Contemporary Britain and France are among the most civilised states in modern history. But their public morals are disfigured by one especially ugly stain-the sale of arms to brutal regimes. Sir Richard Scott's report on arms-to-Iraq explains how the competitive scramble for markets and jobs in the defence sector prompts otherwise civilised men to take uncivilised decisions. The report shows that the government believed defence exports justified the misleading of parliament, the withholding of documents from a criminal trial, and the provision of secret subsidies for export credits.
Why? It is an uncomfortable fact that a large slice of Britain's manufacturing sector is based around defence. 400,000 jobs are thought to depend on it, directly and indirectly. The number of jobs dependent upon arms exports is far smaller but still substantial-British Aerospace (BAe), the biggest arms company in Europe, generates at least 80 per cent of its sales from exports.
Partly for these economic reasons, and partly for strategic reasons, ministers consider the defence industry to be different-an expression of British sovereignty. And despite an expanding role in multi-national projects, such as the four-nation Eurofighter 2000, the government regards Britain's defence companies as engaged in a Colbertian struggle against rivals in France, the US and elsewhere. The economic logic of the eternal excuse is: "If we don't sell arms to this undesirable regime, somebody else will."
But this moral stain can be removed from western countries in ways that avoid economic self-denial. For this to happen, two lines of policy must be pursued. First, Nato and the EU must establish and enforce clear rules on arms sales. Second, governments must nudge their defence companies into appropriate international mergers which makes the very idea of "national champions"-which need to be aided by fair means or foul-outmoded. Fortunately, there are trends working in this direction.
Nato countries have cut their spending on arms by about 30 per cent since the end of the cold war, yet the real cost of new weapons continues to grow. Not even the US can afford to maintain every sort of military technology within its frontiers. Information technology is making the defence industry more like other sorts of manufacturing and more dependent on diversified global sourcing. There is more "spin on" from the civilian sector to defence than "spin off" from it.
Economies of scale are growing larger. That is why US defence contractors have embarked on an unprecedented wave of mergers. Lockheed and Martin Marietta, having formed the world's biggest defence company last year, are now due to wed Loral, making a behemoth with military sales of $20 billion a year (three times the size of BAe). No comparable rationalisation is happening in Europe: the Eurofighter, costing Britain, Germany, Italy and Spain $60 billion, will have four production lines to satisfy national sensibilities.
In an age of peacekeeping, national armies seldom fight on their own and there is a growing need for Nato troops to use compatible equipment. The coalitions serving in the Gulf war and in Bosnia were handicapped by, among other things, radio systems which could not communicate. EU governments have yet to catch up with these changes. Britain, France and Germany still spend 90 per cent of their arms procurement budgets at home.
Defenders of the status quo argue that the manufacture of weapons really does have an impact on national security: remember the perfidious Belgians, who would not sell Britain ammunition during the Gulf war? But the world and the arms industry have moved on since then. A government should certainly protect a defence company from foreign ownership if the purchaser's country is a potential aggressor. But among Nato allies, such fears are no longer valid: they rely on each other for such necessities as close air support and logistics, so why not also for arms supplies? Britain and France have begun to recognise this: their defence ministries have agreed that it no longer makes sense for each country to manufacture every type of ammunition, if the other does.
Yet EU governments are doing too little to help the industry restructure along pan-European lines. They cling to the Treaty of Rome's article 223, which allows governments to exempt defence companies from EU rules on procurement, mergers and state aid. And each EU member maintains different export control regimes: Britain will export to Indonesia; Germany will not. Such distinctions create headaches for companies involved in collaborative projects: what happens if Indonesia wants to buy the Eurofighter-largely an Anglo-German enterprise?
Britain's GEC-Marconi and France's Thomson-CSF were mooting a wide ranging alliance until February this year, when Jacques Chirac decreed that Thomson-CSF should instead become the core of a national defence-electronics champion. Other defence companies over the past five years have been talking about merging subsidiaries in particular business areas. The model is Eurocopter, which combines the helicopter interests of France's A?rospatiale and Germany's Dasa. But few of these proposed alliances have happened. The planned joint venture between BAe's Royal Ordnance and France's nationalised Giat, for ammunition and artillery, has stalled over the latter's inability to deal with over-manning. The French government has blocked the planned merger of the missile divisions of BAe and France's Matra, because Britain will not guarantee that the new venture will win the contract for a new cruise missile.
So the first thing EU governments should do is bless the idea of full-blooded, pan-European defence mergers. For instance, BAe, Dassault and Sweden's Saab; A?rospatiale, Dasa, and Italy's Finmeccanica; Thomson-CSF and GEC- Marconi; and Germany's Krauss-Maffei, maker of the successful Leopard tank, with the troubled Giat. Given the will, the obstacle of cutting spare capacity could be tackled through trade-offs.
The EU should also use its current inter-governmental conference to revise article 223: governments should be allowed to shield only the most sensitive technologies, such as nuclear weapons and code-breaking. Moreover, the new Franco-German armaments agency should admit other EU members, push for common specifications on equipment orders, and put some contracts out to tender. Above all, the EU should move towards a common export control regime and decide on a blacklist of unacceptable countries.
The point of the corporate restructuring should not be to create European champions that stare across the Atlantic at the US goliaths. US companies are so powerful and so advanced technologically that the Europeans need to work with them. The way to ensure competition in the US and Europe is for their companies to collaborate and, ultimately, to merge. BAe, Dassault, Saab and McDonnell Douglas could form one transatlantic team; A?rospatiale, Dasa, Finmeccanica and Northrop Grumman could make a rival alliance.
Many Europeans fear that such inter-continental dalliance would end in European companies serving as low-tech subcontractors to US masters. These concerns are not to be dismissed. If Europe lost the capacity to make some kinds of weapon, global competition could suffer: the US itself has only one maker of tanks and one of submarines. Furthermore, the US has often made sales of arms-or parts for them-conditional on compliance with its foreign policy objectives. Suppose that, ten years hence, Germany vetoed Polish membership of Nato, on account of Russian objections; that the US, to help its friends in Poland, warned Germany that its planned purchase of F-22 fighters would be blocked; and that there was, by then, no alternative European fighter available.
Such Euro-pessimism may be overdone. European companies are world leaders in some niche technologies. GEC-Marconi supplies some of the avionics for the Lockheed Martin F-22. Britain and France, between them, hold about 35 per cent of the global arms export market. So long as European companies can rationalise themselves, they should be able to negotiate trans-Atlantic alliances from positions of some strength.
The creation of Euro-American alliances would help to curb protectionist tendencies on both sides of the Atlantic. Congress's "Buy America" rules force the Pentagon to purchase many kinds of defence equipment at home. The US's excessively strict rules on technology transfer make it hard for its companies to work on multi-national projects. And even when the administration does choose a foreign weapon, such as the Harrier jumpjet, it has to be made in the US.
The fact that Europe buys six times as many US arms as vice versa prompts some in France and Germany to demand "Buy European" rules. Yet the protection of Euro-champions would erode their competitive edge and harm export performance. The EU armaments agency, however, could help to open the US market by allowing US companies to compete for EU contracts, in return for reciprocal access.
Nato is the ideal body to weld the European and US markets into a single whole-and not only because it is the only multi-national entity that many Americans respect. Nato already has a Conference of National Armaments Directors (CNAD), which struggles to get governments to harmonise procurement requirements. Nato should beef up CNAD, which is strong on technical issues but has avoided politically difficult issues such as common rules on technology transfer or even a code of conduct for arms sales. CNAD should build on such progress as the EU has made and tackle the duplication of R&D between countries; it should promote competition and open procurement; and should encourage technology transfer among Nato members but impede its diffusion to rogue regimes.
In short, a combination of defence company mergers plus tougher rules on arms sales-policed by Nato and the EU-offers a realistic route out of the moral dilemmas of the modern arms trade.
