Sebastian Payne

What the BAE merger says about UK relations with the US and Europe

The merger of British BAE Systems with French giant EADS finds the government at a tricky crossroads for the future of the UK’s defence industry. Although merging with EADS threatens to rip the heart out of Britain’s largest defence firm, BAE has little choice. The firm has suffered from spending cuts on both sides of the Atlantic — 98 per cent of BAE’s business originates from the defence market and orders are in decline. Therefore a merger appears to be the obvious solution, allowing BAE to diversify and secure its future. But as the world’s third largest defence contractor, any kind of dilution of BAE has security and strategic implications.

Although in some respects merging with EADS is a regular business transaction, the importance of the deal means that Westminster will make the final decision. The government’s ‘golden share’ in BAE means they can nail the deal at any stage if they decide to. As the former defence secretary John Reid said on the Today programme this morning, the merger will be a ‘huge call’ for the government on not just the future of our defence industry, but also our trading relationship with the United States:

‘There may will be cost savings, there may well be efficiency. But the status quo – ie the two companies staying separate – won’t stave that off. Particularly for BAE systems who are working in a defence market that’s not just shrinking in the United Kingdom, it’s also shrinking through the world.

‘There are those who would say you have to regard the BAE Systems entry and growth in the American market as very important as well. So we have to deal with the complexities of not only the French and the Germans and the British, but also how the American government would regard their intellectual property, of you like, the investment that they’re making – now about £7bn worth of orders I think BAE systems gets.’

This situation recalls another juncture the British government once faced over a pan-Europe defence merger — 1986’s Westlands

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