Margareta Pagano: BAE shows attack is the best method of defence

The proposed tie-up with EADS is a bold move by Britain's military giant in the face of tough competition and cuts in spending in the West

When Lord Robertson, the former head of Nato, took over as Labour's Secretary of State for Defence in 1997, one of the first speeches he made to industrialists carried a stark warning: that Europe's defence and aerospace industry must "rationalise or die".

Robertson made his warning against a background of shrinking defence spending but also the growth of industrial giants in the US such as Boeing and Lockheed Martin, against which home-players like BAE Systems had to compete.

He was on the button; since then European defence budgets have retreated. Even the mighty US military complex, which represents about 43 per cent of total defence spending in the world, says it will slash defence expenditure by at least $400bn (£247bn) over the next decade.

John Louth of the Royal United Services Institute, the defence think-tank, predicts spending in the West will continue to fall while countries such as Russia, China, Saudi Arabia, the Gulf Co-operation Council countries and other emerging economies, are gearing up to spend more – and create their own weapons manufacturers.

Lower defence spending in the West is to be celebrated on many fronts. But it lands companies such as BAE, which depends on defence equipment and employs 93,500 around the world (35,000 in the UK) in a pickle. Over the past five years or so BAE has had a tough time competing worldwide – its shares have fallen by 30 per cent, it has cut more than 20,000 jobs, and lost out to rivals such as France's Dassault to provide India with Typhoon fighter jets. One order like that would have kept BAE in biscuits for years to come.

That's why BAE had to be drastic with four options to choose from: manage decline; diversify and buy, say, a car-maker; wind itself down and pay back money to shareholders; or be bold. BAE's chief executive, Ian King, has been both bold and brave with his decision to hold merger talks with Tom Enders, the German boss of Europe's EADS. Neither side will say who made the first move, but after years of on-off talks, the two – who have known each other for 20 years – finally sat down in June to see whether creating this pan-European monster with the firepower to rival the world's most serious players made sense.

They think it does. Both get access to new markets – BAE has more exposure to civil aerospace technology with Airbus, while Eads can move into the US market.

So why have the shares fallen since the news broke? It's partly on fears that the regulatory hurdles are too great. Sorting out all the approvals is bound to be a tortuous process, but it sounds as though Mr King and Mr Enders have been given at least tacit backing from the governments involved – the French, Germans, Spanish and British, which are shareholders, and the US, where BAE has 40 per cent of its business.

Politicians are asking how this will impact the UK's national security and whether there are guarantees about British jobs. Mr King and Mr Enders say the new corporate structure will give governments special shares, carrying a veto to block a "foreign" takeover, but not blocking votes.

As to protecting UK jobs, neither BAE nor EADS are allowed to make any pledges but both stress that this merger is about growth and not cost-cutting as there is little overlap between businesses.

It may have taken 15 years to get to the table since Robertson's warning, but it looks as though BAE and EADS have listened, choosing to go for growth rather than extinction. Let's hope Europe's governments show they can back a winner when they see one.

More retailers could do with some of the John Lewis magic

When the going is tough, the tough really do seem to go shopping. And the toughest take their wallets and purses to John Lewis and Waitrose. Even when they are on holiday or the rain is pouring, the British public just can't have enough of the John Lewis Partnership.

In the six months to the end of July – a period that covered the Diamond Jubilee, the VAT hike, appalling weather and the Olympic Games build-up – the retail group owned by its staff saw a 60 per cent rise in profits to £144.5m. On a like-for-like basis, sales at Waitrose were up 2.2 per cent and at John Lewis sales rose 9.2 per cent; figures which have beaten rival retailers to the ground.

It's a great result and Andy Street, the John Lewis boss, puts the success down to one word above all else: trust.

Sales are good because of hard times, he says, rather than the group having discovered a magic formula to find its way around the recession. When times are hard, shoppers want to know they get value and quality.

But maybe Street is being too modest? It's building up that trust which is the magic, and a formula that has taken decades to achieve. Other retailers with results last week such as Next and Home Retail – owner of Argos and Homebase – showed a much more mixed picture and badly need some of that magic.

It's difficult to read too much into the numbers as Argos reported solid trading while the poor sales at Homebase can be blamed on the summer's slug epidemic; something even the most dedicated gardeners couldn't fight.

Even so there is much to be positive about; industrial output, private-sector employment and exports are all up. That's why it was disappointing to see new figures on Friday afternoon from YouGov's Household Economic Activity Tracker – or the Heat Index – which dropped in the first week of September to 90 compared with 93 in August; itself down from 96 in July.

Perhaps best to wait for the autumn leaves to fall before celebrating green shoots too soon.

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