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EADS-BAE Failure Shows Road to United EU Ends in Berlin

In effectively scuttling the planned merger between European Aeronautic, Defence & Space Co. and BAE Systems Plc (BA/), Germany demonstrated the road to European integration runs through Berlin.

As Chancellor Angela Merkel’s government has shown in almost three years of managing the euro-area financial crisis, the interests of German taxpayers trump strategic designs --even in defense, where German spending is about half of Britain’s as a share of its economy.

“It highlights a lack of ’smart politics’, which is a key condition for ’smart defense,’” said Henrik Heidenkamp, a German research fellow at the Royal United Services Institute, a London-based independent security-research group. “Politicians, at least in Germany, do not perceive their European defense industrial base as a strategic element of their security and defense posture but first and foremost as a subject of national economic influence.”

France and Britain were unable to overcome German concerns about being marginalized in the merged company whose operations would have been run out of Toulouse, France, and London, shutting out Munich, people familiar with the matter said. After the companies abandoned the talks yesterday, BAE Chief Executive Officer Ian King said there was more “understanding” with France than Germany.

Letter to Employees

In a letter to employees, EADS’s chief executive Tom Enders, a German, said he “never expected to find such opposition against the deal, in particular not in Berlin.” He applauded “strong efforts” by the French and U.K. governments to reach agreement.

German Deputy Economy Minister Peter Hintze said the failure of the talks between EADS and BAE were in Germany’s interest, Spiegel magazine reported.

“I think that Germany’s industrial interests are best protected in this form of having a strong production chain from research, development to industrial production,” Hintze was quoted by Spiegel as saying. A ministry spokesman declined to comment on the report.

Two German officials asking not to be named pushed back at assertions that Berlin torpedoed the deal. The U.K. rejected France’s demand to keep open an option to increase its stake above 9 percent, they said. Germany was open to the option, as long as it maintained parity with France, they said.

EADS (EAD) shares climbed 0.5 percent to 27.62 euros at 9:14 a.m. in Paris, extending yesterday’s 5.3 percent gain. BAE rose 0.5 percent to 322.5 pence after falling 1.4 percent yesterday.

‘Sad Failure’

Germany is the European Union’s most populous country and its largest economy. On military matters, it lags nuclear-armed Britain and France, in both conventional hardware and force projection. France and Britain led NATO’s 2011 air campaign to overthrow Muammar Qaddafi in Libya. Germany sat it out.

“This sad failure shows you how much national rivalries still account for in Europe,” said Philippe Moreau-Defarges, a researcher at the Paris-based French Institute of International Affairs. “But it’s also a clash between an Anglo-French outlook that is more open to the world, and a German view that is more turned inward to the continent.”

According to the Stockholm International Peace Research Institute, Germany spent $43.5 billion or 1.4 percent of its economy on its military in 2011. The U.K. and France each spent $58 billion. That amounted to 2.3 percent of the French economy and 2.6 percent of Britain’s.

France and Britain are also working together to develop the next generation of aircraft carriers and drones.

10-Year Project

“The German government, compared to the French and the British governments, is always uncoordinated,” said Charles Grant, director of the London-based Centre for European Reform. “You have different ministries, different parties with their own agenda and a structurally weak leadership in the sense that the chancellery doesn’t have the power over the system that the Elysee has or the British government has. And Merkel has not been a great visionary leader.”

The failure of the planned merger announced Sept. 12 follows stalled efforts to increase military cooperation in Europe. A 10-year-old project to create a rapid reaction force is still incomplete. European forces in Afghanistan each operate under different rules of engagement.

U.S. Defense Secretary Robert Gates, in a parting shot before leaving office in June 2011, said NATO risks “collective military irrelevance” unless Europe contributed more to the alliance’s operations.

European Malaise

“The entire malaise of European foreign policy is encapsulated in this decision,” said Jan Techau, director of the European Center of the Carnegie Endowment for International Peace in Brussels and former researcher at the NATO Defense College in Rome.

The two companies had offered the governments special shares that gave them some veto rights. France, which owns a 15 percent direct stake in EADS, would have kept a holding of about 9 percent. Germany was granted permission for an equal stake, even as Enders sought to limit state involvement.

Just as the companies were announcing the collapse of their talks, French President Francois Hollande and Spanish Prime Minister Mariano Rajoy were complaining about what they saw as German foot dragging on another issue -- bank regulation.

They were asked about attempts by German Finance Minister Wolfgang Schaeuble to keep Germany’s regional banks out of the control of the prospective supervisor under the European Central Bank.

“The regulator must be credible, and to be credible it must have a wide field to cover,” Hollande said -- “even modest banks.”

To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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