Leading Article: Defence industry must bite the bullet

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YESTERDAY'S dollars 10bn merger between Martin Marietta and Lockheed is more than just another blockbusting Wall Street deal. It illustrates a trend that will have profound consequences in Europe - for governments, for weapons makers, and for the one in nine British manufacturing workers whose jobs depend on the defence sector.

Since the end of the Cold War, American firms have cut more fat than their European counterparts. While US defence industry employment has fallen by one-third over five years, Britain's has fallen by only one-quarter over 10. Mergers and acquisitions have been more common across the Atlantic, too. General Motors, Ford, IBM and General Dynamics are only some of the US firms that have sold off defence subsidiaries.

Until now, European industrialists could claim that these and other deals were largely limited in scope to single divisions of companies, or specific sectors. The creation of Lockheed Martin represents a change of gear. It brings together two companies with few interests in common - Martin Marietta made no aircraft, and Lockheed was far from a leading electronics manufacturer - realising that the defence business now requires leaner, more competitive firms than in the Cold War.

In Europe, the market has not been able to rationalise unaided. The European Union's dozen governments, whose combined spending is comparable with that of the Pentagon, still buy largely from domestic suppliers. Thus four EU countries make four different, and incompatible, tanks. Even Britain, which is more apt to preach the virtues of the market, spends only 6 per cent of its arms procurement budget on imports, and only 16 per cent on goods bought from co- operative ventures.

European defence companies, discovering that US firms are increasingly able to undercut them, will doubtless cloak themselves in the national flag, claiming that reform would threaten their countries' industrial base, destroy hi- tech jobs, and even call the defence of the realm into question. In the past, politicians have found it hard to resist private interests that present themselves with such a populist gloss.

It ought now to be possible to take a more robust line. Europe is supposed to be moving towards a common defence policy. A sharp consolidation of the defence industry that goes far further than the ungainly co-operation of the European Fighter Aircraft or the Airbus Industrie projects will undoubtedly cost jobs in the short term. But it would preserve the Union's industrial base, and reduce dramatically the cost to European taxpayers of the weapons deemed necessary for their defence. If the job is not done soon, stiffer competition from the US will make it dearer and more painful later.