Conclusions and Policy Implications
As set out in the Final Report to the European Commission, January 2001


Introduction

4.1.1 This section draws together our conclusions concerning what our analysis of national systems of innovation in the defence sector reveals about the ways in which technological and industrial change, within a framework of globalisation, may be altering the arms economy. It identifies areas requiring further research. And it explores how the developments which have been examined in this project may lead companies and governments towards certain possible future scenarios.

4.1.2 These scenarios focus upon:

  • tranatlantic discord in the form of strong, but competing, US and European poles in the defence sector

  • transatlantic harmony, with distinct European and US pillars, but operating within some framework of general understanding and cooperation and

  • transatlantic discord via 'divide and rule', in which US companies 'pick off' individual European firms in partnership arrangements, leaving other firms, and governments, with a strong sense of vulnerability to decisions made on the other side of the Atlantic.

These scenarios are offered as 'possible futures', not as predictions. They allow for the possibility that developments at the industrial level, within production networks, may not be synchronised with developments at the political, and especially intergovernmental, level.

4.1.3 What overall conclusions emerge from our discussion, and especially from our application of the national systems of innovation approach to the field of defence industrial and technology policy? We introduce them under the three headings of their relations to trends within the general political economy, developments more specifically within defence industries and technology, and the value of, and our contribution to, the national systems of innovation analytical approach.


General Political Economy

4.2.1 In the context of the stage in the evolution of global political economy which emerged during the nineties, we conclude that a new, internationalised (but not yet globalised), arms economy is taking hold.

4.2.2 Economic and security challenges are becoming closely intertwined. They are doing so within a world in which only one military superpower now exists, and in which that military superpower is also the most powerful economic actor. Hence the role of the United States in shaping the future of the arms economy, as of so much else, is crucial. The internationalisation of the arms sector both revolves around, and is developing in opposition to, the United States.

4.2.3 How the relationship between military doctrines in the United States and Europe, and the corresponding configurations of arms industries, will develop on the two sides of the Atlantic is not so easy to state. Indeed, it should be the subject of further research. Much will depend on how far political and security agendas converge or, contrarily, remain distinct. In this respect, the legacy of Kosovo may prove to be a touchstone.

4.2.4 All the signs are that the US political system in general, and the military in particular, continue to regard peacekeeping and peacemaking interventions in a different light from their European partners. That is to say, whereas in Europe such interventions have come to the fore in defence debates, and traditional Cold War concerns have moved to the rear of the stage, no such clear shift has occurred in the United States. One might put the point more strongly: what, in Europe, is now regarded as perhaps the prime function of military forces is still seen in the United States as a distraction from the proper role of the military.

4.2.5 To the extent that the purposes of US and European military forces remain distinct, this is likely to lead to different military requirements and therefore to different equipment requirements. What is less clear is whether this will lead to different structures for the arms industries. Put in different terms, the policy networks on the two sides of the Atlantic might grow no closer together than they presently are; but this does not necessarily mean that the same will apply to the production networks. Indeed, an important question for future research is to consider what effect the growing number of transatlantic defence firms may have on the dynamics of these processes. Will these international firms, through their interactions with multiple national policy networks, tip the scales towards some form of policy convergence (in a transatlantic version of Monnet's European functionalism of the 1950s), or will policy networks, and their agendas, retain relatively separate identities?

4.2.6 Kosovo may also prove to be a touchstone in a second sense. The debate over how to respond to the crisis reflected a wide range of political cultures, geopolitical priorities, and economic interests, and these ran deeply within as well as between national political systems. With the resolution of the crisis, one question for history will be what effect it has on the views of military equipment requirements for the future. Kosovo confirmed what the Gulf War had already shown, namely, a vast transatlantic technological gap, and a corresponding gap in capacity to field appropriately equipped forces, for a campaign of the sort that was conducted - with precision bombing, information warfare, dependence on highly advanced intelligence gathering technologies, and so on.

4.2.7 Some would argue that this gap need not drive future policy and production choices, because the campaign, as conducted, was not an appropriate way to attempt to resolve the crisis. Others will draw a different conclusion, namely, that Europe will remain unduly dependent on the United States for any similar future circumstances unless it can equip its forces to a level approaching that of the United States, and in the types of technologies that featured over Kosovo. For the latter, and this is the dominant position in most western capitals, the issue is whether to seek ways to buy from the United States, using partnership arrangements at both policy and production levels to try to retain such independence of action as can be achieved, or whether to press wholeheartedly for a largely independent European defence equipment development and production capability.


Defence Industry and Technology: Civil-Military Integration?

4.3.1 These high level political and security considerations provide the general framework within which our study has focused on defence-industrial affairs. At this lower level, we can observe first that, while the prospect which some, in the 1980s, saw for a transformation of military production based on the concept of dual-use technologies, has proved optimistic, nevertheless efforts at reforming defence procurement to promote growing civil-military integration have been substantial and ambitious. We see evidence of this in various of the countries that we have studied.

4.3.2 That said, the impact of these measures has so far been relatively limited at the level of prime contractors. Indeed, at first glance, there may even be thought to be a counter-tendency, arising from the fact that most of the defence prime contractors who survived the shakeouts of the 1990s are at least as heavily concentrated on defence production as previously, if not more so.

4.3.3 However, important examples of civil-military integration can be found among suppliers, and also in the production processes being used by defence primes. Outsourcing practices among defence primes are also increasing the relevance of civil-military integration in the supply chain. These trends do not appear to be due directly to the main procurement reform efforts. That is to say, they can be viewed as the consequences of decisions made within production networks rather than as emerging from official procurement reforms, although some governments have also encouraged defence primes to draw SMEs into their supply chains. The extent to which such policies have been implemented in practice, or sustained over time, is not, however, as clear as is the fact that, in times of difficulty, policy networks have tended to focus more on the maintenance of an adequate core of prime contractors than on the interests of lower tier suppliers.

4.3.4 Arguably, a stronger influence on the role of SMEs is a combination of technological and stock market pressure: technology, in the sense of the familiar phenomenon that the sources of innovation often lie outside the major corporations, the more alert of which, however, are quick to co-opt them; and stock market pressure in the sense that, in those countries where private (typically, mainly institutional) investors are now able to exert leverage over defence firms, they are likely to apply greater pressure than governments for returns on capital invested, thus encouraging defence primes to look actively at new modes of sourcing.

4.3.5 Assessing the policy consequences of these developments is not, however, a simple matter.

4.3.6 Thus, one consequence of increased civil-military integration within supply chains, whether arising purely nationally or internationally, may be to further weaken the grip of governments over the defence procurement process, although this weakening is a relative matter, given the over-riding fact that governments are the customers in this particular 'marketplace'. This point may be made even more forcefully in cases where defence production networks overlap with truly globalised suppliers, as is increasingly the case for telecommunications equipment. It arises equally when the global regulatory system impacts upon the defence sector, as it may yet do in the form of a trade war in the World Trade Organisation over subsidies to the aeronautical sector which, while formally concerned only with support to civil aviation, would inevitably have consequences for the defence sector.

4.3.7 On the other hand, developments such as 'Smart Procurement' in the UK strengthen the links between government and industry by giving industry greater responsibility both for the specification of the project and for its management. However, the fact that the state is thereby reducing its control over at least some parts of the production process does not mean that individual firms are necessarily able to act more autonomously in the defence sector.

4.3.8 What is clear, despite all the recent changes in the defence sector, and the globalisation of the sourcing of technology in so many areas of production generally, is the following. While civil-military boundaries evidently can be re-opened for negotiation under certain circumstances, there remains nevertheless a lot of inertia in the existing structure. The most impressive achievement of the military industrial complex in the United States could be said to have been the way that a very stable set of institutions (corporate and governmental) regularized the work of technological innovation so that continuous technological change did not involve anything like Schumpeter's waves of creative destruction". The question now is, has the end of the Cold War changed the terms so much that that this stability (the boundaries around the networks) can no longer be maintained? Given the consolidation of the industry into "pure play"; contractors, that is, defence specialist firms, the mechanism for opening up the boundaries is not clear. We take this discussion a little further in the next sub-section.


National Systems of Innovation

4.4.1 What does our study contribute, at the methodological level, to the NSI mode of analysis? In what ways has it benefited from it? First, we have elaborated the NSI framework through our distinction between policy and production networks, and subsequently through our observation of the scope for divergence (or at least a lack of synchronisation) between the two. We have evidence of such divergence. Hence, the approach offers a way of characterising the multi-layered evolution of the new arms economy.

4.4.2 Second, the emphasis in the framework upon changes in institutions and environment has directed our attention towards certain key sources of dynamism in the defence sector. Going beyond the obvious issue of the end of the Cold War, these also include new ownership relations, in the form of privatisation, and also changes in the sources of new technology, both of which are indicative of changes in the traditional boundary of the defence innovation system. These observations have led us, in turn, to explore how these developments have opened up various 'gaps', such as civil-military, US-Europe, in a way that is less uni-dimensional than, say, the 1960s debate about the transatlantic Technology Gap.

4.4.3 Third, the institutional emphasis of the NSI approach draws attention to the fact that certain 'national' core competences have now shifted to foreign ownership (cf the Swedish case), and this also has implications similar to those identified in the preceding paragraph.

4.4.4 Fourth, the NSI approach enables us to approach from another perspective the issue of the stability of the defence industrial sector over time, alluded to at the end of the preceding sub-section. It is nearly two decades since Kaldor described the evolution of military technology under the title of the 'baroque arsenal', meaning the way in which the types of major weapons platforms (the warship, jet fighter and tank) had remained broadly fixed since the end of the Second World War, and that innovation had taken the form of incremental (rather than revolutionary) change, resulting in embellishment of these basic platforms to baroque proportions. One way to explain this form of technological stability at the level of generic platforms, combined with continuous innovation within the framework thus set, is to observe that NSI theory would expect the military and industrial institutions associated with the generic platforms to feed off each other, and to resist intruders into their network. Thus, when debate surfaced in the late 1970s and early 1980s on the question of whether precision-guided missiles spelled the end of the tank, a natural coalition of interest formed between networks associated with tanks - specifically the relevant sections within armies and their suppliers. In those countries where engagement with the Cold War was a dominant feature of defence policy, with all the consequences that flowed for the relative inviolability of defence budgets, the consequence at an institutional level would be a sealing of the network against the threat to its members, and a channelling of funds to develop answers to the threat. (In the history of technology, this is known as the 'sailing ship effect' - a reference to the way in which sailing ship technology improved under the threat of the faster passage promised by the new technology of steam-powered ships).

4.4.5 On this analysis, the end of the Cold War should result in reduced political legitimation for defence budgets, and therefore increased pressure to seek more radical approaches to defence innovation. The introduction onto the scene of a more diverse set of actors (partly because of civil-military technological integration, discussed above, and partly because of the insertion of institutional investors into defence innovation networks) should also mean that the networks are more open to discordant influences than hitherto. A number of important policy questions arise from this observation.

4.4.6 One of these is that the continuing stability of the networks, in the sense of continued domination by firms or groups of firms with a long history of defence contracting (granting also the exiting of other such firms), and the absence of new entrants at the prime contractor level, requires comment. Several factors may be at work here. One is the relatively small size of the defence sector compared to most global commercial markets. Just as in Britain at the end of the Second World War, ICI turned down a request from the government to take over nuclear reprocessing for the atomic bomb programme because the company saw a brighter future in organic chemicals, so today, companies which may potentially have the capacity to move into the defence sector may not see it as worthwhile. Second, it may be that not enough time has yet passed for the system to change: the strategy of 'survival via consolidation' has dominated the last decade; now that this cannot go much further, other options might start to emerge. Third, in the largest of all defence markets, the United States, it may also be that the budgetary reductions have simply not yet been great enough to create the conditions for more radical change, though the other side of this argument would be that we would expect to have seen more evidence of radical change in smaller countries.

4.4.7 Network boundaries have changed, however, and new entrants have emerged, at the level of sub-elements of the defence innovation system. That is to say, we have in the recent past seen cross-sectoral shifts within the defence sector (aircraft manufacturers becoming prime contractors for warship contracts, for example). In this respect, it is widely claimed that the key competence needed by prime contractors is that of systems integration. This raises a further key policy question which we have not been able to address, but which urgently requires further study, namely, how easy it is to acquire such a capacity with reference to defence systems. This is clearly a critical issue for the analysis of barriers to entry to defence networks.

4.4.8 Put differently, how far is a 'systems integration capacity' something that can be transferred from one context to another (in the way that it is sometimes claimed that 'management' is a generic skill, and can be applied regardless of context)? If it is something that cannot be easily transferred, then even if other protective elements of the old networks are weakened (eg, by privatisation, and increased budgetary pressure), we might still expect to see (as indeed we have) the continued domination of the sector by traditional players. If it can be easily transferred, then the question becomes, why is there so little evidence of it happening? And in the light of the growing importance of civil-military technological integration, which arises mainly at sub-contractor level, it also bears asking whether the trend towards technology integration at sub-system level (the supply by sub-contractors of 'black box' technology) may also threaten to destabilise traditional concepts of systems integration, and related control.

4.4.9 A related matter deserving further analysis, within this set of questions, is the role of 'tacit knowledge' in defining a systems integration capability. A considerable body of work in the 'science and technology studies' field emphasises the importance of such knowledge, acquired by experience over many years, and often embodied in whole organisations and not simply individuals. Modern approaches to the capturing of such capabilities (eg, computer-based expert systems) can reduce the barriers to their acquisition. But the concept of tacit knowledge goes wider than this. Moreover, the modern trend to use computer-based systems to integrate the processes of design and production could be argued to require more demanding systems integration skills, rather than their reduction to some sort of expert system. There is scope here for further study, to establish more precisely what a systems integration capability entails, how context dependent they are, and what effect current developments may be having on their transferability across the civil-military divide.

4.4.10 Finally, of particular interest, because so novel in a number of countries, is the question of the potential influence of institutional investors in altering the balance of power within defence innovation networks. We suggest that this influence will not necessarily be the dominant one in any particular decision, but that does not mean that it will have no effect. First, in the case of diverse corporations, with minor interests in defence, it may encourage decisions to exit the defence sector: in such a corporation, shareholder behaviour is likely to be more attuned to general business prospects than to those of the defence sector in particular. In addition, it increasingly weakens the control that governments can exert over defence companies. It may also (as said above) be encouraging, or at least enabling, civil-military integration in the supply chains, below prime contractor level, with consequences for the overall stability of networks that cannot be predicted.

4.4.11 This is a complex matter, however, and one that deserves more extended study in the future. Such study will need to reflect on the fact that the transfer of control over the defence industrial sector to shareholders is proceeding at varying speeds in different countries, and in nationally specific ways. One sense in which this is so concerns the degree of control over key decisions that governments are really allowing to privatised companies. 'Golden shares', and other residual control mechanisms, remain significant forces. Thus, rational economic behaviour might lead shareholders interested in this sector to opt for holdings that gave them access to the most secure defence market in the world, that of the United States, but political controls over foreign investment may impede any such desire.

4.4.12 A second, and more subtle, brake upon radical change arising from shareholder power can be expected to be the attitude of shareholders to future geopolitical prospects, and the degree to which they share these with other key elements of defence policy networks. Looking at this hypothesis from an international perspective, we can observe the varying degree of exposure, by country, to the new geo-political reality. Compare, for instance, the position in Germany, where history and geography provide direct incentives to seek a stable and cooperative security environment, with that in the United States, where a sense of responsibility for containing the decaying military structures of post-Soviet Russia is inevitably mixed with residues of Cold War arguments for maintaining military might. In France, meanwhile, there is a familiar blend of resistance to American domination and concern not to allow Germany a monopoly of contacts and cooperation with Russia, while in Britain, traditional ties with the United States and a relative remoteness from the concept of regarding Russia as part of the new Europe remain important. It is not difficult to see how these different starting points could have consequences for defence equipment decisions.

4.4.13 Against this overall background, how might the new arms economy, and especially its two main transatlantic elements develop in the future? To address this question, we consider, as already explained, three illustrative scenarios.


Possible futures

4.5.1 For heuristic purposes, we have chosen to reduce Europe's possible military-industrial futures to three basic scenarios: Transatlantic Discord between competing US and European poles; Transatlantic Harmony; and Transatlantic Discord via Divide and Rule.

4.5.2 We note in passing, however, that the European debate on military security has not yet fully appreciated the long-term consequences of the dramatic economic decline of Russia and other nations of the former Soviet Union. While Russia will command an arsenal of weapons of mass destruction for many years to come, she is economically incapable of maintaining conventional forces which would constitute a military menace to Europe. Nevertheless, Europe needs to make political stability in Russia a high priority on the agenda of security issues in order to create mutual dependencies and the gradual integration of the Russian economy including its military industries into the European procurement process. Although this process is unlikely to be completed within the next decade, we nevertheless make reference to various features of it below.


(I) SCENARIO ONE: Transatlantic Discord: Competing US and European Poles

4.6.1 A new threat perception, arising not from the east but from the west, emerged in Europe during the second half of the 1990s. It was not a threat to national security and independence, but to European military-industrial survival and advanced technology competitiveness. Although the east-west conflict in the form of the cold war disappeared, technological competition among western countries did not. Military-technological competition among the technologically most advanced nations, partly within Europe but primarily across the Atlantic, became a decisive factor driving European common action.

4.6.2 The American threat was created by the so-called 'last supper' in 1993, when the US Secretary of Defense told the chief executives of the biggest American military companies that half of those present were superfluous (Volkman 1998). The companies, supported by Wall Street, reacted with stunning rapidity. Within a few years there was a dramatic reduction in the number of prime producers in 10 of the 12 industry market sectors identified as important to national security. The largest reductions were in aerospace markets such as tactical missiles (from 13 to three), fixed-wing aircraft (from eight to two), expendable launch vehicles (from six to two) and satellites (from eight to five). The US defence market became practically dominated by three giant companies - Boeing, Lockheed Martin and Hughes. In November 1999 the US Deputy Defense Secretary concluded that the company consolidation in the US defence industrial base had gone about as far as it could (Defence Press Service 1999).

4.6.3 The European reaction, catalysed further by the Yugoslav crises, was an acceleration of defence-related activities, both industrial and political, in an attempt to strengthen Europe's military industry's position.

4.6.4 The first scenario assumes that these developments continue to the point where a strong European defence industrial pole is created, capable of matching that of the United States.

4.6.5 Two main forces drive the Transatlantic Discord scenario. First, the urge of European governments and defence companies to remain on the competitive playing field. Second, a need to reconfirm Europe's political and economic role in the new and unipolar world characterised by US dominance. There is a desire to define a clear defence-political identity for Europe in order to give credibility to the pan-European structures and also to mark differences from the US. The evolution of the European Union and the common European market provide a background and framework for these efforts.

4.6.6 A condition for the development of this scenario is that there is no renewing of tension between Europe and Russia, or even that there is close political and defence cooperation with Russia and Europe, and perhaps even between Russia and the US. EU-Russian military cooperation, although unlikely in the short term, would further support this scenario, enabling military postures that no longer needed to follow the US military technological or political lead but concentrated on protecting Europe from external threats and contributing to peace-keeping operations under the mandate of the United Nations. As a precondition for this scenario Russia would have to accept its economic and military limitations. Just as Europe, in our second scenario, cooperates with the US, Russia would in this scenario realise that cooperation with Europe could sustain technological capabilities basically embedded in civilian high-tech industries competing in international markets. Thus, EU-Russian cooperation in military-industrial and security fields could lead to a new self-confident European defence option.

4.6.7 Also crucial for the sustainability of this scenario would be a united European will to remain and act independent of the US, not least if one consequence of this course of action were that the US might withdraw its military presence, and perhaps also its military guarantees, from Europe. An extreme variant would be to accept the emergence of a new transatlantic order in which the NATO military alliance would no longer have a role. US domestic, mainly economic, problems and/or a neutralistic American administration would probably be needed in order to support such a decision.

4.6.8 An outcome based on competing US and European defence poles would probably be very costly for Europe since it would include facets of European superpower ambitions. Advanced European military R&D, innovation and acquisitions as well as an independent European Science and Technology Intelligence organisation (Hagelin 1999) would need to be supported. Military systems not otherwise contemplated, such as anti-ballistic missile systems, perhaps even aircraft carriers and strategic bombers, might be argued for. Satellite communication links would be a necessary ingredient in the new defence posture. In order not to remain dependent upon the US, independent and cost-effective European civilian communication infrastructures and intelligence services would be needed, resulting in a new balance between exclusively military infrastructures and intelligence and often more efficient services provided by the private sector organised in globally operating corporations.


(II) SCENARIO TWO: Transatlantic Harmony

4.7.1 Undoubtedly, there is still political, economic and technological importance attached to nationally independent military production. However, it may be argued that in most, if not all, countries with an indigenous military industrial base, national independence has not existed in advanced military innovation, R&D, production and acquisitions during peacetime. National production of the technolo­gically most advanced equipment is possible only with the assistance of different forms of international research and development co-operation and/or trade of skills, technologies and products. In the future, international projects are likely to define much if not all of the advanced military production or acquisitions to be considered affordable in Europe. Thus, military-relevant technology innovation will not be national but international.

4.7.2 Our second scenario assumes a happy union between European and transatlantic cooperation, in which Europe and the US make up two pillars of the same military (and military-industrial) system. Like the first scenario, however, it rests upon the same general foundation of successful European political and industrial responses to the American challenge as well as realisation of EU ambitions. The second scenario, therefore, also implies a willingness on the part of European governments to increase their military expenditures, although transatlantic cooperation may support rationalisations and cost savings.

4.7.3 But there is one decisive difference, namely that the US believes European representatives when they assure them that there is no risk of independent European ambitions, so that the US then supports the creation of a strong European defence industrial base. Hence, as a reaction to European industrial consolidations and acquisitions, the basis for transatlantic cooperation actually improves. Part of the US support may be based on the need for an increased ratio between equipment and men in Europe as a result of NATO enlargement, and an increasing EU role in NATO power projection operations.

4.7.4 A further stimulus for this scenario could emerge from a deterioration of the European security situation, mainly in EU-Russian and US-Russian relations, with re-emerging cold war-type military rationales for NATO. One example might be Russian non-compliance with US-EU views on international arms and technology controls. Another example could be a US and perhaps also a European Theatre Missile Defence system that, in the Russian view, is partly aimed at Russia. Russian opposition could create support for faster NATO enlargement to include Finland and Sweden and result in revitalised transatlantic military including industrial ties. A destabilising, costly and counter-productive European arms race could follow.

4.7.5 On this scenario, the US administration would reduce its technology transfer restrictions in parallel with reducing the force of the Buy American Act and other constraints against American acquisition of European equipment. It would also alter the its historical unwillingness to share its most advanced technology even in NATO projects. Moving toward this alternative for both first, second and third tier suppliers is important for achieving the highest forms of European and transatlantic co-operation. Examples of steps and decisions that could illustrate this are the April 1999 DCI initiative, the Joint Strike Fighter (JSF), the US willingness to share BVRAAM missile technology, the proposals by the Defense Science Board's Task Force on Globalization and Security (Arms Sales Monitor, No. 42, Jan. 2000, p. 1), recently changed US licensing legislation, and the February 2000 Declaration of Principles between the defence ministries in the US and UK (DoD Briefing 8 February 2000).

4.7.6 Although there may be many rationales for closer transatlantic cooperation in the future (Barry & Kay 2000; Adams 2000), the buzz words in this scenario would be trade liberalisation and technology sharing, involving the whole spectrum from R&D to production and acquisition in defence as well as dual-use technologies and products. Because of the great imbalance in transatlantic defence trade, the US would not only open up its military market, but also accept spin-offs and spin-ons in American military and civilian programs in an attempt to narrow the technology gap and support increased military trade and co-operation with Europe. The future of defence spinoffs, however, may remain a controversial issue.

4.7.7 Closer and more efficient transatlantic co-operation is likely to develop in steps, starting with industrial teaming and partnerships. Over time, this would create a political, military and industrial climate that, in turn, would support ambitions on both sides of the Atlantic to achieve transatlantic mergers. Transatlantic company mergers would strengthen NATO, improve interoperability, diminish trade protectionism, maintain competition, and bring Europe into the new so called Revolution in Military Affairs (RMA). Constructive co-operation in this field would support common require­ments and NATO standardisation increasingly around European equipment.

4.7.8 However, although mergers would reflect the highest industrial form of transatlantic co-operation, they are not absolutely necessary for this scenario. The most important factor is the reduction of transatlantic political and military animo­sities and tension and to establish constructive US support of EU technology, defence and security ambitions. Integrated transatlantic project teams sharing as well as developing skills and technologies - perhaps following competitive R&D on each side of the Atlantic - would be one alternative. The negative result from 'the second supper' in 1999, when representatives from both sides of the Atlantic met to discuss possible transatlantic mega-deals, is therefore not necessarily critical. The UK in particular could, if it can manage its transatlantic and European balancing act, be the major European bridgehead for this transatlantic military-industrial bridge.

4.7.9 The experiences of the Kosovo war highlighted the rift between the US and European nations. For this scenario it became a cross-road in transatlantic cooperation. It elevated the European debate about integration of military capacities to an action-oriented level and contributed to eventually breaking the stalemate of extending the process of European integration to cover military affairs. Over time, developments could involve a transatlantic-wide restructuring of military and dual-use R&D and production. Certain types of equipment or technologies for the transatlantic area as a whole may be developed and produced in Europe, while others are developed and produced in the US. This means taking advantage of comparative advantages in the US and European nations.

4.7.10 This would have implications for the focus of technology innovation in Europe and the US in that it would support the creation of asymmetric but coordinated NATO or US-EU military technology innovation. That would demand hand-in-hand transatlantic cooperation, in reality basically a common military industrial base as a means to make military technology, spending and acquisitions more effective.

4.7.11 However, the analysis of the Kosovo consequences in the history books of the future may conclude that what followed was not a harmonious transatlantic relationship. Rather, US pressure upon European weapon acquisitions strengthened. The US defence establishment began to market not only military equipment but also a future military doctrine in Europe. What had hitherto been regarded as distinctly European security concerns became obscured and, even manipulated, by vested American interests.


(III) SCENARIO THREE: Transatlantic Discord: Divide and Rule

4.8.1 There exists a fundamental risk in transatlantic relations that has to do with the types and use of the armed forces. Apart from different conclusions with regard to Russia's future, the European discussion of new threats and military out-of-area obligations has not matured to give a clear guidance of how much military potential is enough and what this potential should be composed of. Military-bureaucratic structures are slow in redirecting the available resources to the emerging scenarios in which the armed forces are likely to be tasked with new missions requiring distinct training and new equipment. Ideological and political battles are waged over the true nature of new threats and the appropriate responses within NATO. Joint statements obscure transatlantic and intra-European differences. In this relative political vacuum entrenched bureaucratic and industrial interests as well as military subgroups continue to fight more or less successfully for their respective survival.

4.8.2 In this scenario the procurement climate in Europe would initially develop in the direction of civil-military technological integration. This would take place against a presumed background of good security relations with Russia and hence of limited pressure for national European armaments. European military expenditures would therefore not increase to the extent desired by the US. Seen from the US, Europe would not be living up to its NATO obligations, leading to a weakening of political will in Washington to work in the ways required for the Transatlantic Harmony scenario to succeed.

4.8.3 In our third scenario, Europe also does not succeed in establishing a common defence entity, and hence does not manage to create the scale of integrated arms market that could support major European defence companies, in terms both of orders and of R&D. Hence, national governmental support for national defence firms (in terms of sales, export credit guarantees, and so on) would continue to divide Europe.

4.8.4 A further consequence of this line of development is that the smaller countries would remain on the periphery. Indeed, as we already see, support for European mergers and acquisitions is most pronounced in the six Letter of Intent/Framework countries: Britain, France, Germany, Italy, Spain and Sweden. These are precisely the countries with the major defence industries and the major stakes in the common European market. But the principal inefficiency of the military institution is structurally predetermined and very obvious in the smaller European NATO-member states. The defence budgets of smaller countries may reach a point where the maintenance of a procurement bureaucracy eats up a dangerously growing proportion of the cake to be distributed in the form of procurement contracts.

4.8.5 Hence, Europe's military-technological and defence-industrial ambitions would remain divided and driven by diverse national government and/or competitive company interests. Nor would they find much support in European defence institutions since there remains a plethora of such institutions (Assembly of Western European Union 1999). Moreover, while on the surface most of Europe's arms industry is privatised, in reality special relations remain in place between major arms manufacturers, the national procurement bureaucracy and the export promotion bureaucracies. The efficiency of the European defence effort is increasingly threatened by the fact that all organisational functions are being unproductively carried out in parallel in the major nations which structurally lowers the ratio of disposable investment and fixed costs. The transatlantic card is only rhetorically played to enhance the respective national military effort (Detlev 1999).

4.8.6 The third scenario supposes that this unstable European situation is taken advantage of by the US. Despite the gap between the political and military ambitions on both sides of the Atlantic, there is still an American rhetoric supporting a strong and united Europe including a strong European defence industry. In reality, however, the US uses sophisticated methods in order to divide and rule. The negative US reaction in 1999 to future transatlantic mergers may well not change. In the words of one commentator: 'there will be no transatlantic merger in the strategic industries that is not a direct American takeover of a foreign company, leaving the US partner in unambiguous technological control' (Pfaff 1999).

4.8.7 The third scenario envisages that US companies will continue to be present on the European market, with economically competitive bids for defence contracts. Based on the European market structure as well as US bilateral relations, some European countries are likely to gain more than others from such contracts. Far-reaching and favourable US collaborative offers, such as the offer to the UK in 1999 for the BVRAAM alternative to the European Meteor missile, will repeatedly threaten the success of European projects. Such offers, supported by bilateral US co-operation agreements with European nations, put the European governments in dilemmas between supporting Europe or buying from the US. In this way, the US would have repeated opportunities to intervene in European moves towards closer military-industrial co-operation.

4.8.8 Even without an explicit political Divide and Rule strategy, competitive relations between US companies may complicate the strategy choices in Europe. In fact, economically more efficient arms procurement in Europe based on transatlantic solutions may in the end increase the potentials to Divide and Rule. US companies such as Lockheed Martin or Boeing may be eager to establish cooperation with major European companies because the other company has done so or in order to gain competitive benefits. Possible closer coopera­tion between BAE SYSTEMS and Boeing, for instance, may be a way to compensate for BAe's participation in the Lockheed Martin JSF team. The US could selectively open the US market by putting a high price on the closest forms of cooperation and influence as in the JSF, in reality restricting such participation to only a few. Again, the UK stands out as crucial. But when the JSF or similar projects are finished, or if the situation changes for other reasons, the basis for such cooperation may disappear. If European companies have then based their future strategies on the continuation and strengthening of such transatlantic cooperation, the consequences may be severe for Europe's possibilities to recuperate.


Conclusion

4.9.1 To repeat, these scenarios are offered as heuristic devices for exploring various features of the policy opportunities and threats that face Europe. It remains to be seen which of them will prove closest to reality. Indeed, the matter of their resolution is not simply one of waiting to see, but rather of seeking to influence them through appropriate appreciation of the underlying factors, and their consequences. While actions (as NSI theorists would be quick to observe) cannot determine outcomes in any simple way, nevertheless the future remains to be constructed rather than to be forecast in any simple-minded way, or awaited in any spirit of fatalism.

4.9.2 In this respect, Europe has choices. The recent strengthening, via mergers and acquisitions, of the leading European firms has altered the transatlantic defence industrial landscape, even though the major source of finance in this field remains the Pentagon. The question is, which choices will the relevant actors make?