an extraordinarily painful experience for these
employees, which took place over a period of years. Fortunately
our economy has been strong enough to absorb this job loss.
U.S. defense companies managed the transition by diversifying
from defense to civilian activities. Lockheed, for instance,
had 80% of its activities centered on the defense sector in
1980; that figure is only 50% today, and will decline to 25%
in ten years, as Lockheed makes the transition to a diversified
technology company. U.S. defense companies benefited from
the synergies with high technology commercial sectors, such
as civilian satellite telecommunications and information technologies,
including the Internet.
America's defense industry needed restructuring. Our defense
budget has fallen dramatically since 1985 both in real terms
and as a percentage of GDP. As a percentage of GDP it is now
about 3%, the lowest level in half a century. This year the
Clinton Administration reversed this trend and proposed an
increase in the defense procurement budget, which will rise
to about $60 billion next year, and to about $75 billion by
2005.
Even though the cooperation among NATO members in the Kosovo
crisis is outstanding, some military specialists warn that
these signs may be misleading. German General Klaus Neumann,
who heads NATO's Military Committee, warned in a recent interview
that "the day may soon be coming" when Europeans and Americans
may no longer be able to fight alongside each other on the
same battlefield because of the rapidly expanding gap in the
their combat capabilities. Europe's defense budgets have gradually
shrunk to what some defense experts believe to be dangerously
low levels. And, since most European governments are struggling
to balance their budgets, there is very little popular inducement
for political leaders to raise defense spending. However,
the political will for a European Defense Identity will likely
require greater investments in defense. We encourage Alliance
member efforts to strengthen individual national defense structures
by increasing defense spending to levels necessary to meet
our common goals.
Reconciling budget constraints and military ambition will
require a combination of European Defense Industry restructuring
as well as transatlantic cooperation between European and
American defense industries. Defense restructuring in France
has followed a clear strategy first articulated in 1995. Until
very recently it appeared that European defense industry restructuring
would follow the French model, built around two groups, one
involving British Aeropsace, DASA and Aerospatiale, and another
involving Thomson, GEC/Marconi and other European and possibly
American partners.
The recent proposed merger of BAe and GEC/Marconi has reshuffled
the deck and highlights the challenges for effective European
defense restructuring. British industry is gearing up for
a single defense company, with activities in both aerospace
and electronics. The BAe/Marconi merger means that for all
practical intents and purposes 90-95% of all British defense
procurement will be from a single company. The potential competitive
impact of this merger has aroused concern in the United States
as well as on the continent. The reaction of Daimler Benz
was particularly negative. Time will tell whether the British
merger will form the basis for one big European Defense Company,
in which the British would play the leading role, or, on the
other hand, if it accelerates the creation of other combinations
of European companies and possibly opens up opportunities
for transatlantic alliances.
Unlike American defense companies, European firms must reconcile
widely different shareholding structures which reflect fundamentally
different concepts of the roles of the state and the market
in the defense sector. BAe/Marconi's shareholding is highly
diffuse, while Germany's Daimler Benz Group tightly holds
all shares of DASA. Shares of Thomson-CSF and Aerospatiale/Matra
are -- or will soon be -- publicly traded, but the French
government still holds substantial stakes of both companies.
The U.S. Government, on the other hand, holds no shares in
any of our defense companies, and shareholding is highly diffuse.
Different tax and accounting systems will also make defense
industry restructuring more complex in Europe than it was
in the United States.
European companies also have widely different relationships
with U.S. defense firms. GEC/Marconi is itself a major investor
in the U.S. defense industry, through its recent acquisition
of Tracor. BAe is allied with Lockheed Martin in a project
for the next generation Joint Strike Fighter. On the other
hand, Thomson-CSF's planned merger with U.S. defense company
LTV in the early 1990's failed because both sides disagreed
on the appropriate level of foreign management control over
a U.S. defense company.
As you know, the fundamental issue for the United States
is protecting sensitive national defense technologies as we
proceed with transnational mergers. This is not an insurmountable
obstacle, but it cannot be glossed over. In fact, France has
sensitive technologies of its own which it must protect as
French companies move ahead with transnational mergers. This
is one area where France and the United States agree: the
need to protect their sensitive national defense technologies,
such as nuclear or ballistic missile programs, which will
remain strictly national preserves for the foreseeable future.
Each government will require accountability and protection
for sensitive technologies to control dissemination to other
nationalities. In many cases we will be able to find NATO
solutions to this dilemma, but in many others we will have
to work on a case-by-case basis, assessing the risks and imposing
appropriate controls on a bilateral basis.
Despite the challenges, the U.S. has strong interests in
European success in defense restructuring. The first is economic,
and consists of maintaining price competition and technological
innovation in the arms market. The second is political; it
is critical to maintain public support for a European defense
identity, based on jobs and a strong industrial base, if our
European allies are to maintain support for the Atlantic Alliance.
Finally, rationalization within the European defense industry
may reduce pressures to export to questionable destinations.
As we saw in the Gulf War and in Bosnia, future warfare will
of necessity be coalition warfare, and it will increasingly
involve the use of high technology weapons and weapon systems.
The so-called technology gap between the U.S. and NATO allies
raises the question of the future capability of our armed
forces to fight together on the battlefield. The U.S. is currently
outspending its NATO allies in Europe by a factor of three
to one in defense R&D and two to one in defense procurement.
Moreover, limited European defense budgets are spread thin
across a wide range of national defense production requirements,
which cost Europe dearly in terms of economic efficiency.
Let me also be clear about what the technology gap is not.
It is not a new "Buy American" scheme. It does not imply that
U.S. technologies are inherently superior to European technologies.
Transatlantic technology exchange is clearly a two way street.
Europe and France produce innovative technologies which are
equal to or superior to U.S. technologies in many important
areas, such as manufacturing processes and composite materials.
I had the pleasure of seeing many of France's best space and
defense technologies first hand during recent trips to Aerospatiale
in Bordeaux and Alcatel in Toulouse.
We stand today at the crossroads for transatlantic defense
cooperation. What are the alternatives? Without a transatlantic
component, European defense restructuring could lead to a
fortress Europe, closed to U.S. defense companies. The American
market, which is now slowly opening up to European defense
trade and investment, would likely close. This could accentuate
competition for exports to third country arms bazaars, and
aggravate arms proliferation. The lack of industrial cooperation,
trade and investment could erode the common security posture
which has made NATO strong and has secured a half-century
of peace and prosperity in Europe.
Transatlantic defense cooperation, on the other hand, can
help our firms increase their production runs despite shrinking
national markets, and provide cost savings to national governments.
More importantly, transatlantic defense cooperation will strengthen
the ability of the NATO Alliance to act together in defense
of our shared values, as we are doing today in the Balkans,
and as we will surely be called upon again to do in some future
conflict. To get there, both sides will need to understand
and accommodate each other's priorities. On the European side,
the top priority is clearly market access and building European
defense companies that can compete -- and cooperate -- on
an equal footing with the leading U.S. defense contractors.
On the U.S. side, the top priority is controlling global weapons
proliferation. Both sides share legitimate concerns about
defense industry security and the protection of sensitive
national military programs and technologies. We must work
together to encourage stronger transatlantic ties by identifying
the risks and resolving the political obstacles to defense
trade, mergers and acquisitions.
The need for transatlantic cooperation will become even clearer
after the Kosovo conflict. How do we get there from here?
The NATO Summit Meeting in Washington next week is a good
starting point. We will need the transatlantic vision which
marked the birth of NATO and the European Community 50 years
ago. Promoting transatlantic defense industry cooperation
should be one of our top priorities as we look ahead to the
future of the NATO alliance. It is certainly one of my top
priorities as the American Ambassador to France.
(end text)
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