LAST WEEK'S Franco-German deal over observation satellites is significant for the European space industry and, it is to be hoped, for the missiles industry as well. Its deeper significance, however, is that the deal finally ends a damaging stalemate between France and Germany, which was threatening to block progress on industry restructuring. The removal of that blockage should also have effects throughout Europe - especially in resolving the relationships between the UK industry and its European counterparts.

The satellite deal - much discussed, and long-awaited - comes at a crucial point for the French and German aerospace industries. Both are in the process of major internal restructuring programmes, neither of which is proceeding smoothly. Germany is a little ahead of France, although it is still mired in the inevitable social problems related to job cuts.

The French industry is in deeper trouble, with Aerospatiale, for instance, demanding Fr10 billion ($2 billion) from a combination of the state and private sectors to recapitalise - effectively producing a kind of privatisation. Although, on the surface, this has nothing to do with the German and other alliances, it is clear that Aerospatiale's ability to carry such alliances through depends on an improvement in its financial health. The only way in which it is going to achieve that health in the short term is through getting the money it wants.

The French Government is trying to press on with a fundamental review of its defence strategy, needs and industrial shape. Its comit, strategique is likely to recommend that several major programmes be cancelled. The strengthening of the Franco-German axis, not least through the satellite and missile deals and a forthcoming defence cooperation agreement may have a profound effect on those deliberations. What does not make economic sense for France or Germany to pursue individually may well make a lot more sense within a joint venture.

A bigger hurdle could yet come from the realities of national politics. Aerospatiale's president Louis Gallois wants his company to be the "pole" of the European restructuring effort, but his unions are worried that as key divisions are progressively hived off into alliances, the identity of the company may be lost. There are similar worries in Germany, where the unions fear that Daimler-Benz's attempts to shrink and make alliances could lead to it being little more than a holding company for low-cost-base manufacturing elsewhere.

What is clear is that the Franco-German alliance is stronger than ever, as evidenced by the agreement reached during November's European Space Agency Council meeting for long-term European participation in the Alpha Space Station. Germany and France compromised to achieve this, and the same is true of the new satellite deal, which saw the Germans reluctantly agreeing to pay more, in exchange for eventual leadership of the satellite alliance.

In return, Aerospatiale will lead the missile merger, the industrial details of which are already agreed. Neither deal, of course, addresses the question of the position of France's other major player in the two sectors, Matra. The failure of its long-awaited deal with British Aerospace to materialise leaves Matra as a significant solo player, while its consolidation of the UK space business in association with GEC has left it as a powerful second force in Europe. Will Europe end up with two missiles and two space entities, or does the Aerospatiale/DASA alignment presage something more far-reaching, perhaps involving the Italians?

What is clear is that the attempts by the French and German Governments to sustain strong, independent aerospace businesses largely within their own borders have not been successful. The sizes of prospective home and export markets for the Europeans are not big enough to support even the proposed number of European aerospace businesses. The missiles and space logjams may have been partly broken by the latest accord, but more will certainly have to be done - and that "more" will be more traumatic than the establishment of a couple of joint ventures.

Source: Flight International