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Germany Cobbles Together Coalition to Cling to Defense Stake

Today the Wall Street Journal is reporting that the German government has succeeded in building a consortium of companies to temporarily hold one third of DaimlerChrysler’s stake in the European defense giant EADS. The stake, which will be valued at $1.9 billion, will be purchased indirectly through derivatives by a group including investment banks such as Morgan Stanley, Credit Suisse, Goldman Sachs Group, Deutsche Bank, Commerzbank, and various federal German banks. A380.jpg Problems with the A380 have opened the door to a Russian move on EADS Ever since last year when EADS announced production problems with the Airbus A380 superjumbo, stakeholders have been under extraordinary pressure to maintain a delicate multinational balance of influence in a business area of significant strategic importance. When it was made public that EADS would be losing about 5 billion euros worth of future profits, the pressure became too much for Dr. Z (CEO Dieter Zetsche) of DaimlerChrysler. Here’s what he told the Journal:

“We would have liked to do our job, come up with a result and then inform the public,” Mr. Zetsche said. “As this is a very political sphere, it’s probably naive to think that’s possible.”

The extremely strict corporate governance rules have a long and at times bitterly political history in the consortium, which has always sought to balance out French and German influence. This latest deal will perpetuate that tradition, which some say holds it back from becoming a market-driven, trans-European corporation that would be more representative of the new, enlarged community of nations instead of the old Franco-German axis of influence. EADS’ financial woes has brought in a number of potential suitors – not always from welcome locations either. In September, when the Russian government-owned VneshTorgBank purchased a $1 billion 5% stake in EADS, Europe reacted with surprising hostility and paranoia. While the market is the market, it seems that even the ancien regime in German politics bristled when Vladimir Putin indicated that Russia would like to make some serious changes to the company:

Putin: We do not view EADS as an ideal corporation. If we take part in this work, we will need to discuss with our partners how the corporation should be organised and on what principles it should function. It should be a market organisation and not an organisation where the state decides everything in advance and years ahead, thereby undermining its market status and effectiveness. We therefore do not have any desire to enter this corporation at any cost.

However, there were some reports that French President Jacques Chirac viewed the Russian role in European defense as a necessary move to compete with U.S. defense firms:

The push for closer defense and aeronautic ties isn’t one-way traffic. Chirac has long hoped to draw Moscow deeper into the EU’s defense arm, believing that Russia’s military might is necessary for Europe to match the U.S. as a global superpower. France and Germany also forged closer relations with Moscow in 2003 when opposing the Iraq war.

eads.jpg Would Russian influence in EADS open new markets, or invite sanctions? It seems much too premature to say whether Russia’s interest in gaining more influence in EADS matches its hunger to acquire energy assets and distribution monopoly, but there are legitimate concerns regarding its quest for an executive role on the board when its progress toward improving rule of law, deepening democracy, and respecting human rights are so disputed. Colonel Christopher Langton, head of the Defence Analysis Department at the International Institute of Strategic Studies (IISS) told ISN Security Watch the following:

The whole question must be put in the broader context of Russo-European strategic relations, which entail not only EADS and defense, but also energy security and supplies,” he said. “Mr [Russian President Vladimir] Putin knows that Europeans are particularly sensitive to energy matters after last year’s Ukraine gas crisis, and thus a grand bargain between Moscow and its Western European counterparts would be welcomed by Paris and Berlin.”

While it certainly has been demonstrated that managed economy in Europe produces a number of dreadful inefficiencies (this intervention by Merkel is more an exception than the norm), and EADS’ long-standing status as a sacred symbol of the Paris-Berlin balance of power is outdated, one has to wonder whether stronger Russian participation would bring more problems than competitive advantages, given Rosoboronexport’s sanctions issues with the United States for selling arms to Iran and Syria.