DAMON WILSON:  My name’s Damon Wilson.  I’m vice president and director of the International Security Program.  I want to thank Ken Huffman and Magnus Nordenman on our staff for helping to put together today’s event.

Today our topic is “The Transatlantic Defense Industry in the Global Marketplace,” a new outlook after the financial crisis, and I’m delighted to be joined by an impressive lineup of strategic thinkers on these issues.  I want to welcome Nick Witney of the European Council of Foreign Relations, and formerly of the European Defense Agency; Vago Muradian of Defense News; and Marshall Billingslea of Deloitte, and formerly of NATO.  Jacques Gansler, who’s on our board of directors, wished he had been able to join us today and sends his regrets.

But I’m also delighted that we’ve got a range of strategic thinkers in the audience with us today.  In fact, there are some of you that we’ve had ongoing conversations with about these issues.  So we want to make sure we have time for discussion to benefit from your insights as well.

The Atlantic Council has a long record of doing work on this set of issues, of defense industry issues.  In recent years the Council has hosted two major conferences on DOD business transformation and how industry could respond better to fill the needs of a nation at war with limited resources to spend on large and long-range procurement projects.  The Council has also hosted senior European procurement and defense industry officials for meetings with their U.S. counterparts and outside of government, as well as panel discussions on export control issues and U.S.-European defense technology cooperation.

With today’s event, and another one in October, October 21st, that we’ll be doing with SAIS and CSIS on defense industry issues in the context of the U.S.-EU relationship, we want to begin to broaden this discussion.  There have been profound changes in the security environment which are being reflected in the militaries of the United States and Europe.  The concept of network centers of warfare, the systems and platforms supporting them have matured considerably.  Unmanned systems are increasingly important in both military and civilian operations.

Many militaries are also reconfiguring themselves away from big force-on-force scenarios and towards a future where they’ll be asked to take on complex small-war tasks and support civilian governments during crises.  Defense industries are already re-inventing themselves to meet these security challenges, and more importantly, incorporating new areas of knowledge and industrial sectors into the industrial base, such as information technology companies, small engineering companies.

In order to harness these emerging technologies, profit from them, while at the same time address – preparing for the mounting fiscal challenges headed our way, the trans-Atlantic defense industrial base is primed for major change in coming years.  The outcome of this change will not only change the face of the industrial base but could also have important implications for the trans-Atlantic link, as well as U.S. and European security.

We want to begin to look at the longer term issues to seek to identify some of the political, economic, and social trends that will impact defense and security industrial base in the near to medium term.  We want to consider here at the Atlantic Council whether we can be part of helping to develop a roadmap for policy solutions that could aid the defense community in creating a healthy trans-Atlantic defense industrial base ready to support U.S. and European governments facing a broad array of national security challenges.

Political and economic trends over the past decade have exerted countervailing pressures on the trans-Atlantic defense industrial cooperation.  As the U.S. defense budget has grown, the American defense industry has increased its global market share, while consolidating to a smaller number of players.  At the same time, despite continuing obstacles of export controls and tech transfer, there has been greater cross-border defense cooperation, resulting in an increased European share of the U.S. defense market.  But as a consequence of the global financial crisis, many countries are set to reduce defense spending.  They face pressures to protect domestic manufacturing jobs.

So we want to explore today how the new reality will affect the trans-Atlantic defense industry.  What does it mean for the industry’s future place in the global marketplace?  Is there a role for a trans-Atlantic defense initiative in an alliance that’s struggling with Afghanistan and the future of NATO?  How do we factor in the increasing role of the European Union as a security actor, including the commission increasingly as a standard-setter or regulator of markets?

We’ve invited Nick Witney today to provide an important European perspective on the outlooks and trends.  Nick joined the European Council on Foreign Relations as a senior policy fellow after serving as the first chief executive of the European Defense Agency in Brussels.  He was chosen by Javier Solana in January 2004 to lead the project team charged with developing the concept and blueprint of the agency, and he was appointed to establish and run the agency for its first three years.

His previous career, after study at Oxford, was spent in British government service, first at the Foreign and Commonwealth Office, and later with the ministry of defense.  He served in Lebanon and Jordan, in Baghdad, and spent four years here in Washington as private secretary to the British ambassador.  Within the MOD his career covered a wide range of responsibilities, including planning and finance, defense exports, nuclear policy, as well as the new Labor government’s 1998 strategic review in industrial policy.  His last job before Brussels was as the MOD’s director general of international security policy, where he was responsible for NATO and EU policy as well as missile defense.

We’re delighted to have you with us today, Nick, and we’re going to ask Nick to kick off this discussion with this perspective, and then I’ll introduce our next two commentators.

NICK WITNEY:  Damon, thank you very much.  Is this mike audible at the back?  Bad luck.

I’m just going to think a few things, I think inspired by the title of this seminar, a few remarks about after the financial crisis, and then a few remarks about the trans-Atlantic defense industry.  I think what I want to say mainly about after the financial crisis, at this anniversary of the death of Lehman’s, I suppose, more or less, is that the financial crisis may be over in the sense that none of us thinks the global financial system is going to collapse any more, but the economic crisis most certainly is not.

I was reading on the plane on the way over a very interesting thing put out by a think tank in Brussels, an extremely reputable and I think very important think tank in Brussels called Breugel.  I do exhort you to have a look at their Web site.  They’ve done a sort of series of reviews on – they specialize in economics and these are papers directed to the new commission, which doesn’t exist yet but will come into office starting next year.  It is fairly gloomy.

They point out the new commission is going to inherit the return of mass unemployment, with unemployment rates above 10 percent, going up to 15 or 20 percent in some regions.  Industrial production shortfalls of a magnitude not seen since the Great Depression.  A depression-deep crisis in parts of Central and Eastern Europe.  A profound deterioration of public finances.  I think it’s those words, profound deterioration of public finances, which are going to ensure that defense spending in Europe in the coming years takes a bath.

I mean, I’m not an economist but I am a Briton and I am aware that the U.K. is now saddled with a generation’s worth of debt that, as it is the U.K. defense budget is in dire difficulties, and that in an unguarded moment what we all assume will be the new Conservative government have already mentioned the possibility of a 10 percent cut order of magnitude in British defense spending.  So defense spending Europe will take a bath.

That needn’t be quite as alarming as it sounds.  Contrary to the general U.S. perspective, defense spending in Europe has actually held up fairly well since the turn of the century.  Big peace dividends in the ’90s, of course, but we’ve spent roughly 200 billion euros a year collectively on defense since then and that’s held up tolerably well.  U.K. and French budgets individually still outstrip the Russian defense budget in current dollar terms.

None of this is anything like the scale of U.S. defense spending, but from another perspective it’s not a bad sum of money that’s currently being spent.  So we’re starting from a relatively high base for these cuts that will follow.  And there is plenty of scope within that spending to spend the money better.  I’ve spent a number of years banging on about the way in which Europeans have spent this chunky sum of money on the wrong capabilities, the platforms, and not the new network-centric capabilities, or the communications, or the ITAR assets that are actually needed by modern operations.  So there’s plenty that can be done there.

We’ve spent money in Europe on keeping nearly 2 million men and women in uniform, which is about half a million more than you have in the States; squeezing out investment spend so that Europeans spend only about a sixth of what Americans do in defense budget terms on research and technology.  Just over 20 percent of European spending goes on armaments and research, in contrast to your own figure, which is closer to 36 percent, I think.

There’s massive duplication in the defense industrial base in Europe, from literally tens of wind tunnels dispersed across the continent, all of them under-utilized, to 23 different kinds of armored fighting vehicles, et cetera, et cetera.  So those are two reasons why if we reacted in Europe the right way to cuts in defense budgets, if we decided to make this crisis an opportunity, the results needn’t be too bad.

What would we have to do to make this crisis an opportunity?  Well, we’d have to move money out of manpower.  We’d have to get rid of an awful lot of bodies, increase investment, and do more things together within the European defense industrial base.  We’d have to make a reality of that term, open the markets within Europe.  Some steps have been taken but there’s a lot more to be done in that.  More defense industrial consolidation.

Well, are we going to do that?  Probably not, or not to the extent we should.  Again, for two reasons.  I think one is because these things are always so much easier to do in an upturn, when there’s money around and the losers aren’t actually losers, they’re just smaller winners than the real winners.  Everyone’s going to be hunkered down; everyone’s going to be busy protecting their own jobs.

Protectionism is going to be increasingly the watchword, I think.  After all, defense spending is one of the few last sort of real assets of pork left to governments in Europe, indeed elsewhere, where you can save jobs in marginal constituencies, and these temptations will be rife.  And there’s not going to be money around for the major collaborative projects which are normally necessary if you want to spur and encourage defense industrial consolidation.  It doesn’t help that the flagship defense collaborative project, the A-400N, should be in such disastrously bad shape at the moment.

Then the other thing that will hamper the sensible response to this budgetary crisis is of course the general political mood, which is not great in Europe at the moment.  I mean, in terms of European endeavors.  The European Union is suffering from, unsurprisingly, from continued indigestion, from nearly doubling in size in the space of the last five or six years.  On defense the Afghanistan mess is having a profound effect on public attitudes in Europe.  There’s always that lurking danger that the consensus will shift in favor of the big Switzerland option.  Those of you who’ve read the German Marshall Fund Transatlantic Trends publication of a few days ago will have seen the evidence of Central and Eastern Europeans falling out of love with the U.S., falling out of love with the idea of doing anything much other than stay home and worry about the Russian bear.

And there’s not fantastic leadership in Europe right now.  The British have decided to confine themselves to some sort of self-imposed irrelevant exile, and the Franco-German motor, which is normally relied upon to haul Europe out of these situations, is simply not working under the current pair of leaders.

So it’s not an optimistic scenario, but just to, as I always do, grope around on these occasions for rays of sunlight, I do think that this time we will get a Lisbon treaty.  I do think that will be useful in itself, and even more useful in terms of putting an end to what has been a decade of bad-tempered wrangling about institutions in Europe.  I think that will give a surprising psychological lift in Brussels to those who try to make European solutions work.  And hopefully it will enable us to get some better leadership with the new top jobs that the Lisbon treaty will create.  But none of this takes away from the fact that defense in Europe is facing a number of very lean years.

Just a few closing words on the trans-Atlantic defense industry, which is a construct which I’m still not quite sure whether it really exists.  Can you talk about a trans-Atlantic defense industry?  Yes.  European firms have followed the money and are much more present in the U.S. market than they were.  I was struck reading a respectable defense journal recently which lists the 100 top international defense companies, find that BA Systems is now, heaven help us, number two in the world.  But we all know that it’s there in the U.S. market as an investor.  What it gets out of its U.S. acquisitions is money, and that’s about the limit of it.  It doesn’t get technology, it doesn’t get the synergies that would come if we didn’t have a system which imposed the sort of technological iron curtains down the middle of the Atlantic.

It’s also true, of course, that there have been a significant number of major awards of contracts to U.S. companies.  I can think of about four significant things in the last few years in terms of – all of them I think in civil aerospace in the defense domain, and that’s great.  It’s a pity that the U.S. 101 is looking poorly at the moment.  It’s an even bigger pity, of course, that the air tanking award to Airbus was pulled, which is a profoundly totemic issue in European terms.  I’ll come back to that in a moment.

So European companies will certainly continue their policies of trying to follow the money, trying to get as much out of the Pentagon budget as they can, but I think that another trend probably at work, which will be Europeans paying a bit more attention to their concerns, the worries will be technology dependence because of the levels of under-investment in research and technology that I’ve mentioned.  There is an increasing concern that we’re just losing the bubble on a whole series of important technologies, and I think that the increasing efforts made, at least to try to identify the gaps and maybe fund them, there will be increasing concern about the constraints of operating with equipments which are – not operating but in commercial terms manufacturing equipment with ITA subject components, and I think there will be increasing interest in trying to invent ITA-free systems, difficult though that will be.

I think we’ll see more by European emerging in the next two or three years.  I think we may see – we’ll certainly see a lot more effort to export.  That’s the magic way to square the circle of fallen domestic demand.  France obviously had some recent renowned successes.  I was surprised in preparing for this event to discover that the Germans are actually out-selling both the French and the British these days in export markets.  Perhaps I shouldn’t have been surprised.  And of course Europeans are always ready to go where Americans may not be ready to go, some cases I think blamelessly in terms of Britain’s done very well out of selling to Saudi Arabia, which I would regard as a very reasonable thing to do.  Perhaps much more controversially potentially I expect that – not immediately but in the next two or three years we’ll hear more about the China arms embargo again.

So all these will be, I think, a reaction to the crisis of trying to retain some sort of vestiges of European independence on the other side of the Atlantic, to try to go a kind of European route.  I think those responses are logical but obviously sub-optimal.  I spend enough time reading The Economist and The Financial Times to feel that a better way to go would be the broader North Atlantic defense industrial space.  But whether we can feel we’re making serious steps in that direction is actually very much in American hands and will turn on very much the way the – I believe the current debate about export controls and technology transfer goes.  Europeans will react to that, whether it’s encouraging or discouraging.  And that tanker deal again, which will be totally totemic in terms of feeling of access to the U.S. market.

And I’ve probably already spoken longer than I should have, so I will shut up.

MR. WILSON:  Thank you, Nick, thank you very much.  Thank you for that perspective.  I think portraying the picture of the indigestion of enlargement, the potential protectionism resulting from the financial crisis, the Afghan mess producing the Switzerland options, and the leadership gaps, I guess to be polite, as well as impact of issues like the tanker deal I think you posed in your opening the important question, is there a trans-Atlantic defense industry.

I want to turn next to Vago Muradian, as the editor of Defense News and one of the most astute observers about trends in this set of issues, to address some of these questions that have come up.  Vago is the editor now of Defense News, but before joining Defense News he was managing editor of Defense Daily International, and the business and international reporter for Defense Daily, where he covered a wide range of military and industry issues, including military procurement and mergers, antitrust policy, acquisition reform, and export controls.

He joined Defense Daily from Air Force Times, where he covered procurement, air mobility command, operations in Somalia, Zaire, Europe, and Haiti, and before that served as Defense News land warfare reporter.  He started his career inside the Army and has a bachelors degree from George Washington University.

So Vago, we turn to you to pick up where Nick left off.  Is there a defense industry?  How does this debate of the future of NATO, the future of the EU impact the concept of a trans-Atlantic defense industry?  Does it matter?  How much do U.S. decisions on specific issues like export controls, the tanker deal impact this?  What’s the result of increasing competition from BRIC countries in the global marketplace, and does that have parallel pressures on the trans-Atlantic defense industrial cooperation?  But let me turn it over to you.

VAGO MURADIAN:  Damon, I’m honored to be on such an august panel as just a journalist.  Anybody who knows me knows that I spend a lot of time thinking about this and will doubtless regret what I say today and modify my views for the future – but as more information comes in.  Reporters can always do that.  They can always rewrite the story you wrote yesterday in a new way tomorrow.

But look, budgets are very, very strong.  Rising tide lifts all boats, and all boats really have been lifting.  No matter what country you go to, there’s been added spending on war costs.  The question is whether or not that’s eating at strategic reserves for the future, and most importantly, the simple reality that on several fronts we’re in uncharted territory.  The biggest uncharted territory is the staggering size of the budget deficits worldwide, particularly in the United States.

Interest rates are low.  If interest rates increase and the debt payments expand, it will start to crush everything in your budget, so that is going to be a forcing function, I think, on everybody.  I think central bankers will try to control interest rates, but history has proven that that’s not always do-able and that the aftermath of having failed and incurred vast amounts of debt without having any palpable way of paying for it comes back to bite you.

You can look at the green chutes now and just say that’s stimulus spending, and cash for clunkers and everything that has a short-term gain, it will succeed if everybody sort of has a positive economic view.  Spending returns and then jobs return with it.  Nobody knows whether or not the next calamity is around the corner or not.

But more broadly, if you look at U.S. defense spending trends over the last 50 years, you basically peak just north of $500-something billion, and you trough around 360, 380.  Anybody who thinks that we’re going to stay steady-state at around 540 has got to have their head examined because this is a cyclical exercise.  I think that it may throw the curve.  We may continue spending for some time.  I’m one of those people who just does not really see that that is possible and tenable over the long term.  And I may be totally wrong about that.

Obviously if there’s another attack, all this stuff goes out the door, and I think that everybody really figures out what’s next and how do you try to figure out if you can find more money.

Speaking of defense industrial integration, I think that the Bush years will be seen by many as kind of a watermark, and certainly something that folks would want to see more of.  They were, in NSPD 19, a whole bunch of things that happened very, very early on to just sort of grease the cooperation skids with our closest allies.  There was the presidential directive late in the term.  They picked French tankers, Franco-German helicopters, Anglo-Italian helicopters, Italian transport planes, French radios, armor from all over the world who could supply its South African land vehicles, and companies like BAE-Finmeccanica, EADS and a number of others got important technological business, and you could even throw Thales in that category I think managed to do some buying, even though everything was named Freedom Fries.

Critics, however, countered that the Pentagon had pretty much shelved all of its reservations, was blatantly rewarding allies, and at the end of the day decided to buy subsidized products ultimately without really giving much consideration as to their source and as to the ramifications of it.

For defense industrial cooperation to happen, you need programs.  You need programs of big enough mass and enough technological sophistication to spread the wealth around.  The problem is that when budgets start to come down, and maybe come down very, very hard and very, very fast, I’d like what, Nick, your point about what the Tories are doing.  I think that the Tories would love to increase defense spending.  The question is whether or not they’re going to be able to increase defense spending, and obviously this sort of self-imposed exile that they’ve been in, which will span another year after they take office until they finish the strategic defense review.  So that self-imposed exile, you could argue, is happening exactly at that time.

As the spending reduces, you’re going to have political cries from all sides – hey, we’ve got to protect our industries, protect our niche capabilities.  And then I think that a particular danger is that, as Nick pointed out, this makes foreign markets much more attractive, and European industry will try to compete obviously in places where U.S. industry can’t compete.  But European industries also tend to compete in a different way, especially after having lost several times.

By the way, I mean this non-judgmentally for anybody from DSO or anybody else.  But DSO did not win a number of very important competitions, and when it came to the Brazilian competition, was like we will give you all.  So this sense of we will give you all the technology in order to win the deal I think is one of these bizarre little things that actually cuts your own strategic throat over the long term because these technologies have been built up over a long period of time, on the backs of big programs which are not any more extant.  At the same time, pissing off the United States, which has a rather dim view of folks going out there and proliferating the technology.  So it’s like sort of a perfect lose-lose situation if you can get yourself into it.

Obviously if you think that you’re not going to sell your product anywhere else, sadly I think the deh-so guys realized that since the French government told them that they have to make a twin-engine fighter instead of a really, really good single-engine fighter, they can blame the government for that and why the French will be buying one Rafale at a time as far as my kids graduate from college.  They’re eight and 12 right now, so you can imagine how much longer they’ll be delivering at the rate of five a year.

As budgets drop, then you get into rather peculiar choices.  Are you going to ensure that your capability above all is more important?  Are you going to protect your industry?  Are you going to try to pick a middle route?  You can look at France as having a very, very – still a very, very full-featured defense industrial complex that can satisfy most of its needs, although large chunks of it are getting long in the tooth.

Britain is trying to do a defense industrial strategy where it protects certain key components of it.  Lord Drayson is back on the U.K. defense industrial scene, but I’m not necessarily sure if the next 24 months of inaction is really going to cater to his character, for anybody who knows him.

Sweden is an interesting case study, a country that for 9 million has a defense industrial capability that’s literally staggering, and yet the Swedish government has decided that in its reform moves the most important thing is the projection of Swedish interests worldwide, participating in global operations, moving away from sort of a home guard military, on a flat budget.  So after meeting with Sweden’s leaders – thank you very much, General Anderson, I appreciate that – the key thing is the Patria deal, where Sweden for the first time looked to its neighbor for the future of its armored vehicles, in my view effectively putting the pistol to Hagalund’s head and shooting it.  The only reason why Hagalund has any global industrial reach is that this extremely savvy customer, that includes the FMV, buys products from them.  So it’s going to be very, very, very interesting.  Patria, for anybody who cares, is 73 percent owned by the Finnish government, so it’s traded one form of subsidization, one could argue, and willingly accepted the other, which can just satisfy its needs for less money.  Ultimately there’s a cost.  It just depends on what sort of risk you put on that cost.

This whole notion that ultimately – and by the way, I’m a very, very big believer in trans-Atlantic cooperation, integration internationally.  I think that nobody has a monopoly on best ideas.  However, it’s a little bit like globalization.  We’re not really sure where globalization takes you on defense products ultimately, and I think that the jury is very, very much out.  For us as consumers, no, it doesn’t matter where my dumbbells are made or where my iPod is made.

By the way, if one other person tells me about the sort of the majesty of the iPod idea, I believe the iPod is a German idea that was dug up by a couple of guys in California, engineered by guys in Singapore and Taiwan and manufactured in China.  So I’m not really necessarily sure how many hundreds of thousands of American jobs are totally dependent on the iPod idea, which wasn’t really ours anyway.

So it’s not clear to me that everybody in this entire defense industrial food chain can keep buying what’s best ad infinitum, and there I put the United States in this category.  Whether our allies oftentimes want to admit this or not, the United States is really the backbone, the global infrastructure of military operations worldwide.  Whether it’s famine relief, whether it’s humanitarian assistance, disaster assistance, or just going out there and just beating the hell out of somebody, the United States is that backbone, whether it’s for strike, whether it’s for logistics, whether it’s for command and control, satellite coms, you name it.

Most countries – I think it’s interesting that even sometimes specialists audience don’t recognize that the reason why some countries have tankers and submarines, the submarines are there to train their ASW forces in the kind of threats they might likely see, and the tankers are there so that all of their aviators are trained and ready to go when a big operation happens and the United States hauls 250 of its tankers some place and sets up these massive air bridges.  These aren’t jobs for four tankers or six tankers or 12 tankers working together, but far, far larger and more robust capabilities.

So the question is, and something that I think is driving Ash Carter and the acquisition team in the United States is, at what point does the overall diminution of the U.S. industrial base writ large, industrial manufacturing capability, and the concomitant drops in engineering talent and everything else, affect the long-term ability of the United States to satisfy its needs?

For the time being they’re saying, looking at select capabilities gap, whether they’re in stealth, whether it’s in military space.  The question is whether or not that list grows potentially and stretches beyond niche areas like stealth and space, and how the Obama administration balances that against its overall desire to increasingly internationally engage and have closer cooperation, and that includes I think on the military program side.

Last graph, WTO has ruled effectively that Airbus received illegal subsidies and that A-330 may never have been developed without that government help.  I’m glad that we required hundreds of thousands of man-hours of research to just determine what guys would have – if you’d been paying attention, I’ve been telling you this for years – but anyway.  Boeing supporters are going to want to obviously make political hay of that.  That’s going to trigger a response in Europe.  My ultimate question is, how does the United States end up buying A-330 tanker planes with this issue sort of festering about.

Last graph on China.  I think that that is an added and interesting dynamic.  Nick mentioned lifting of the effective arms embargo.  China’s military capability has rapidly increased to the point of sheer alarm, not only here but as well with my friends in France and my friends in Britain and elsewhere, even though – and largely because of the kind of trade that their governments have done with China.

I think that an interesting case in point in looking at China is looking at their rare earth policies.  Having cornered the global market – the last big holdout is Rio Tinto of Australia, and China is sort of trying to manipulate global pricing to get everybody to put pressure on Rio Tinto to sell to the Chinese.  I think the interesting question here is, okay, this is an important commodity but it’s not apparently behaving pursuant to any sort of market trend.  Rather, somebody who’s monopolizing the market is now trying to set global pricing for it.  I think that that’s an important lesson for anybody who’s looking at China merely, I think, as sort of a mercantile actor on the global stage.  That’s all I’ll say.  It’s something that’s worth a strategist stepping back and realizing, you know, is there something more afoot here?  What does it necessarily mean for us and for other democratic nations ultimately as to what sort of position you want to be in.

I find the paucity of being able to imagine what life is like 20 years from now in Washington to be people’s imagination, or lack of imagination is sometimes to me stunning.  I yield the balance of my time to the distinguished gentleman from the Atlantic Council.

By the way, bacon tastes good; pork chop tastes good – in the immortal words of John Travolta’s character in “Pulp Fiction.”  I think the global economy is fed by pork, no matter how it’s seen, and that’s got to be a strategic factor you’ve got to fold into any decision-making.

MR. WILSON:  Thank you.  Thank you, Vago.  You put the issues of subsidies on the table, the prospect of where the administration will be heading on some of these issues, and the impact of a new global player that may play by different rules.  I think that’s important.

I want to continue the conversation by turning to Marshall Billingslea, who is a close friend, a close friend of the Atlantic Council.  Marshall served as deputy undersecretary of the Navy in the last administration, where he had overall responsibility for Navy and Marine Corps defense policy and planning, as well as oversight of all Navy Department intelligence and special operations activity.  He served as the Navy secretary’s number two on a wide range of issues, including long-range planning and budget development.

As part of his role at the Department of the Navy, Marshall was assistant secretary general of NATO for defense investment, where we worked together while I was with NATO Secretary General Lord Robertson.  In that capacity he was the U.S. senior civilian official serving within the alliance.  He oversaw NATO’s military investment programs, administered NATO’s military procurement budget.  And his accomplishments while in Brussels included the creation of NATO’s strategic airlift capability, the founding of NATO’s special operations coordination’s center, and the launching of the alliance’s theater ballistic missile defense program.

Marshall came to NATO after serving as the acting assistant secretary of defense for special operations in low intensity conflict, where he oversaw DOD operations efforts against al-Qaida following 9/11.  Marshall holds a BA from Dartmouth College, as well as attended Tufts University Fletcher School.

Marshall, please pick up the discussion, bring it back, I hope, to this consideration of the impact of the reality of trans-Atlantic defense industrial space, how these issues are developing, the development of that concept.

MARSHALL BILLINGSLEA:  The good news is that I remain in about 96 percent agreement with my friend Nick Witney on all topics.

I’m not as optimistic about a recovery.  I actually see a significant collapse in defense spending in Europe.  I think if you look at the past decade, and you certainly can chart a trend, but it is a fact that today there are only around six NATO allies that are spending 2 percent or more GDP on defense.  And two of those remain Greece and Turkey, whose expenditure dynamics are driven by one another and not really in relation to anything that the alliance cares about.  Nor is the situation improving.

We’re looking this year, 2009, at anticipated large budget cuts in Italy and Spain, 7 and 4 percent expected reductions respectively.  Germany and France and the U.K. are attempting to build back somewhat.  I think we’re expecting, if you look at the white papers, to see somewhere between 4 and 5-point-something percent increases in those budgets.  The U.K. and France have, I think, within the European allies done the best at fending off the major challenges to defense budgets, but I’m going to come back to that in a second.

Germany has lost ground, and so if we do see a 4 percent or so increase, Germany hopefully – depending on, again, where inflation goes, which could really hollow that out completely – Germany may begin to build back somewhat but it has quite a ways to go.

I’ve forgotten to turn on my microphone, so I suppose that’s why the wild waving arms in the back of the room.  How’s that?

Even more worrisome, I think, is that this fiscal crisis has basically taken the Baltic nations out of the action.  And the concern that I would have is that when you looked at promising defense spending growth and promising defense investment trends, basically Latvia and Estonia were two of the four European nations making good headway.  The others would be, I think, Albania and Slovenia.  So I would say for now Latvia is absolutely down for the count, with the bond rating going to where it’s gone.  We’ll see with Estonia.

So put another way, then, during the first five, six years of this decade when the European economy was growing, that growth I think really greatly and disproportionately outpaced growth and investment in defense budgets.  Now that the economies have taken downturns, again I think there is a disproportionate effect on the budgets.

How the money is being spent is equally frustrating and difficult, and Nick alluded to it.  But in the majority of the cases, the majority of the nations, 14 of the 28 alliance members – and I haven’t seen the Croatian or Albanian numbers yet, but I’m guessing it would be at a minimum 14 of the alliance members – it’s all about jobs.  It is a jobs program.  The defense budget, 14 of those nations, more than 50 percent of the defense budget is spent on military personnel, okay.  Belgium spends 74 percent of its entire budget on manpower.  Greece spends 73.5 percent, Portugal 73.2 percent.  Just think about that for a moment.  Three out of every four dollars you get gets plowed into military personnel costs.

I think one of the single greatest effects of this economic downturn, therefore, is going to be a hardening of the problem because when you are in a political position and you’re worried about your electability in a small nation with a parliament, multiple parliamentary parties, you’re going to be the last guy who’s going to threaten defense jobs, given the fact that every other man or job in the economy is at risk given the downturn.  So this is going to be an increasingly difficult problem to wrestle with.  And you’re going to see the lag.  You’re going to see an economic recovery but you’re going to see this lag stratifying and hardening the MILPERS allocation challenge.

There are a number of consequences for this fairly, I think, severe situation we’re looking at.  I think we’ve seen a shift from disproportionate reliance on the United States, a disproportionate degree of burden-sharing to the ridiculous.  In 1999 the U.S. shouldered – and again, it depends on which, but I’m going to be off by 1 or 2 percentage points at the most.  In 1999 the U.S. shouldered about 49 percent of the total spending amongst the alliance nations.  By 2002 the U.S. percentage of defense spending within NATO had grown from 49 percent up to 64 percent.

Some of that stands to reason with the 9/11 attacks and the massive ramp-up.  But now, depending again on whoever’s numbers you look at, the U.S. is spending between 71 to 73 percent of all defense spending within the alliance nations.  That is an issue that is going to come back to haunt us politically within the United States.  I think you will not find the effect immediate.  You have an Obama administration that is determined to focus on alliances and relationships with partner nations, and will work to massage this critical point into a matter of maybe secondary or tertiary relevance for now.  But there are many within the Congress who will episodically focus on this matter and this will be an issue that we will begin to hear more about, I’m sure, particularly in the later stages of the Obama administration as we begin to have to think through how we’re going to pay all the bills that we’ve run up over the last few years.

There’s an opportunity cost to NATO operations which is further exacerbating this problem.  Much of the shift in percentages between the United States and Europe has to do with the fact that the U.S. has engaged in supplementary spending, has basically added to its defense budget much of the money needed for operations.  Not all, but much of it has been extra-budgetary, added in the supplemental process.  Whereas in the case of many European nations there has not been this budgetary approach, and the operational expenditures have been absorbed within existing (top lines ?).  As a result, you’ve seen that the U.S. has been able to maintain by and large – and again Nick alluded to this – the traditional ratios between military personnel costs, between acquisition of new systems, R&D, and then your operations and maintenance budgets.

Now I’ll tell you in the Navy and Marine Corps case we struggled.  I don’t think anybody believes that the Navy Department’s 30-year shipbuilding plan is real, but it is at least real out to three to five to seven years of predictability.  But there are trades that are made within these budgets all the time.  The United States has done a better job of managing those trades and those ratios.  In the rest of Europe, I think, this is not the case, and it’s taking its toll particularly on defense investment.

So I would actually commend you to a fairly recently published CSIS study which looks at some of these ratios, and particularly the defense investment modernization ratios.  When you look at that, I think you see that only about 8 NATO allies are able to maintain about 20 percent of the total defense budget spent on defense investment and modernization.  And when you factor the size of the relevant military with the amount of total budget, only about 10 allies are spending anything more than $20,000 U.S. per soldier.  Only five are spending about $40,000 or more per soldier on modernization.

So you literally see a number of countries that are per capita of the soldier investing in $4,000, $5,000 of modernization money per year, which is really quite a lot.  That’s quite a major discrepancy when you think about all of the massive changes that are happening in the C-2, the C-4, the ISR field, the need to get these soldiers networked, the need to bring into these militaries network-enabled capability, more modern intelligence fusion systems and so on.

And I think within all of that, where you look first is on the R&D side, and I think you see a very alarming loss of R&D capacity within the European nations.  European R&D took, I think it’s fair to say, a nosedive in the first half of the decade.  And we’re going to see the lingering effects of that for some time to come.  There has been a slight uptick in some countries for about the last two years, but you basically have had Italy and Spain exit completely from the meaningful R&D business.  That’s going to have significant ongoing ramifications, not the least of which for those national defense industries.

Staving off the free market compounds the problem.  If the free market were to function without constraint – and the defense sector is never in that situation – I think we would see a significant shake-out in defense industries.  I do foresee, as Nick has foreseen, I do foresee a resurgence in the buy-European mentality, in part in reaction to these economic realities.  I think as it is now the U.S. presents by far and away the Western market, the other two being China and India.  And I think you have seen a significant influx, and I think this will continue, a significant influx in the number of European storefronts setting up shop here in North America.

Thales led the way long before any of these economic crises, but you’ve got BAE, you have EADS, and lately if you look, the Finmeccanica Group is making a concerted push in the United States, not only through outright acquisition of DRS, but you see Selex setting up here, you see Alenia is here, and so on.  So I do think you will see that trend continue.  I also think that you will see renewed European drumbeat to drive into the other two big markets – into China and into India.

Second, I would agree with those who say that the demands for tech transfer are going to grow rapidly as European firms face the lack of sufficient R&D and modernization dollars at home and begin to find themselves not one, but maybe two, sometimes three generations behind in significant ISR and sensor technologies.  I saw this firsthand in the case of AGS.

I also think you’re going to see pressure grow on the U.S. side, real pressure in the way that it’s been sporadic in the past, for overhauling the Arms Export Control Act because I think you’re going to see the U.S. firms beginning to smell blood in the water, beginning to see that if we could just get past some of these issues, we could go for the throat in some of these markets that have been traditionally closed off to us, or where we’ve been less competitive for a variety of legislative restrictions.  So I would watch to begin to see that come in on the U.S. side.

Third, I would say that you will see the tendency to insist on cost share equaling work share, making collectively multilateral ventures pretty much unworkable if this has to be done on a case-by-case basis.  By that, I mean that if you must net out that the amount of money you put in comes back in an equivalent percentage of work at home in your nation, you’re going to find not only NATO projects but Euro-fighter-type projects very difficult to pull off, very difficult to effectively launch.

I think where you’re going to have to see this go is some form of NATO and EDA-managed multi-year planning cost-projecting structure so that the various countries and companies can actually look to see a return on their cost-share investments over multiple projects, over multiple years, so that maybe if you go down this road you begin to net these things out on a more equitable basis.

But I also think that since no such arrangements really do exist, in the interim what you’re going to see is a sharp downturn in significant developmental programs in a multinational framework.  They’re very hard to do on the developmental side, and I think you will see a turn toward cooperative acquisition along the JSF model, where basically the template is set and you’re talking about buying the planes, or like the C-17 deal, where there’s no work share because the plane – it is what it is.  You buy into it and own it part-time for the flying hours that you want.

I would say that within the European defense industry there would be areas that I would recommend you focus, and again, I think there will be a reciprocal U.S. industrial push into Europe with further acquisitions.  There’s a lot of private equity sitting on the sidelines now looking hard at various European companies.  The one observation I would have is I think that most of the target European firms out there are probably still over-valued a little bit, so I think you’ll probably watch the U.S. companies let this ride a little bit longer, and then I think you’re going to start to see some plays being made.

Where I would certainly advise that you look would be in areas where I see Europe remaining very strong, in the C-4 business, in parts of the ISR business, especially in the small/medium UAV sectors.  I would look at companies and industrial sectors that are doing niche integrative capacity work, either nationally or in multinational formations, sort of the BALTBAT kind of integration, works in the Nordic structures where you need to be able to integrate C-2 or other planning systems.

I would also say that there remains within Europe a very unique and distinctive set of smaller hobby shops and smaller inventive structures that haven’t necessarily been stamped out the way they have been in the United States, where you do find the primes in the United States moving in and consuming most of the oxygen in the big acquisition processes and the smaller guys having a very hard time getting the markets. I think within Europe you still see some really interesting innovative technology sectors where I think you will see creativity driving revenue.  I think I’ll close with that.

MR. WILSON:  Thank you, Marshall.  Thank you very much.  Fascinating to use some of these figures to underscore the challenge.  You talked about collapse in defense spending, of a hardening of the problem, pointed to the problem that the focus of this is really a jobs program, the disproportionate to the ridiculous, as your phrase, in terms of the burden-sharing, but also the prospect of increased cooperative acquisitions, the influx of European companies into the U.S. market, vice versa, and the niche roles that many of those companies can play.

I want to get into a discussion with everyone here but I wanted to sort of put one question on the table for the panel and then take some questions from the audience.  Seeing Steve Grundman in the audience from CRA International and an Atlantic Council member, Steve was involved in the 1990s within the administration in working on – I hope you don’t mind me sharing this – but working within the administration on a strategic rationale for policy, actual initiatives for trans-Atlantic defense industrial cooperation premised on strategic issues of how you reinforce the alliance, or ensure that there are no real commercial obstacles as we’re moving into post-Cold War phase, how to improve the performance of NATO interoperability of forces, promote transformation, improve the efficiency of the industrial structures upon which U.S. and European governments rely, given that there was a decreased spending.  And you saw a government push within the alliance for a trans-Atlantic defense industrial cooperation initiative.

Much of what we’ve talked about are trends that are in some respects industry-driven rather than necessarily being driven by a strategic sense of policy direction and priority.  Is there scope for some type of discussion within the alliance, across the Atlantic for some type of trans-Atlantic defense industrial cooperation initiative, given the debate on the credibility of our alliance, our allies, our capabilities, how that factors into the discussion of politics here on Afghanistan, the sense of the West in our alliance as a diminishing commodity in the context of a globalizing world, with the prospect of protectionist sentiment out there, given the basis that much of these programs are jobs programs.

But in the context of the debate that’s unfolding on NATO’s future, its new strategic concept, headed toward the Lisbon summit and towards the end of next year, and in the context of a potential – the Lisbon Treaty coming into effect, and EU role in – stronger EU role in defense issues, is there an area for a major initiative between North America and Europe, between governments to help put forward policy ideas in a strategic sense as we head towards the Lisbon summit, head towards a new U.S.-European relationship?  Let me first ask that question to Nick, and maybe Marshall you can comment.  And I want to bring in questions from the audience after that.

MR. WITNEY:  Well, I sort of hope there is because I think the risk in Europe is of a vicious downward spiral, if you like, where strategic uncertainty – what I label the temptations of the big Switzerland option – following on from Afghanistan, in the case of the British, Iraq, and various other unhappy experiences which have taken the shine off the liberal interventionism which we all felt so comfortable with a few years ago.  There is that sort of shift in mood.

And the other thing is the diminishing value of the defense industry in Europe.  These things should not actually be connected.  What a country goes and does in the world, how it sees itself and its international role, international responsibilities, what capabilities it feels it ought to be able to field, this ought to be entirely unconnected from what its defense industry looks like.  Vago pointed to that.

You have the Swedes, who have done some bold things about sacrificing their own defense industry in pursuit of their wider strategic interests and their sense of where they’re going to be in the world.  Well, the Swedes are a special case.  Most people are not going to do that.  There is this – whether it ought to be there or not – if you have a strong defense industry, you’re more likely to be interested in a strong defense and you’re more likely then to be interested in doing things with your armed forces.

The British have, I think, a traditionally strong sense, perhaps over-strong sense, of their strategic role in the world, but if you attend any debate in the British House of Commons, the people who jump up and make points are those who have shipyards in their constituencies or military bases in their constituencies.  There is this practical link.  So I think it depends how much, you know, seen from Washington, you feel it’s important to keep Europe in play as a strategic player, that a combination of a weakening defense industry will only feed these quietist tendencies.

When it comes to a trans-Atlantic defense initiative, well, as I indicated at the end of my remarks I think, you know, the cards are in America’s hands, which is not surprising since you spend the money and you’ve got the technology.  How much effort are you prepared to make, how many risks are you prepared to take in terms of further dissemination of potentially battle-winning technologies elsewhere in terms of helping the Europeans to stay in the game?

MR. WILSON:  Marshall?

MR. BILLINGSLEA:  I think that the United States needs to engage in another round of goal-setting for specific areas of trans-Atlantic defense cooperation.  With the exception of the C-17 deal, which did not come out of Washington as an initiative, it’s been quite a few years since you’ve had an administration dig in and decide that it wanted to launch a collaborative series of investments.  But I think that the importance of this is really two or threefold.

The first is that it is in the U.S. interest that the alliance be given reliable and enduring capabilities that it can tap to engage in activities.  One of the best ways to make sure the capabilities are in fact reliable and enduring is to get them into a NATO collective either common funded or commonly funded, multinationally-funded arrangement.  It is very difficult for finance ministries to unilaterally back out and cut those programs within the individual nations.  They have somewhat of a protected status.

If you can get the finance ministry maneuvered into making the mistake of investing in it the first time, pretty guaranteed you’ll be able to continue to count on them investing in it for the longer term.  This is what the U.S. tried with AGS, and they will get there with a very reduced AGS capability now.  Eight UAVs, I expect, or so, but certainly no manned aircraft.  I think I would come back to the manned aircraft at some point once the UAV structure has been going.

Where I would focus right now is rotary-wing lift.  I’d focus on lift.  I think that you see a significant shortfall in the national capacities in the helicopter business.  I think there’s opportunity there.  I think that the network-enabled capability push that the U.S., the U.K., and others have driven toward bringing network centricity to the alliance now needs to manifest itself in terms of concrete instantiations of capability.  And the NATO C-3 agency is probably well-positioned to move that if a decision is made to go down that road.

Again, the U.S. needs to be prepared to bankroll.  The U.S. needs to be prepared to understand that some level of tech transfer is a given, but I would recommend that we begin to layer in this longer-term vision for how we give out workshare and get two or three of these different projects going at once so you can kind of level load across multiple different projects to get people the return on investment that they need to have.

MR. WILSON:  Vago, you wanted to reply on that?

MR. MURADIAN:  I think that’s noble.  Again we come back to the big question, and who here wants to sacrifice in an environment where, for example, individual people in big and little decisions shape where you end up.  If the guys who are in the QDR process now decide we don’t need forced entry, all of a sudden the United States Marine Corps starts to look very, very different from what the United States Marine Corps looks now.  You can get rid of the EFV; you can give them fewer amphibs.  There’s a whole bunch of other things that you do in order to shape that course.

Conversely, nations – Britain gave up empire for free aspirin, ultimately.  It was national health service and social reforms that had been postponed for several hundred years finally came to a head and all of a sudden nobody was going to get elected unless they fixed that.  Similarly, look at what Germany is doing right now.  There is such a stigma with chemical engineering and everything else.  Well, guess what?  Germany is one of the leaders in what?  Chemical engineering, pharmaceutical, you could argue defense hardware.  And yet there is such a stigma being ascribed to that by an increasingly liberal and increasingly green electorate that now Germany is not making those investments for the first time in generations, and in some fields, centuries.  Germany is now starting to take increasingly a second-place role in some of those technologies which have been absolutely key to Germany’s growth, especially its postwar growth – fertilizers, chemicals, et cetera.

So I think that folks have got to take a much more strategic, big-picture approach as to what are some of the capabilities they really do have stay resonant.  I completely agree with the notion that if you happen to have invested in it and gotten good at it, you’re not likely to give it up.  On the other hand, how on earth do you convince a whole group of nations that it’s in their interest when a large fraction of them do see it as a jobs program and don’t – I don’t want to say don’t understand what you’re saying.

I think they understand what you’re saying.  I think that they ultimately aren’t ready to do anything about it and don’t particularly care about it.  Then that only feeds then that sense of separation among the countries that have capability and are really willing to use it.  Then countries that just haven’t had capability because they’ve always had capability and they don’t really intend to use it unless the rivers break their banks.

MR. WILSON:  Thank you, Vago.  Let me know if you have questions.  Just signal to me and Ryan will come to you with the mike.  Just introduce yourself and your affiliation.  Start with you.

Q:  Thank you very much.  I’m Tom Trimble from SAIC.  Damon, thanks very much for assembling this extraordinarily well-informed panel.  A question perhaps for any member of the panel with regard to the Levin-McCain bill, which in its original language postulated, I think as you all know, that U.S. defense companies should decide whether they’re development and production companies or they’re services companies and carve themselves away on one side of that fence or the other.

The language of that, finally, as I think probably everyone knows as well, came down to, well, we’re not going to put that into legislation.  We’ll kick the can down the road a little bit, let the DOD decide what the language should actually look like.  And I think that’s about nine months out right now.  The question is, is that sort of thing happening in Europe or elsewhere, that you’re seeing?  It sent a shock wave through medium to large companies in the U.S. of decision about whether divestiture should be made, acquisition should be made.  Should we act in advance of the DOD decisions?  I’m curious about whether that’s happening elsewhere.

MR. WITNEY:  I think exactly the reverse is happening.  I think there’s an acceptance and understanding in Europe that we’ve so little in the way of development and production of big projects coming up that one of the ways that defense companies can compensate is for getting more downstream into in-service support and upgrades, and everything that you might call services.  I think that’s sensible because a lot of this bloated manpower that is sucking up over 50 percent of European defense spending is not only guys painting stones white but it’s cooks and it’s clerks, and it’s people doing maintenance, which could probably be more efficiently done by the original equipment manufacturer.  So I think the reverse of the situation you describe here – I’m talking European generally.

MR. BILLINGSLEA:  I agree with that.  I would actually add to that that within the large European defense groups – and actually I think it’s important, you know, groups – what they found was as they went through a series of acquisitions and integrations in Europe during the late ’90s and early 2000s, they found themselves with a number of different companies and product lines that were themselves not interoperable.

So you saw the establishment of centers to converge the technologies and the product lines, or at least make them not necessarily service-oriented or architecture frameworks, but other integrated efforts.  They now have – that has become the heart of many of these companies, service line activities.  They have got a sunk investment in them, they need to maintain them for their legacy capabilities, and these now become marketing opportunities for the big European companies.  So I think they’re going in exactly the opposite direction where Levin-McCain would have taken us.

MR. WILSON:  Comment on that?

MR. MURADIAN:  No, I don’t disagree from my distinguished panel-mates.

Q:  I’m Steve Grundman from Charles River Associates.  The gist of my question starts like this.  The least protectionist – the entirety of our discussion seems focused on what I’d call the superstructure of the problem.  We haven’t talked as much, if at all, about the crux of the problem, which is capabilities that military services want to buy at a price that they want to buy at.  My own experience in the Pentagon, in being observer of this for a couple of decades at least now, is that when the military services find a capability that they can buy at a price they want to buy, they quickly get over their reflexive protectionism.

Maybe it would be interesting to debate that premise, but if you accept that premise, I want to turn the question to sort of new capabilities.  I think the image that we have in our minds, and even the systems that we’re talking about in this conversation, are ships and planes and tanks, and the new kinds of capabilities, frankly, the sort of capabilities that the U.S. secretary of defense has been trying to reorient urgency onto, are not particularly those kinds of things.  They are the communications systems that override them; they are cybersecurity.  How many times are we going to see cybersecurity on the front page of Defense News?  Probably many, many, many more times – robotics, autonomous systems, these sorts of things.

So maybe I’m asking, is there a hopeful glint here from the possibility that in satisfying military services’ need to have new capabilities that there is on that basis a platform, if you will, for trans-Atlantic cooperation, which tanks and planes and ships and trains is just going to be too hard to do, and we’ve learned that.

MR. MURADIAN:  I would say generally yes, but those are the sliver markets that are growth markets, right, still in the United States.  I mean, you can argue that if there are growth markets then it’s going to be an ISR, it’s going to be in services and support, it’s going to be in that sort of thing, in UAVs.  The potential problem is vast, huge, crushing U.S. investment in those fields.

So in some of those, you find American companies are leaders in them, but more over, it’s our regs of requiring Americans to be working in these things that are a complicating factor to getting foreign companies involved in the United States.  You have to have U.S. citizens who are doing this work.  So ultimately, you’re then setting up a redundancy, you could argue, instead of doing it the most efficient way.

You’ve got to sort of re-establish capability here in the United States, then partner.  Then everybody gets – I don’t know, maybe I’m being a little simplistic about this, but then everybody points at each other and says, you stole my technology.  No, I didn’t, we put it in comparative – there’s going to be even more comparative testing, which I think is a good thing because I think that you’re right, military services look at a capability and once they like it, they like it, right?

That’s the big problem with the tanker.  I think the U.S. Air Force looks at an A-330 and goes, yummy, that’s a nice tanker.  And now everybody else is going to go running around, going, okay, so how do we buy a subsidized tanker potentially, because the WTO said it – I want to be very careful by attributing – the WTO said it; I didn’t call it that.

So I think that there is an opportunity, but I think that there are kind of unique complexities that we tend to add to that equation that complicates it.  So if you’re a small company, can you afford to still make a profit by replicating some of this capability to staffing offices and everything else in the United States and end up it being worth your while?

MR. WILSON:  Do you want to add anything on this sliver of a growth market as a potential platform for trans-Atlantic cooperation?

MR. MURADIAN:  Well, caveating that, by European standards it’s frigging huge, but from our standpoint it’s sort of – it’s just a sliver.  (Laughter.)  It’s a couple of billion here or there.

MR. BILLINGSLEA:  The protectionism is not in our U.S. long-term interests either.  I can’t tell you how many foreign shipyards with truly state-of-the-art manufacturing capability I’ve been in that you would contend we would be able to procure a form-produced hull for our Navy.  Never.  I think you probably have to look at it sector by sector and understand the nature of the investment class.

But I do think, again, in those niche markets that we’ve talked about there is an opportunity to do some collaborative development, again, not the least of which is many of the dominant European firms now have SSA-structure – DOD-SSA-structured independent companies here in North America, who become – you know, Thales North America sells the MBITR handset to SOCOM.  The Selex unattended ground sensor stuff, there’s a North America firm here.  The leading U.K. firm that produces the new generation of solid-state surface radars is setting up shop here.  So we’re watching – this is a trend that’s happening.

MR. WILSON:  I think that’s your point.  Is there a qualitative difference between the ships, tanks, and planes in some of these other issue areas.  The gentleman in the back.

Q:  Hi, my name’s Bruce Graham from Textron.  I wanted to get to your question about looking at rotary-wing lift.  Do you really think there is hope for a joint EU-U.S. effort for heavy-lift helicopter?

MR. MURADIAN:  I do, and I think that it’s being driven by the lack of lift capability in Afghanistan.  The issue will be whether – again, I would shy away from trying to do some kind of developmental program.  We’ve got one of those called the NH-90.  Rather you may want to look at some form of collaboratively, collectively owned and operated mix of European and U.S.-produced air frames that is available to the subscribing nations for those operational purposes.

MR. WILSON:  This was the point of the – when I was working with Lord Robertson, it was almost the pathetic exercise toward the end of the term, throwing capital on capital, trying to find–

MR. BILLINGSLEA: – for want of a helicopter.

MR. MURADIAN:  Which has spawned a series of initiatives from countries within the alliance, both NATO and the EU side on how to work some of this.

MR. BILLINGSLEA:  When you pull on that rotary-wing issue in Afghanistan, you are touching a part of the central nervous system of any of the allied militaries operating there.  The lack of rotary-wing lift not only impairs your ability to get troops onto the target; it impairs your ability to get people out of there back to the level 3 medical facilities in time, and so on and so on and so on.

So the shortfalls in rotary wing – we are losing in Afghanistan, and if we’re going to turn the corner, it’s going to require an investment in many of the enabling capabilities.  Head of the list, now that we’ve got the strategic lift, at least in part moving, with the Antonov leasing arrangement, SALLIS (ph) and with the NATO SAC – head of the list is rotary wing.

MR. WILSON:  Want to add to that, Nick?

MR. WITNEY:  I think it links back in a way to the previous question about whether the armed forces can be hard-headed buyers – in my view, not.  I mean, I think the defense procurement is much too important to let the military anywhere near it.  (Laughter)  I was not military in my career.  But I do think – I’ve observed the British armed forces and worked very closely with them and for them, and let me take the pledge about my admiration.  But they are plainly guilty within – put them in the staff jobs in the ministry of defense and the whole Gates business about exquisite and baroque systems is absolutely it.

They will vehemently insist on the investment in money in things which might come to fruition if you’re very lucky with a technological punt you’re taking and produce something wonderful in 15 years time, and constantly overlook the demands of today and next year and the year after on the battlefield.  I’m just amazed that we can all sit around with these after-action reports from operations around the globe for 10 or 15 years in which the lack of helicopters has always been the Achilles heel and it’s only really in the last few years that this has finally come to be gripped.

I think a trans-Atlantic heavy helicopter project would be great.  I think the origins of this are the thought that this is one of the areas where the Europeans do something good.  We’ve not only got one, we’ve got two world-class helicopter-producing companies in the form Eurocopter and AugustaWestland.  The need is there.  Can we structure something that works across the Atlantic, given that the demand for these things may not be enough to sustain viable programs in Europe, perhaps only in America?  Can you put the two demands together and produce something that works cross the Atlantic?  I hope so.  It would be great.

MR. MURADIAN:  It’s a good one to latch onto in the sense that you have viable helicopter programs on both sides of the Atlantic.  The C-17 arrangement would have gone much smoother for NATO if the A-400M had existed.  The fact that it still doesn’t impairs – it impaired our ability to make a commitment that we would actually procure a little of both.

Q:  Bruce Weinrod at the Wilson Center.

MR. WILSON:  Former defense advisor at NATO.  Very much involved in these issues and with policy.

Q:  I thought I’d take advantage of both Marshall and Nick and ask about the NATO-EU-EDA relationship.  Where it is, where it’s been since you both were more actively involved, where it could go.  Is it something that could be really positive?  How so in terms of – and what are the implications obviously for defense industry?  And separately for Nick, if I could add, from what your sense – let’s assume the Tories were to win in the U.K.  What are the implications for the EDA, for example, among other things?

MR. WILSON:  I might just add to Bruce’s question.  We had hosted General Abrial, who is the new French strategic commander down at Norfolk, Allied Command Transformation.  And one of the ideas that came up in this transition seminar that we had was potential relationship between ACT and EDA.  Some type of reciprocal relationship there.  So I just wanted to inject that particular thing into the context of Bruce’s question.  Does France’s full reintegration into the alliance, and particularly French command of ACT, open up potential other opportunities for developing this relationship?

MR. WITNEY:  I’m a bit of a maverick on this.  As we know, the problem, it’s actually not really been France.  In the old days of bad France they were actually able just to sit back and watch the Turks behaving like bad allies, and the Cypriots behaving like bad member states of the European Union and locking up this relationship.

It wasn’t all downside, not in Brussels.  I’m sure it was on the ground, where there were operational coordination to be done.  But in fact, without having to get involved in the mangle of a ghastly set of interests at joint committee meetings which sucked up all your time and energy, I feel we kind of knew what we were doing pretty well.  The so-called long-term vision document that the EDA produced within weeks of what are called, from the Riga summit, the general political guidance, comprehensive list for guidance – I mean, actually those documents, without comparing texts, without massive amounts of joint committees, worked very well together.

I remember being particularly struck on one occasion when Marshall and I found ourselves greatly daring.  I went to Evaire in order to address – it was the major defense college were around, and you and I both gave presentations, completely, naturally, without coordination.  We were talking about capabilities and what was needed and what wasn’t.  There was, again, an extraordinary congruence between the messages we were both giving.

So these things happen by osmosis in Brussels, and the current alleged Cold War to my mind actually allows people to get on with this work.  But that’s not – I know it’s a minority view.  What will the Tories do about the European Defense Agency?  I don’t know.  I think there’s a good chance they’ll pull out of it.  I think – I can’t quite credit that the conservatives will actually come to power and deliberately cut off their own levels of global influence in the way in which they – William Hay talks about at the moment.  But it may happen.

MR. BILLINGSLEA:  I think the relationship between the NATO structure and the EDA is not where it needs to be.  It certainly is better than the days when we would dress in trench coats and trade briefcases in the middle of a park.  But to be honest, really some staggeringly ridiculous bureaucratic resistance to bringing those organizations together.

One of the challenges early on was that the EDA needed time to sort itself out and get itself going and to develop its own identity.  And the NATO structures, having been around for 50 years, were inherently threatening from a bureaucratic standpoint.  But I think that that honeymoon stand-up period is now long over.

This unclear division of labor could be addressed and a more clear division of labor – I think as the dollars become scarcer and scarcer, the need to carve up some duties here about how to try to ram through progress, I would look to the EDA on the R&D side in Europe.  I think that that is – I mean, certainly NATO can poke in areas, but fundamentally NATO needs to ask the EDA to drive that train.

I think some of this integration, the C-2 kind of command-and-control integration, when you latched on and began driving a software-defined radio initiative, that was exactly the right kind of effort out of the EDA, things like that.  I would want to see important material forms of cooperation emerge soon between the two structures because if buy-Europe rears its head, I fear the EDA will be the main instrumentality of enforcement of that, so I would watch that very, very closely.

MR. WILSON:  If I can bring this back.  You had mentioned your optimism about the Lisbon Treaty.  Often, what we would hear in European debates on capabilities was that it would be easier to generate the political momentum and support when you’re talking about it in a European context – DSTP, European identity side of this – that, that would provide a basis for more popular support within parliaments for supporting the capabilities message.

I’m not sure that was always believed on the other side of the Atlantic, but what kind of impact do you see ratification of the Lisbon Treaty?  What kind of implications does it have for the set of issues we’ve been discussing today?  How relevant is that?

MR. WITNEY:  It should be relevant at the sort of strategic level of foreign security policy and not so relevant in the specific defense domain.  At the strategic level it just provides a chance for European to get its act together and hopefully benefit from some leadership from whoever is appointed as the president of the European Council and the new Javier Solana.  Those are two new posts.

There is also going to be a thing called a European External Action Service, which will be a European diplomatic service.  It will also be an embryo European foreign office.  And although this is not going to affect the way decisions are taken in Europe, which will be having to try to get 27 cats corralled into one place at one time and agree on something, it’s going to mean that the agendas that are set and the decisions that are prepared will be a lot more efficiently prepared and the analyses will be better, and that once there is consensus on this is our strategy, our policy, whatever, then those decisions will be much more effectively implemented.

So that’s the sort of foreign policy side.  And if you have a more coherent and more readily understood and more confident framework then, well, one keeps on hoping that the defense implications will follow more easily.  The defense implications in the treaty are pretty slight, but one aspect that will be important, I think, is the idea of – it legitimates the idea of pioneer groups in defense, which is rather than everything having to proceed at the pace of 27, and therefore the slowest ship in the convoy, that there should be encouragement to smaller groups to travel further and faster, whether it’s on defense research together or on – even running operations.  There’s provision for that.

I hope that that variable geometry will – it will also be an encouragement to Europeans because if there’s anything that Europeans hate, it’s being left out of things. The fear of exclusion is the great motivator in the European and in Brussels.  So if you have a pioneer group and you don’t belong, and someone says, well, this is a pioneer group for those who undertake that within two years they will spend 2 percent of their GDP on defense, there would be people who would be prepared to step up a bit.  So that’s it.  The foreign policy side and the pioneer aspects in defense.

MR. WILSON:  Thank you, Nick.  Let’s take a question here, and then I want to come to Vago for a wrap-up.

Q:  Jeff Ronka from also Charles River Associates.  Question about incentives for the other side of the equation that we haven’t talked that much about, and that’s board of directors, the stakeholders in the companies that will drive them to really take the risk and advance sort of trans-Atlantic industrial initiatives:  I’m thinking, looking back over the last decade, it was rather a unique environment that really catalyzed some significant amount of investment in the U.S – everything from favorable currency to massive growth in the U.S. market to starting, at the turn of the decade at least, the promise of eased export controls and sort of getting back to the declaration of principles.

Having already gone through some of the round of consolidation in Europe, which then allowed them to say now I’m going to look at the next step and come to the U.S. for the formation of sort of EADS, Thales, combination of U.K. into BAE systems.  So if I’m looking at the next decade and I’m trying to think of the set of incentives, what will drive corporate behavior in terms of either the promise of regulatory reform or, as in the U.S. there had been some salient programs which catalyzed the development of trans-Atlantic teams in the entry of the big systems integrators, whether it’s JCA, tanker, all that.  I have a hard time seeing a lot of favorable conditions.  And going the other way, why didn’t we see more of the U.S. going to Europe?  It’s because the absence of those conditions.

So I guess I’m thinking of – you talked a lot about government today.  What do you guys see in sort of the decision factors driving decisions within the corporate boardrooms of the people who actually have to take these risks?  Particularly everything’s an opportunity cost relative to investing in going after the Indian market, the Middle Eastern market, which may be much more favorable?  Thanks.

MR. MURADIAN:  Cynically put, what are the incentives?  I mean, if you’re going to be in one of those boardrooms, you’re going to ask the same question that folks were asking in the 1990s, which was, why do I want to climb out on the stick before I have an indication from the governments that they’re even interested in what it is I want to do?

If you look at one of the great cooperative ventures was EADS and Northrop on AGS.  That’s gone crackingly well, hasn’t it?  I mean, if you look at that, then it’s just rush out and do more deals like that, I suppose.  So cynicism then in my mind reigns because you didn’t see some of those factors.  You didn’t see the American guys growing their footprints over in Europe for a variety of reasons, in part because I think that there are a lot of European governments who I don’t think would have been particularly keen to see an even bigger Lockheed at their doorstep with a bigger domestic footprint and be able to claim that I’m a European supplier.

Nick, correct me if I’m wrong, but I can’t imagine there were like welcoming arms to the idea of some of that stuff happening.  And I think that it is going to depend very, very much on government giving guidance because these guys are going to look at it as I have a fiduciary responsibility to my shareholder not to invest money on something – not to flush money down a hole, some would consider.  However short-sighted and unimaginative that would be.

MR. WILSON:  We’ve about run out of time, but does cynicism reign on this side of the panel as well?

MR. WITNEY:  I think it’s a good question, by which I mean I don’t really have an answer to it.  I think European companies are going to remain very interested in the American market as long as there’s a lot more money in America than there is in Europe.  I think Vago is right, that beyond that collaboration, particularly if there’s risk involved, then people are going to want government to talk cover.

MR. BILLINGSLEA:  I’m actually a little more optimistic.  I watched SAIC move in pretty aggressively when they won the TMD contract.  So on the systems integration side I think they saw an opening there and they pushed into that.  I think they’re actually – I don’t do any of this stuff any more.  I watch, but I think they’re doing fairly well.  Thales is the big competitor in the C-3 integration business within the NATO structure right now.  They’re the team to beat.

I do think you’ve got companies continuing to look for investment in key areas, and particularly in Eastern Europe.  The question is going to be whether the U.S. firms – that all the pain that you go through with the ITAR and everything else, whether in fact the Indian market isn’t a more attractive market.  I think it may be an either-or for a lot of these investment dollars now.

MR. WILSON:  Thank you.  I want to thank the panel today.  I think we’ve had an important discussion that we want to be able to continue in the coming months at the Atlantic Council.  When we step back from the immediate issues that we talk about, I think we as an organization remain concerned about how public debate or debate on concern about lack of European capabilities.

What role the allies are playing in Afghanistan can lead to a continual erosion of public support for the trans-Atlantic alliance in the United States, across the Atlantic, and we want to be able to explore the potential of whether, as policymakers, you’re dealing with new issues on trans-Atlantic defense industrial cooperation, whether there are some areas there to begin to push back on some of the negative trend lines that can erode that sense of solidarity across the trans-Atlantic.

So I want to thank my colleagues for joining us today.  Thank you for coming here, and thank you.  We appreciate the discussion.  (Applause)

Transcript by Federal News Service, Washington, D.C.

Back to Transatlantic Defense Spending Event Page

Related Experts: Damon Wilson