GEORGETOWN UNIVERSITY

RESEARCH PROPOSAL:

THE COST OF SOVEREIGNTY:

AN ANALYSIS OF EUROPEAN CROSS-BORDER DEFENSE INDUSTRY

CONSOLIDATION

INAF 590: EUROPE AND INTERNATIONAL RELATIONS

DR. ABRAHAM L. NEWMAN

BY

SEAN P. MCBRIDE

WASHINGTON, DC

7 MAY 2010

AD MAIOREM DEI GLORIAM

McBride,

1

1. What is the question and why is it important?

Why do defense firms1 merge across state borders? This question is important for

students of international relations, as cross-border defense integration challenges traditional

notions of state sovereignty. For example, Michael Williams has recently characterized the

defense industry as “a critical component of the Westphalian system, and perhaps the last bastion

blocking the way to a new kind of international security system.”2 This comment relates to the

idea that defense firms bridge the gap between economic and military power, accepting money

and national resources as an input and outputting military weapons platforms able to project

national power in the international arena. Cross-national industrial consolidation therefore

stands as an extremely important change, perhaps even presaging a paradigm shift in the

relationship between states and defense firms in providing security in the international sphere.

Drawing on Kenneth Waltz3 and other theorists of structural realism, this question is

tremendously important because of the central role the defense industry plays in shifts in the

international balance of power,4 as the expansion, contraction, or consolidation in a country’s

defense industrial base will have a direct impact on that state’s ability to project power in the

future. Nevertheless, the idea of cross-border defense integration is problematic for traditional

theorists of realism, who argue that states seek to produce independent military capacities

1 The term “defense firm” requires some clarification. This paper employs the definition used by the

Stockholm International Peace Research Institute (SIPRI) of a defense firm as a company that produces

equipment for the armed forces or provides crucial components for the production of such equipment. See

“What is the arms industry,” in Stockholm International Peace Research Institute [Web site and database];

available from < http://www.sipri.org/research/armaments/production/researchissues/transparancy>;

accessed 5 May 2010. Related terms such as “defense industry,” “armaments industry,” or “defense

industrial base” are used to refer collectively to defense firms. 2 Matthew Williams, “Machineries of War and Mechanisms of Change in World Politics” (Ph.D. diss.,

Queen’s University, 2007), 25. 3 Kenneth Waltz, Theory of International Politics (Reading: Addison-Wesley Publishing Company, 1970).

4 Williams, 2.

McBride,

2

because they cannot be sure of the intentions of other states.5 This leads to the self-help system,

which limits the potential for cooperation between states out of fear that the other state may gain

in relative power. While this more traditional conception of balance of power is of limited utility

to examining cross-border defense integration between states, some scholars have adopted the

concept of balance of threat, which argues that states balance against perceptions of threat as

opposed to mere concentrations of power.6 Under this more-flexible realist framework, defense

integration serves as a form of external balancing carried out between states that do not pose

threats to each other against a more-threatening third party. In contrast to Waltz’s model, these

states are able to signal credibly about their intentions, thereby dampening concerns about

relative power.

Because the defense industry lies at the intersection of security, economics, and politics,

an investigation into the causes of cross-border integration must look beyond realist explanations

to examine the possibility that economic or political factors may have compelled defense firms to

merge across state borders. Given the fact that many defense firms are privately-owned and

relatively separate from the government, it seems logical to consider the possibility that defense

firms acted as agents in their own right according to their own preferences and economic

interests, much like normal mergers between multinational firms in other sectors. However, this

idea that firms can be actors alongside states is anathema to more traditional realist conceptions

of international relations. How then can we account for firms as agents? In Power and

Interdependence, Robert Keohane and Joseph Nye propose that realist theories “are often an

5 Waltz, 165.

6 Stephen Walt, “Alliance Formation and the Balance of World Power,” International Security 9, no. 4

(Spring 1985): 3-43.

McBride,

3

inadequate basis for analyzing the politics of interdependence.”7 This leads them to offer a

model of international relations called “complex interdependence,” which argues that “multiple

channels connect societies” and allows room for “transnational organizations (such as

multinational… corporations)” to be actors on the international scene.8 What then is the role of

firms in international relations? Susan Strange argues that firms possess “structural power,”

which is “the power to shape and determine structures of the global political economy within

which other states, their political institutions, their economic enterprises and their scientists and

other professional people, have to operate.”9 Because of the growing influence of firms, they

have become more “statesmanlike,” making state-firm and firm-firm bargaining two new

important dimensions of international diplomacy.10

Liberals thus provide a theoretical

framework to examine defense firms as actual actors on the international stage, suggesting that

firm preferences based around economic priorities drive cross-national defense consolidation.

What about political factors? As realist scholars argue, states have historically been

loathe to give up control over their national defense industrial base, except when an common

external threat necessitates that states cooperate as a means of counterbalancing. What if there is

no external threat? What political actor would support defense integration then? In the case of

areas experiencing regional integration,11

this paper identifies the supranational entrepreneurs at

the regional level as potential supporters of cross-border defense consolidation absent external

7 Robert Keohane and Joseph Nye, Power and Interdependence (New York: Harper Collins Publishers,

1989), 23 8 Ibid.

9 Susan Strange, States and Markets (Malden: Blackwell Publishers, 1988), 22.

10 Susan Strange, “States, Firms and Diplomacy,” International Affairs 68, no.1 (January 1992): 1-15. Also

see John Stopford, Susan Strange, and John Henley, Rival States, Rival Firms: Competition for World

Market Shares (Cambridge: Cambridge University Press, 1991). 11

Even though this criterion only applies to European integration currently, it is helpful to generalize this

theoretical discussion before moving to a specific application of Constructivist theory to European

integration.

McBride,

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threats. This relates to the political interest of the regional actors in strengthening their

supranational organization relative to the member states. This possible hypothesis ties to

constructivist theory, which argues that all actors, including states, are socially constructed,

necessitating that actor identities be sociologically examined. In the context of regional

integration, J.T. Checkel12

argues that social-constructivism allows for an examination of social

learning, the process whereby actors acquire new interests and preferences, typically through the

novel application of a preexisting norm. A regional government official can thus learn to apply a

preexisting norm, such as “economic integration,” to a new area, such as the defense sector.13

This change in preferences at the regional level thus offers a potential political explanation for

cross-border defense integration.

2. What do you want to explain?

The past two decades since the end of the Cold War have witnessed an unprecedented

level of cross-national consolidation in the European defense industry. The specific goal of this

paper is to examine the factors that have led to this cross-border consolidation from the end of

the Cold War until the present. Although these recent changes in the European defense industry

can be contextualized globally,14

this paper seeks to focus on the European case because of its

unique combination of decreased defense expenditures, regional economic and political

integration, and a historical commitment to security through a transatlantic framework.

Furthermore, this paper will primarily focus on European Aerospace Defense and Space

12

Jeffrey T. Checkel, “Social construction and integration,” Journal of European Public Policy 64, no. 4

(Special Issue 1999), 545-560. 13

Checkel, 548. 14

For a global examination of this phenomenon, please see Eun-Seok Jang, “The Importance of

Nationalism Force in the Development of Autonomous Major-Weapons Production in Less-Powerful

Nations” (Ph.D. diss., University of Kentucky, 2004). A similar study of Canada’s defense industrial base

is Wendy Webber, “The End of the Cold War and the Transformation of the U.S. Defense Market and

Defense Industrial Base: Implications for Canada” (MA thesis, University of Manitoba, 1997).

McBride,

5

Company (EADS), the largest pan-European defense firm, and BAE Systems (BAE), a

competing defense firm that has expanded both on the European continent and in the United

States. Due to the myriad products and services provided by defense companies, this paper will

focus on a single weapons system. Though surely not all elements of the defense industry have

undergone the same internal and external pressures, this paper assumes that the general trends in

European military aerospace (specifically fighter jets) are representative of the wider European

defense industry. European aerospace has experienced greater pressure to integrate due to the

higher R&D cost of its product, but similar price trends in other weapons systems suggest that

what happens to aerospace will likely eventually happen to the rest of the defense industry.

Because of the close relationship between shifts in the defense industry and future shifts

in the international balance of power, the consolidation of Europe’s defense industry has

important implications for the ongoing debate in the United States over how to perceive the rise

of Europe and the development of a European Common Security and Defense Policy [CSDP].

Furthermore, by examining the underlying causes of European defense integration, this paper

will better contextualize the debate on Europe’s rise as a strategic rival or partner. By examining

the logic and reasoning behind the formation of transnational defense firms, this paper can

contribute to a greater understanding of the changing nature of the security dilemma in a

globalizing world through an examination of the interrelationship of cross-national defense

industrial consolidation, the security dilemma, and regional integration.

3. What is the conventional wisdom?

The conventional wisdom regarding the European defense industry views defense firms

as sub-national actors that are subject to state regulation as part of a national defense industrial

base. This largely draws from traditional realist perceptions of state sovereignty and of the

McBride,

6

domestic industrial base as a key part of a state’s power.15

In this light, the formation of cross-

national defense firms such as EADS are written off as mere superficial changes due to the

continuing dominance of juste retour thinking among EU member states, which ultimately is

enshrined of Article 296 EC of the EU Treaty, which allows any member state to “…take such

measures at it considers necessary for the protection of the essential interests of its security

which are connected with the production of or trade in arms, munitions and war materiel.”16

My approach challenges the null hypothesis of treating defense firms as lackeys of states

by synthesizing the theoretical frameworks of several recent works. First, I draw from Seth

Jones’ idea that states may be willing use cross-border defense firm integration as a means to

further their national interests.17

Second, I draw from Sorin Lungu’s application of Susan

Strange’s conception of state-firm bargaining to the defense sector. Third, I draw from Terrence

Guay’s consideration of the European Union as an actor in the debate over defense industry

consolidation. Synthesizing these three approaches allows for a fuller picture of the interaction

of defense firms, states, and the European Union in examining the post Cold War development

of a pan-European defense industry.

4. What is your hunch?

Due to the complex role of defense firms in security, economics, and politics, my hunch

is that the cross-national consolidation of the European defense industry since the end of the

Cold War is driven by either security, economic, or political factors. This means that this event

either occurred as a means to counterbalance the unipolarity of the United States, to serve the

15

In addition to more modern theorists such as Morgenthau and Waltz, this perception of the defense

industrial base stretches back to Machiavelli and Thucydides. Terrance Guay, The Transatlantic Defense

Industrial Base: Restructuring Scenarios and their Implications (Washington DC: Strategic Studies

Institute, 2005), 6. 16

Center for Strategic and International Studies, European Defense Integration: Bridging the Gap between

Strategy and Capabilities (Washington: CSIS, 2005), 74. 17

Seth Jones, “The Rise of a European Defense,” Political Science Quarterly, no. 2 (2006): 241-267.

McBride,

7

economic interests of the defense firms, or to support the larger process of European integration.

In order to investigate these possibilities, this paper offers three hypotheses for explaining the

dependent variable. Based on my preliminary research, I believe that economic factors have

played the dominant role in driving this cross-border consolidation, leading me to expect that

firm preferences best explain cross-border European defense integration

My first argument seeks to explain the dependent variable from a power-based approach.

Drawing from the balance of power and balance of threat literature, I hypothesize that defense

industry consolidation represents an effort by the European states to counterbalance the current

American unipolarity of the international system. This relates to Samuel Huntington’s assertion

that European integration represents "undoubtedly the single most important move toward an

anti-hegemonic coalition."18

The primary actors of this argument are the European member

states, although the move to construct a European defense industry can potentially be viewed as

moving towards the formation of a European super-state. The independent variable is the

polarity of the international system. This argument is compelling for several reasons. First,

states are historically the most important buyers of military hardware. Second, the European

states have played a dominant role in forming and administering intergovernmental defense

projects, such as the Panavia Tornado and the Eurofighter. Third, due to the legacy of state-

owned defense firms (e.g. France and Spain are minority share holders in EADS), certain state

government have had tremendous control over their defense industrial base.

Hypothesis #1: If the international system shifts to unipolarity around an external power,

then states undergoing regional integration will integrate their defense industrial bases

cross-nationally to counterbalance that power.

18

Samuel P. Huntington, "The Lonely Superpower," Foreign Affairs 78, no. 2 (March/April 1999), 45.

McBride,

8

My second argument seeks to explain the dependent variable from an economic-based

approach. Drawing from liberal theorists, such as Keohane and Nye, I hypothesize that defense

industry consolidation is a function of firm preferences. Under this model, defense industry

consolidation has been transnational since the end of the Cold War, meaning states have not been

the dominant actors and that consolidation has been the result of economic pressures beyond the

control of governmental actors, including a decrease in external security threats and an increase

in weapons R&D costs. Under this hypothesis, the primary actors are the European defense

firms, and the independent variable is firm preferences. This hypothesis is compelling because

European defense integration appears to have developed in a way that defied the original intent

established by French, German, and British policymakers at the 1997 WEU conference on

defense integration, which envisioned a pan-European defense firm formed between the key

Airbus/Eurofighter partners. Instead of this outcome, BAE defied the Blair government and

pulled out of the government-backed pan-European deal in favor penetrating the American

defense market.

Hypothesis #2: If national defense firms prefer to pursue cross-border consolidation as a

means to counteract unfavorable shifts in the defense market, then the defense industry

will consolidate cross-nationally.

My third argument seeks to explain the dependent variable from a norm-based approach.

Drawing from Constructivist theorists, such as J.T. Checkel, it suggests that cross-national

defense industry consolidation has been the result of the “social learning,”19

meaning that

European elite decision makers have promoted cross-national defense integration by applying the

norm of “building the single market” to the defense industry. Under this hypothesis, the primary

actor is the European Commission, and the independent variable is the norm of regional

19

Checkel, 553.

McBride,

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economic integration. Social learning acts as a mechanism to apply this norm to the previously

untouched defense sector. This argument is plausible because the cross-border defense industry

consolidation in Europe occurred shortly after the 1992 Maastricht Treaty, which formed the

Common Foreign and Security Policy, and has occurred alongside the development of the EU’s

CSDP and the European Defense Agency.

Hypothesis #3: If supranational entrepreneurs apply the norm of regional economic

integration to the defense sector through social learning, then the defense industry will

consolidate cross-nationally.

These theories are admittedly not mutually exclusive, meaning that the European states,

the defense industry leaders, and the European Commission may all have played central roles

leading up to the cross-border mergers, particularly in the formation of EADS. This will be

undoubtedly true to some degree, but I expect to discover that one of these actors played a

dominant role in this debate. Depending on which actor this is, I will be able to make certain

predictions about the future shape of European integration in the realm of CSDP. If the power-

based hypothesis appears the most germane, then European actions have been driven by the

desire to counterbalance U.S. unipolarity. This would suggest that further moves towards a

European CSDP represent a direct threat to NATO, the transatlantic community, and U.S.

national interests. If the economic-based hypothesis appears the most germane, then the

consolidation of the European defense industry must be viewed as detached from governmental

moves to strengthen CSDP, representing instead a transnational economic issue largely unrelated

to government policy. Furthermore, the defense firms’ economic interests may actually counter

the states’ policy preferences, much as BAE pursued transatlantic consolidation over pan-

European consolidation in defiance of the Blair government. In this case, it is likely that defense

firms will continue to pressure governments to allow them to compete in the lucrative American

defense market, which could potentially force European security policy in a transatlantic

McBride,

10

direction. If the norm-based hypothesis appears the most germane, then this suggests that EU

policymakers will likely continue to build up EU capacities in the field of CSDP, particularly by

building up the European Defense Agency as a unified procurement body for the member states.

Because this policy would be pursued as a means to “build Europe” rather than as a means to

counterbalance the United States, further development of CSDP would not form a direct threat to

U.S. national interests.

Competing Hypotheses for Cross-Border European Defense Integration

Norm-Based IV: Norm of

economic

integration

Actor: EU

Commission

Economic-Based IV: Firm

Preferences

Actor: Defense

Firms

Power-Based IV: Polarity

Actor: States

DV:

Cross-Border

European

Defense

Integration

Rea

lism

Liberalism Constructivism

Mechanism of

Social Learning

McBride,

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5. How will you prove it?

In order to test my three proposed hypotheses, I will investigate the post-Cold War

actions of the largest European defense firms (including those that decided for and against cross-

national integration), the European member states, and the European Commission in order to

determine when these actors began to discuss cross-national defense integration and what actions

these actors took to promote or deter this end. The primary documents will be government

documents (such as defense white papers), notes from congressional, parliamentary, and

transnational debates on defense consolidation and cooperation (such as over cost overruns in the

Eurofighter), corporate documents (shareholder reports and other public documents), as well as

media coverage and publicized comments made by state government officials, European

Commission officials, or European defense industry leaders. In looking at these documents, I

will seek to identify the date of the comment, document, debate, etc. in order to map the

chronological relation of these discourses against key dates of the end of the Soviet Union, the

cutting of defense budgets and, the consolidation of U.S. defense firms, and the passage of the

Maastricht Treaty. I will further examine the documents to identify argumentative references to

U.S. unipolarity, economics or profit-based reasoning, or “building Europe.” I expect that the

largest challenge I will encounter will be my inability to access classified government and

corporate documents regarding corporate mergers. In order to overcome this limitation in

primary sources, I will have to fill in informational gaps by making educated inferences based on

available documents and news coverage in defense industry publications and news sources such

as The Economist and The Financial Times.

If my power-based hypothesis is correct, then I expect to find that the European states

played the primary role in promoting defense industry consolidation. I should identify that

McBride,

12

government debate on defense industry integration should have begun once it became apparent

that the international system was shifting to bipolarity to unipolarity. An appropriate date for

this shift is December 12, 1991, when Russia officially succeeded from the USSR. Furthermore,

within discussions between state policymakers on defense consolidation, I should identify direct

or veiled references to American unipolarity as a key element of the discourse.

If my economic-based hypothesis is correct, then I should find that the European defense

firms were the dominant players in causing cross-border defense consolidation. This suggests

that one or more of the CEOs of these firms (or possibly the cooperative Airbus or Eurofighter

consortiums) were likely the policy entrepreneur of cross-border integration. Several features I

should find in the public discourse include the formation of industry working groups, the

proliferation of industry lobbying firms, and the felt presence of industry leaders and

representatives in key debates, such as the 1997 WEU symposium on defense integration. The

chronological trigger for this shift should be the cutting of European defense budgets and

consolidation of competing defense firms in the United States, such as the so-called “Last

Supper,” which occurred shortly after President Clinton took office in 1993 and led to a dramatic

consolidation in U.S. defense firms. Finally, I should find that economic logic has been the

dominant force in the discourse on firm consolidation.

If my norm-based hypothesis is correct, then I should find that the European Union

played the dominant role in promoting cross-border integration. I would expect that the

European Commission acted as a policy entrepreneur for a “European” defense industry,

contacting industry leaders to sell them on the idea, and then acting as an “honest broker”

between defense industry representatives and the member states. In this hypothesis, I would

expect to find that discourse on “building the single market” or “building Europe” plays a key

McBride,

13

role in debates. The likely trigger for this action was either the negotiations leading up to the

Maastricht Treaty, although it is possible that this may have started after in debates occurring

alongside discussions leading up to the creation of the Common Security and Defense Policy and

the European Defense Agency.

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McBride,

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