Sat, 08 Apr 2000

When will 'Fortress Europe' come into being in the defense sector?

By Paul R. Michaud

PARIS (JP): After "Fortress America", will "Fortress Europe" be far behind? Although the idea of merging all of Europe's major defense contractors into a new super defense group sounds impressive on paper, will it ever become a reality?

As far as Philippe Camus is concerned, the European Aeronautics Defense and Space Company (EADS), as it is formally called, will see the light of day later this spring as scheduled.

But perhaps Camus, the chairman of Aerospatiale-Matra and future co-chairman of EADS, might take a leaf from another Camus -- Albert, no relation of his, the great French novelist awarded the Nobel Prize for Literature in 1957.

The second Camus was never one to exude too much optimism, but had instead a healthy appreciation of the tragic nature of man, which he noted in the myth of Sisyphus, a former Corinthian king who was condemned to roll a stone up a mountainside, only to see it fall down again just as it reached the top.

Despite appearances, it was hardly a pessimistic view of the world; indeed, it was considered more an appropriately pragmatic assessment of an otherwise absurd situation. It was a position optimistic in its own way as Sisyphus never gave up, always picking up his stone and rolling it up the mountain one more time.

There have been pessimistic forecasts about EADS, including Philippe Camus' own in February when he admitted that EADS might have to wait until the fall to go through with the merger. However, he said on March 23 that EADS' three constituent companies -- Aerospatiale-Matra of France, DASA of Germany and CASA of Spain -- would come together "before summer". He also said the new defense group would be able to hold its first board of directors meeting and have its stock publicly listed by mid- July.

It is certainly an overoptimistic appraisal of the situation of EADS, tragic in its way as we will see. It needs more time to come to grips with a number of factors which will determine whether it sinks or swims as a major world industrial group.

For the moment, EADS seems so certain of being able to stick to its original game plan that it has already named the three banks which are to handle the public listing of its stock: BNP Paribas which is to be in charge of individual stockholders, and ABN Amro Rothschild and Deutsche Bank, which are to deal with institutional investors.

The issue will be handled in two tranches, says a spokesman for EADS, with the first reserved for institutional buyers, the second for individuals.

If only a few weeks ago Camus was predicting that EADS would take four months more to get off the ground, it was in large part the result of his expectation that the European Commission would be opening an in-depth investigation into the antitrust implications of the creation of EADS.

The EC wanted to be sure that the new group would not be in violation of usually stringent European Union antitrust regulations for certain of its activities, fields in which a merger would give EADS an unfair advantage over other companies.

But, at present, the EC has notified EADS only that the paperwork it has presented is "incomplete", and that before taking a further decision it needs "additional information, given the extent of the activities concerned".

The notification of the milder-than-expected decision was made to EADS on March 22, and visibly did not deter Philippe Camus (and EADS' other future co-chairman, Rainer Hertrich, the present head of DASA) from making their optimistic joint announcement the following day according to which the new paperwork would be quickly forthcoming. If any delay were expected, it would be for no longer than a month, and that the EC's green light was expected to be given by April 28.

Still, EADS has some important structural problems it must tackle before undertaking a full-fledged merger -- problems, this writer understands from European Commission sources, which were the origin of the EC's decision to undertake its "deep" investigation into the EADS merger.

That was before the EC was persuaded by Camus and Hertrich that it would be best to allow EADS to continue according to schedule and not have to undergo a lengthy investigation by the EC.

The major structural impediment to EADS' becoming operational is one which one day may certainly prove to be its major selling card -- its pan-European structure.

But this factor will, for the moment at least, if not for the coming months, prove to be a major obstacle that the EC would have liked to study more closely.

As matters stand, European ministers from France, Germany and Spain, plus others expected eventually to associate themselves in one way or another with EADS such as Britain, Italy and Sweden, were unable to hold to their self-imposed deadline of last December to establish a new set of regulations to replace the different rules governing, for example, the export and the exchange of military secrets.

Until a new set of guidelines is handed down, EADS cannot be expected to function as a truly transnational enterprise.

The desperately needed harmonization of the rules and regulations applies in particular to Germany and France, the two countries that effectively control EADS through DASA and Aerospatiale-Matra. At present, a German national is forbidden from working on a French defense project, and, moreover, one country, according to present regulations, cannot effectively export its technological know-how to the other.

And even if it wanted to, and chose to apply to national authorities to do so, the procedures in either country are such that it would take years before a workable solution could be handed down.

An absurd situation indeed, and one which Philippe Camus puts on the back of the national governments.

"The actions presently being developed by we industrialists need necessarily to be accompanied by appropriate actions of behalf of our national governments," he said.

Does it not contradict EADS' insistence that the EC -- which indeed is in itself a superior form of government as it transcends national governments -- forgo any effective investigation into EADS' very real structural problems?

The writer, a former Harvard lecturer and U.S. State Department official, has reported out of Paris for the past 25 years.