Europe's Non-Deal of the Century

As Europe picks over the ruins of the mega-merger that would have created a world-beating new aerospace and defense giant, questions are being asked about the inglorious role that the European Union played in the fiasco. The European Commission’s failure to champion the $50 billion tie-up of Franco-German EADS, owner of Airbus, and the United Kingdom’s BAE Systems is being seen as a crucial factor in the deal’s collapse.

The integration of the two high-tech aviation and avionics leaders had looked like an EU-inspired blueprint for industrial success. For several years, EU leaders have been urging the consolidation of Europe’s defence industries, so the proposed deal – which originated in the corporate boardrooms of EADS and BAE Systems – looked like an answer to its calls. Yet both the Commission and the European Parliament kept silent and withheld the political support that might have ensured that the deal went through.

A timely reminder by EU leaders of the strategic importance of the aerospace sector would have helped allay many of the misgivings in Berlin, and to a lesser degree in London, that sank the deal. Aviation, like defence, is the sharpest of the R&D cutting edges available to advanced countries, and regularly produces key technological breakthroughs. Nationalist squabbles over the details of the merger would surely have been attenuated by a statesmanlike intervention from the Commission in Brussels.

It was therefore a bizarre coincidence that the merger’s collapse came on the day that the Commission unveiled its new industrial strategy for regaining Europe’s competitive edge in the face of Asian and North American competition. One of the most powerful arguments for the EADS-BAE marriage had been the expectation of industry analysts that within 20 years China will challenge Airbus and Boeing in the global aviation market, while also creating a powerful new defence industry. That scenario now looks all the more likely.

Why, then, did the European Commission remain silent? The answer appears to be that it feared negative reactions from the three governments involved in the merger talks, and believed that its own authority would suffer from any public rebuff. The persistent rumour circulating among defence company executives is that soon after news of the proposed merger leaked out, the weekly commissioners’ meeting chaired by José Manuel Barroso was enjoined to silence on the matter in order to avoid any potential dangers.

Whether true or not, the important point is that the merger deal transcended national considerations, and the European Commission had a duty to involve itself. The EU’s executive body is meant to be the driving force behind Europe’s efforts to revive laggard industries and fight to reverse the long-term economic decline that the eurozone crisis appears to presage.

Nobody is arguing that the Commission is responsible for the deal’s unhappy end – only that it should have rallied support for it. The significance of the merger’s collapse is now becoming clear to observers across Europe, especially in Germany, where the media have been extremely critical of how “negative politics” sealed the proposed merger’s fate.

With the EU in the throes of the seemingly endless eurozone sovereign-debt crisis and facing a looming debate over its future decision-making architecture, the end of the EADS-BAE merger will be no more than a footnote in the history books. But it may be said to mark the point when the European Commission openly acknowledged that it has become little more than a secretariat to EU governments. That is a far cry from the political powerhouse that some Europeans fear – and for which others still hope.

For additional reading on this topic please see:
The EADS-BAE Merger Talks Signal European Ambitions
Towards an EU Security Industry Strategy
Study on the Industrial Implications in Europe of the Blurring of Dividing Lines Between Security and Defense