NATOEurope and AmericaA Military and an Economic Partnership?
Mr. John Weston
Chief Executive, British Aerospace
After 40 years of Cold War and an established and stable pattern of economic and military relationships, the last decade has seen sweeping changes in both the political and military landscapes of the European and North Atlantic alliances. Following the fall of the Berlin Wall, the collapse of the Warsaw Pact, and the dissolution of the Soviet Union, new relationships are now being built through the Partnership for Peace program; new allies are also moving towards full membership in NATO. The grim stability of the Cold War has been replaced by international instability, complete with a rise in nationalism and, in some areas, religious fanaticism. While we may all desire a new world order, we may have to learn to live with significant disorder.
THE EUROPEAN MONETARY UNION (EMU)
This decade has also seen the closer integration of EU core countries and the implementation of a single EU currency system. The recent decision of 11 key European countries to combine their currencies into the Euro is a move of enormous economic significance and one that will affect the relationships between the countries involved, the relationship between Europe and the United States, and NATO.
In economic terms, todays world is dominated by a dollar-based trade bloc led by the United States, a bloc that outweighs, by a significant margin, any other economic bloc. The U.S. currently accounts for 16.1% of the worlds trade and 22.9% of the worlds GDP (inflation adjusted on a Purchasing Power Parity [PPP] basis). Of the free-trade economies, Japan comes next with 8.5% of the worlds trade and 8.95% of the worlds GDP (on a PPP basis). With the implementation of the Economic and Monetary Union, 11 European countries will command 18.6% of the worlds trade and 17.8% of the worlds GDP (on a PPP basis). In other words, the European countries will command more world trade than the United States.
The consequences of this change could be profound. Currently 40% to 60% of all global financial transactions are carried out in dollars, with the nearest competing currencies, the deutsche mark and the yen, accounting for only 10% to 20%. The creation of the Euro will likely produce a real alternative to the dollar as a global trade and reserve currency. Fred Bergsten, a director of the Institute for International Economics since 1981 and Assistant Secretary in the U.S. Treasury during the Carter Administration, has estimated that the resulting adjustments in reserves will call for $100 to $300 billion to flow out of dollars and into Euros. In the private sector he expects $350 to $700 billion to transfer. There are historical precedents for this. During the early 1980s, when America was running a particularly large deficit together with a high interest rate, $230 billion moved from the yen to the dollar, resulting in a 25% appreciation of the dollar against the yen. The inevitable consequence of billions moving from dollars to Euros would be the creation of a strong Euro and a weak dollar, the erosion of American industrys current advantage of having the dollar as the cost basis of world currency, and a boost to Americas competitiveness through the exchange rate.
Bergstens analysis also considers the impact of such change on a number of key economic institutions. The Group of Seven, for example, with the U.S. the largest and most powerful economic partner, would become a Group of Twotwo powerful economic groups plus two or three also-rans. The International Monetary Fund and other international consultative bodies would be affected in a similar way. It will, of course, take some time for these changes to take place; it will be 2002 before Euro bank notes replace all the relevant national currencies. But from January, 1999, the process becomes irreversible.
The countries concerned will face some significant risks. For example, the ability to make interest rate adjustments will be removed from the National Finance Ministers tool box, significantly reducing the control that individual nations can exert over their financial affairs. Countries with inflexible labor markets and relatively high tax burdens are also likely to experience further negative impacts on their unemployment rates, which are already very high. The effect of the Euros introduction will be profound, and has the potential to change economic relationships between Europe and the United States. The impact will also increase as additional countries join the Alliance in 2002. Is this something that should concern us?
And what about the implications for those Central and Eastern European nations that aspire to join the EU? The EU is now the dominant trade partner for most nations in Central Europe. Some 60% or more of their trade flows are focused on/received from the EU, which also provides the majority of the foreign direct investment flowing into the region. It seems logical that several of these Central and Eastern European nations should in due time join the EU.
The nations of Central Europe already face substantial challengespolitical, financial, industrial, and (especially for those joining NATO in 1999) military. EU membership and the Monetary Union will be two other major challengesperhaps difficult ones for nations that have only recently acquired or reacquired effective sovereignty. The immediate impact of the EMU on those aspiring to join the EU will be mixedthere will be some pain from the measures they take to reduce inflation and budget deficits; some gain from reduced transaction costs for the majority of their trade within Europe; and possibly some export trade gain in the short term if the Euro proves to be a strong currency. But the main regional gain from a successful launch of the Euro will be politicalit will give Europe greater self-confidence, which should help the process of EU expansion. In my view, the impact of EU and NATO expansion on the prospects for security and prosperity in Europe will be every bit as significant, and as positive, as the fall of the Berlin Wall.
A SHORT HISTORY OF THE AEROSPACE INDUSTRY
I would like to take a moment now to point out a few instances in the history of my industry that I believe illustrate what can be achieved when both sides of the North Atlantic act together.
The first form of aircraft was the kite, made about the fifth century BC. In the 13th century, an English monk, Roger Bacon, conducted studies that led him to conclude that air could support a craft in the same manner water supports a boat. At the beginning of the 16th century, Leonardo da Vinci gathered data on the flight of birds and anticipated flight developments that subsequently became practical. As well as inventing the airscrew, or propeller, and the parachute, he conceived three different types of heavier-than-air craft: an ornithopter, a machine with mechanical wings designed to flap like those of a bird; a helicopter, designed to rise by the revolving of a rotor on a vertical axis; and a glider, consisting of a wing fixed to a frame on which a person might coast on the air. Leonardos concepts also involved the use of human muscle power. And though many of his concepts were quite unsuccessful in producing flight, Leonardo made an important contribution to aviation because he was the first to make scientific proposals.
The practical development of aviation took various paths during the 19th century. The aeronautical engineer and inventor George Cayley was a far-sighted theorist who deserves to be called the father of aviation. Cayley tested his ideas with experiments involving kites and controlled and man-carrying gliders, and designed a combined helicopter and horizontally propelled aircraft. Francis Herbert Wenham, a founding member of the Royal Aeronautical Society in Britain, used a wind tunnel in his research and foresaw the use of multiple wings placed one above the other. Other early contributors included the Frenchman Jean Marie Le Bris, who tested a glider with movable wings, and the renowned Otto Lilienthal of Germany, whose experiments with aircraft, including kites, ornithopters, and gliders, attained great success from 1894 until his death in 1896, when his glider went out of control and crashed. The many advances throughout the 19th century, especially those of the pioneers Cayley and Lilienthal, laid the foundation for the successful flight by the Wright brothers in 1903.
Later in the 20th century, other European contributions were made to aerospace development. These included the first jet engines, pioneered by Sir Frank Whittle in the UK, and a ramjet model created by the French aeronautical engineer Rene Leduc that he exhibited in Paris in 1938. A jet plane that was powered by an axial-flow turbojet and designed by the German engineer Hans Pabst von Ohain made its first flight in 1939. In the following year, under the direction of the aeronautical engineer Secundo Campini, a number of Italians developed an aircraft powered by a turboprop engine with a reciprocating engine-driven compressor. Germany also contributed swept-wing aerodynamics; the UK produced the worlds first jetliner, the Comet; the British and the French produced the worlds only successful supersonic airliner, the Concorde; and the UK produced the worlds first vertical take-off and landing aircraft, the Harrier.
None of this, of course, detracts from the enormous contributions made by the United Statesby the Wright brothers, Lindbergh, the pioneering of mass-produced civil airliners such as the DC3 and its successors, the leap forward in aircraft systems represented by the Flying Fortress (the B17), the first supersonic flights, the early exploration of space, and Americas finest achievement, placing a man on the moon less than 70 years following mans first flight.
The message I draw from this history is that, on the global stage, Europe and North America progress more constructively and faster when we act together, building upon our respective talents and technologies. British Aerospace has continued this great tradition. We have worked with McDonnell Douglas, which is now Boeing, for more than 30 years, on programs such as the F4 Phantom II, the Harrier jump jet, and the T45 Goshawk trainer. Boeing is now a partner on Nimrod 2000, our new Maritime Patrol system for the Royal Air Force. We are teamed with Lockheed on the JSF fighter program and on the Future Scout Cavalry System reconnaissance vehicle. We are also teamed with Raytheon-Hughes on AIM 9-X and ASRAAM short-range air-to-air missiles.
EUROPEAN AEROSPACE AND DEFENSE INDUSTRY CONSOLIDATION
Currently we are engaged in Europe in a debate focusing on how we will take our defense and aerospace industries forward. We have been impressed by the progress in the United States over the last few years in consolidating United States industry.
Britain has always had a global view, particularly because we are dependent on exports for our economic well being. At British Aerospace, our vision of our industrys future is global too. The U.S. industry is currently dominated by two or three large players. It is our job to make sure that we are part of the most successful of these global alliances. In order for this to come about, however, our customersand in the defense business that means the respective governmentsmust become comfortable with the idea of working with an international defense contractor. The United States is likely to set the pace with respect to how soon we could begin such a process. In the meantime we must continue to do what we can to bring elements of the European industry together. Then, when the day arrives that a transatlantic link can be put in place, there will be a European entity with which the U.S. can deal as an equal partner.
Since I last addressed a NATO Workshop on the subject of the possible integration of the European industry, we have made considerable progress. The program to turn the Airbus operation into a normal company is proceeding on schedule, although the difficult phase of negotiations on valuation is about to begin. We have also spent time discussing the request posed in the trilateral declaration from the French, British, and German governments for proposals for the integration of the industry on a wider basis. The report that we were able to submit in March of 1998 contained much promising progress. We were able to tell the governments that we had a joint view of the scope of the company that might result; a joint view of the management structures; and, in the long term, a joint view of the required ownership structure.
Along with this considerable progress, however, there remain some significant obstacles, largely associated with the question of how we will get from here to there. We were initially disappointed that the French government indicated that they saw continued state shareholding in the French industry for the foreseeable future, but the recent announcement by that government of plans to open Aerospatiales share capital is an indication of how seriously the European governments wish to see progress on this issue. The government deliberations also now include the Swedish, Spanish, and Italian governments.
Another issue that demands thought is how the defense and aerospace industries of the new NATO members and other nations in Central Europe will develop their role within the wider European partnership.
It will be interesting to see whether the recently announced merger of Daimler Benz, Germanys most prestigious industrial company, and Chrysler, an important American company, has any impact on the approach to consolidation in Germany. The merger is certainly an indication of changing relationships across the North Atlantic, and a further move in German attitude towards the shareholder-value culture of the Anglo-Saxon nations.
We are also watching with interest the U.S. governments deliberations on the future of Lockheed and Northrop-Grumman. It would appear to European eyes that the U.S. is now questioning whether the national industry-consolidation story has gone far enough, and where it will look for further structural moves. It seems inevitable that the next steps for the U.S. giantsLockheed, Boeing, and Raytheonwill be in the direction of the more significant European players.
With the profound changes we have seen in both our security and our economic institutions, it is worth reflecting on what the next ten years may bring. Will the next decade of change outstrip the remarkable changes of the 1990s? Will we properly exploit the opportunities that NATO and EU expansion will offer for increased prosperity and security in Europe? Will the new economics of the new North Atlantic partnership eventually provide a backdrop to the NATO military alliance? Should we begin to think about a North Atlantic free trade area that consists of an enlarged European free market area combined with the North American free trade area? After all, NAFTA stands just as well for the North Atlantic free trade area as it does for the North American free trade area.
STRENGTHENING AND IMPROVING THE U.S.-EUROPEAN ALLIANCE
The events of the Second World War and of the Cold War remind us that the U.S. and Europe need to think about their economic and security policies holistically. While the NATO Alliance has been remarkable testimony to the strength of our mutual resolve and what can be achieved through it, the more recent lessons of the Gulf War, Bosnia, and the new Asian security picture that is emerging in the wake of Pakistans and Indias nuclear tests teach us that future threats to our security and economic well-being will not be restricted to the transatlantic area. They also teach us that we should not be afraid of thinking about moving our tried and tested transatlantic relationships onto a new and higher plane as we confront the challenges of the next millennium.