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<TITLE>British Aerospace CEO John Weston's Address to 1998 NATO Workshop, Vienna, Austria</TITLE>
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<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="6" FACE="Palatino">NATO—Europe
and America—A Military and an Economic Partnership? </FONT></P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="4" FACE="Palatino">Mr. John
Weston, Chief Executive<BR>
</FONT></P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="4" FACE="Palatino">British
Aerospace</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">After 40
years of Cold War and an established and stable pattern of economic and
military relationships, the last decade has seen sweeping changes in both
the political and military landscapes of the European and North Atlantic
alliances. Following the fall of the Berlin Wall, the collapse of
the Warsaw Pact, and the dissolution of the Soviet Union, new
relationships are now being built through the Partnership for Peace
program; new allies are also moving towards full membership in NATO.
The grim stability of the Cold War has been replaced by
international instability, complete with a rise in nationalism and, in
some areas, religious fanaticism. While we may all desire a new
world order, we may have to learn to live with significant disorder.
</FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>THE
EUROPEAN MONETARY UNION (EMU)</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">This decade
has also seen the closer integration of EU core countries and the
implementation of a single EU currency system. The recent decision
of 11 key European countries to combine their currencies into the Euro is
a move of enormous economic significance and one that will affect the
relationships between the countries involved, the relationship between
Europe and the United States, and NATO. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">In economic
terms, today’s world is dominated by a dollar-based trade bloc led by
the United States, a bloc that outweighs, by a significant margin, any
other economic bloc. The U.S. currently accounts for 16.1% of the
world’s trade and 22.9% of the world’s GDP (inflation adjusted
on a Purchasing Power Parity [PPP] basis). Of the free-trade
economies, Japan comes next with 8.5% of the world’s trade and 8.95%
of the world’s GDP (on a PPP basis). With the implementation of
the Economic and Monetary Union, 11 European countries will command 18.6%
of the world’s trade and 17.8% of the world’s GDP (on a PPP
basis). In other words, the European countries will command more
world trade than the United States. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The
consequences of this change could be profound. Currently 40% to 60%
of all global financial transactions are carried out in dollars, with the
nearest competing currencies, the deutsche mark and the yen, accounting
for only 10% to 20%. The creation of the Euro will likely produce a
real alternative to the dollar as a global trade and reserve currency.
Fred Bergsten, a director of the Institute for International
Economics since 1981 and Assistant Secretary in the U.S. Treasury during
the Carter Administration, has estimated that the resulting adjustments in
reserves will call for $100 to $300 billion to flow out of dollars and
into Euros. In the private sector he expects $350 to $700 billion to
transfer. There are historical precedents for this. During the
early 1980s, when America was running a particularly large deficit
together with a high interest rate, $230 billion moved from the yen to the
dollar, resulting in a 25% appreciation of the dollar against the yen.
The inevitable consequence of billions moving from dollars to Euros
would be the creation of a strong Euro and a weak dollar, the erosion of
American industry’s current advantage of having the dollar as the
cost basis of world currency, and a boost to America’s
competitiveness through the exchange rate. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Bergsten’s
analysis also considers the impact of such change on a number of key
economic institutions. The Group of Seven, for example, with the
U.S. the largest and most powerful economic partner, would become a “Group
of Two”—two powerful economic groups plus two or three
also-rans. The International Monetary Fund and other international
consultative bodies would be affected in a similar way. It will, of
course, take some time for these changes to take place; it will be 2002
before Euro bank notes replace all the relevant national currencies.
But from January, 1999, the process becomes irreversible. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The
countries concerned will face some significant risks. For example,
the ability to make interest rate adjustments will be removed from the
National Finance Ministers’ tool box, significantly reducing the
control that individual nations can exert over their financial affairs.
Countries with inflexible labor markets and relatively high tax
burdens are also likely to experience further negative impacts on their
unemployment rates, which are already very high. The effect of the
Euro’s introduction will be profound, and has the potential to change
economic relationships between Europe and the United States. The
impact will also increase as additional countries join the Alliance in
2002. Is this something that should concern us? </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">And what
about the implications for those Central and Eastern European nations that
aspire to join the EU? The EU is now the dominant trade partner for
most nations in Central Europe. Some 60% or more of their trade
flows are focused on/received from the EU, which also provides the
majority of the foreign direct investment flowing into the region. It
seems logical that several of these Central and Eastern European nations
should in due time join the EU. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The nations
of Central Europe already face substantial challenges—political,
financial, industrial, and (especially for those joining NATO in 1999)
military. EU membership and the Monetary Union will be two other
major challenges—perhaps difficult ones for nations that have only
recently acquired or reacquired effective sovereignty. The immediate
impact of the EMU on those aspiring to join the EU will be mixed—there
will be some pain from the measures they take to reduce inflation and
budget deficits; some gain from reduced transaction costs for the majority
of their trade within Europe; and possibly some export trade gain in the
short term if the Euro proves to be a strong currency. But the main
regional gain from a successful launch of the Euro will be political—it
will give Europe greater self-confidence, which should help the process of
EU expansion. In my view, the impact of EU and NATO expansion on the
prospects for security and prosperity in Europe will be every bit as
significant, and as positive, as the fall of the Berlin Wall. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>A
SHORT HISTORY OF THE AEROSPACE INDUSTRY</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">I would like
to take a moment now to point out a few instances in the history of my
industry that I believe illustrate what can be achieved when both sides of
the North Atlantic act together. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The first
form of aircraft was the kite, made about the fifth century BC. In
the 13th century, an English monk, Roger Bacon, conducted studies that led
him to conclude that air could support a craft in the same manner water
supports a boat. At the beginning of the 16th century, Leonardo da
Vinci gathered data on the flight of birds and anticipated flight
developments that subsequently became practical. As well as
inventing the airscrew, or propeller, and the parachute, he conceived
three different types of heavier-than-air craft: an ornithopter, a machine
with mechanical wings designed to flap like those of a bird; a helicopter,
designed to rise by the revolving of a rotor on a vertical axis; and a
glider, consisting of a wing fixed to a frame on which a person might
coast on the air. Leonardo’s concepts also involved the use of
human muscle power. And though many of his concepts were quite
unsuccessful in producing flight, Leonardo made an important contribution
to aviation because he was the first to make scientific proposals. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The
practical development of aviation took various paths during the 19th
century. The aeronautical engineer and inventor George Cayley was a
far-sighted theorist who deserves to be called the father of aviation.
Cayley tested his ideas with experiments involving kites and
controlled and man-carrying gliders, and designed a combined helicopter
and horizontally propelled aircraft. Francis Herbert Wenham, a
founding member of the Royal Aeronautical Society in Britain, used a wind
tunnel in his research and foresaw the use of multiple wings placed one
above the other. Other early contributors included the Frenchman
Jean Marie Le Bris, who tested a glider with movable wings, and the
renowned Otto Lilienthal of Germany, whose experiments with aircraft,
including kites, ornithopters, and gliders, attained great success from
1894 until his death in 1896, when his glider went out of control and
crashed. The many advances throughout the 19th century, especially
those of the pioneers Cayley and Lilienthal, laid the foundation for the
successful flight by the Wright brothers in 1903. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Later in the
20th century, other European contributions were made to aerospace
development. These included the first jet engines, pioneered by Sir
Frank Whittle in the UK, and a ramjet model created by the French
aeronautical engineer Rene Leduc that he exhibited in Paris in 1938.
A jet plane that was powered by an axial-flow turbojet and designed
by the German engineer Hans Pabst von Ohain made its first flight in 1939.
In the following year, under the direction of the aeronautical
engineer Secundo Campini, a number of Italians developed an aircraft
powered by a turboprop engine with a reciprocating engine-driven
compressor. Germany also contributed swept-wing aerodynamics; the UK
produced the world’s first jetliner, the Comet; the British and the
French produced the world’s only successful supersonic airliner, the
Concorde; and the UK produced the world’s first vertical take-off and
landing aircraft, the Harrier. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">None of
this, of course, detracts from the enormous contributions made by the
United States—by the Wright brothers, Lindbergh, the pioneering of
mass-produced civil airliners such as the DC3 and its successors, the leap
forward in aircraft systems represented by the Flying Fortress (the B17),
the first supersonic flights, the early exploration of space, and America’s
finest achievement, placing a man on the moon less than 70 years following
man’s first flight. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The message
I draw from this history is that, on the global stage, Europe and North
America progress more constructively and faster when we act together,
building upon our respective talents and technologies. British
Aerospace has continued this great tradition. We have worked with
McDonnell Douglas, which is now Boeing, for more than 30 years, on
programs such as the F4 Phantom II, the Harrier jump jet, and the T45
Goshawk trainer. Boeing is now a partner on Nimrod 2000, our new
Maritime Patrol system for the Royal Air Force. We are teamed with
Lockheed on the JSF fighter program and on the Future Scout Cavalry System
reconnaissance vehicle. We are also teamed with Raytheon-Hughes on
AIM 9-X and ASRAAM short-range air-to-air missiles. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>EUROPEAN
AEROSPACE AND DEFENSE INDUSTRY CONSOLIDATION</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Currently we
are engaged in Europe in a debate focusing on how we will take our defense
and aerospace industries forward. We have been impressed by the
progress in the United States over the last few years in consolidating
United States industry. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Britain has
always had a global view, particularly because we are dependent on exports
for our economic well being. At British Aerospace, our vision of our
industry’s future is global too. The U.S. industry is currently
dominated by two or three large players. It is our job to make sure
that we are part of the most successful of these global alliances. In
order for this to come about, however, our customers—and in the
defense business that means the respective governments—must become
comfortable with the idea of working with an international defense
contractor. The United States is likely to set the pace with respect
to how soon we could begin such a process. In the meantime we must
continue to do what we can to bring elements of the European industry
together. Then, when the day arrives that a transatlantic link can
be put in place, there will be a European entity with which the U.S. can
deal as an equal partner. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Since I last
addressed a NATO Workshop on the subject of the possible integration of
the European industry, we have made considerable progress. The
program to turn the Airbus operation into a normal company is proceeding
on schedule, although the difficult phase of negotiations on valuation is
about to begin. We have also spent time discussing the request posed
in the trilateral declaration from the French, British, and German
governments for proposals for the integration of the industry on a wider
basis. The report that we were able to submit in March of 1998
contained much promising progress. We were able to tell the
governments that we had a joint view of the scope of the company that
might result; a joint view of the management structures; and, in the long
term, a joint view of the required ownership structure. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Along with
this considerable progress, however, there remain some significant
obstacles, largely associated with the question of how we will get from
here to there. We were initially disappointed that the French
government indicated that they saw continued state shareholding in the
French industry for the foreseeable future, but the recent announcement by
that government of plans to open Aerospatiale’s share capital is an
indication of how seriously the European governments wish to see progress
on this issue. The government deliberations also now include the
Swedish, Spanish, and Italian governments. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Another
issue that demands thought is how the defense and aerospace industries of
the new NATO members and other nations in Central Europe will develop
their role within the wider European partnership. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>TRANSATLANTIC
PERSPECTIVES</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">It will be
interesting to see whether the recently announced merger of Daimler Benz,
Germany’s most prestigious industrial company, and Chrysler, an
important American company, has any impact on the approach to
consolidation in Germany. The merger is certainly an indication of
changing relationships across the North Atlantic, and a further move in
German attitude towards the shareholder-value culture of the Anglo-Saxon
nations. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">We are also
watching with interest the U.S. government’s deliberations on the
future of Lockheed and Northrop-Grumman. It would appear to European
eyes that the U.S. is now questioning whether the national
industry-consolidation story has gone far enough, and where it will look
for further structural moves. It seems inevitable that the next
steps for the U.S. giants—Lockheed, Boeing, and Raytheon—will be
in the direction of the more significant European players. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">With the
profound changes we have seen in both our security and our economic
institutions, it is worth reflecting on what the next ten years may bring.
Will the next decade of change outstrip the remarkable changes of
the 1990s? Will we properly exploit the opportunities that NATO and
EU expansion will offer for increased prosperity and security in Europe?
Will the new economics of the new North Atlantic partnership
eventually provide a backdrop to the NATO military alliance? Should
we begin to think about a North Atlantic free trade area that consists of
an enlarged European free market area combined with the North American
free trade area? After all, NAFTA stands just as well for the North
<I>Atlantic</I> free trade area as it does for the North <I>American</I>
free trade area. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>STRENGTHENING
AND IMPROVING THE U.S.-EUROPEAN ALLIANCE</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The events
of the Second World War and of the Cold War remind us that the U.S. and
Europe need to think about their economic and security policies
holistically. While the NATO Alliance has been remarkable testimony
to the strength of our mutual resolve and what can be achieved through it,
the more recent lessons of the Gulf War, Bosnia, and the new Asian
security picture that is emerging in the wake of Pakistan’s and India’s
nuclear tests teach us that future threats to our security and economic
well-being will not be restricted to the transatlantic area. They
also teach us that we should not be afraid of thinking about moving our
tried and tested transatlantic relationships onto a new and higher plane
as we confront the challenges of the next millennium. </FONT></P>
<P ALIGN="LEFT"><A HREF="weston98.htm">Go to Top of Page</A></P>
<P ALIGN="LEFT"><A HREF="workshop98.htm">Return to Vienna '98</A></P>
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<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Copyright ©
1998 Center for Strategic Decision Research</FONT></P>
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