Wave a cheerful goodbye to BAE

Britain should be delighted to be getting rid of weapons maker BAE - we're much better off out of the defence industry, says Matthew Lynn.

No sooner had the deal been announced than the soul-searching began. British Aerospace (BAE), for decades Britain's national champion in the defence and aerospace industries, announced last week it was planning a £30bn merger with its French and German-owned rival, EADS.

Why are we surrendering control of one of our most important industries, wailed the critics? How can British jobs be safeguarded? How can we make sure our boys in the field get the best kit when we don't control our major arms manufacturer any more?

It's all nonsense. Our bloated defence industry is an albatross. It consumes vast, if often hidden, public subsidies that could be better spent elsewhere. It is frequently an embarrassment, distorting foreign policy to no great effect. And it is one of the world's fastest-declining industries a good thing to be getting out of. We should wave a cheerful goodbye to BAE. We're better off without it.

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It remains to be seen whether the merger goes through. The two companies have struck a deal but, as the Glencore/Xstrata merger has shown us, there is a difference between that and the firms actually combining. The shareholders still have to be brought on board, and with complex golden shares' owned by the British, French and German governments, it wouldn't be a surprise if in a year's time everyone is still arguing about the final terms of the combination.

In Britain the political opposition is already making itself felt. Retired generals and admirals are queueing up to tell us how vital a British weapons industry is to the defence of the country. Tory backbenchers fret about the impact on jobs. Industrialists complain that one of the few major manufacturing industries we have left will now move to France and Germany. But does Britain really want to be a major player in defence anymore?

It is true that Britain has a big arms industry. We are the fifth-largest arms exporter in the world, just behind America, Russia, Germany and France. Around 300,000 jobs in Britain are dependent on the industry, according to the Defence Industries Council.

Many of those are high skilled, technologically advanced and well paid, say the industry's defenders precisely the kind of thing we should be encouraging. Germany and France are working hard on boosting their defence industry, and so should we, argue the merger's critics. While there are plenty of safeguards built in, the merged firm will basically be a French/German company which means the best jobs will be in Hamburg and Toulouse, not Bristol.

The trouble is, none of these arguments for having such a big presence in the arms industry really stack up. Defence devours huge sums of public money. The government feels compelled to buy British, rather than sourcing the best and cheapest products from around the world. So the industry receives vast subsidies, in the form of high prices and help with research and development. Surely it would be better if that money was spread out across a range of industries?

True, it creates jobs. But any form of government spending creates jobs the question is whether these are the jobs we want to create. Worse, the industry does huge reputational damage to the country. A succession of British prime ministers, from Margaret Thatcher to Tony Blair, have humiliated themselves doing deals with corrupt and shady regimes simply because they placed orders for British weapons. Foreign policy gets shaped by the demands of the arms industry. It is easy to pressurise ministers into turning themselves into glorified weapons salesmen when there are jobs at stake. But it would surely be better for the country if they didn't have to.

Moreover, defence in the developed world is an industry in decline. Eighteen European countries have seen real-terms falls of more than 10% in military spending since 2008. Eight of these have made cuts of greater than 20%. In western Europe, the largest falls have been in Greece where spending is down 26%; Spain, down 18%; and in Italy, where spending is down 16%. But budgets are also falling in real terms in Germany, Britain and America. In France they are static. Governments are under huge pressure to cut their deficits and defence is an easy target.

Yes, some countries are ramping up military spending. As China grows richer, for example, it is spending a lot more on its armed forces. But are the Chinese going to equip the Red Army with British weapons? Yeah, right. Maybe they will buy our TV sets as well. In fact, it is because the industry is in decline that BAE and EADS want to merge. Both are finding it too tough on their own.

Since the end of the Cold War, the defence business has been shrinking. Happily, despite the many problems in the world, there is no reason to think that is going to change any time soon. There may be an argument for keeping a small domestic weapons industry: you never quite know what might happen. But Britain doesn't need one of the largest defence industries in the world. If the merger goes ahead, Britain can happily wave goodbye to it and concentrate on genuine growth industries instead.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.