What could the collapse of the Euro mean to the aerospace industry? A special analysis from Professor Keith Hayward, the Royal Aeronautical Society's Head of Research, who assesses the impact and effects of the Eurozone crisis on the aviation sector.   Some years ago, I wrote a pamphlet discussing the implications of the euro for the aerospace sector. It was largely positive; indeed I hinted of the benefits that might follow if the euro might join the US dollar as an international reserve currency. I did not engage in the argument about UK joining its European neighbours in monetary union. In general, I concluded that European aerospace would gain more than it might lose from the euro.  

Eurozone in crisis

The next few months may see at least one member state leaving the eurozone, possibly with a full scale collapse, or at least major reconfiguration of the common currency. This could mean four of Europe’s major aerospace powers would be outside the euro (with Spain and Italy joining the UK and Sweden). This would immediately negatively affect all of the European consortia and transnational companies whose operations were greatly eased by the eradication or simplification of currency fluctuations brought by the euro. We would be back to the days of Concorde and Tornado when cost estimating and work sharing was complicated by movements in national currencies. The European Space Agency would have similar problems; and the relative value of other EU research funding would be difficult to predict over time. Any ambitions to ‘take on the dollar’ would be indefinitely curbed.  

The dollar still rules -  aerospace OK!

Taking on the dollar was always likely to be a hard road. The critical link between oil pricing and aviation is the crux of the problem. Although some oil producing countries did accept that an alternative to dollar pricing would be politically advantageous, no one seemed to be in a hurry to challenge the status quo. The oil link led effectively to commercial aircraft dollar pricing and the gift of a useful commercial edge to US manufacturers. It also encouraged Airbus and other European consortia to price internal contracts in dollars and to invest in, or buy from, dollar area suppliers. Euro pricing would have substantially reduced this advantage. Realistically, the prospect of ending dollar pricing was some years away even before the current crisis hit the European Union. But even limited damage to the eurozone will have a marked impact on the way European aerospace does business — and this is before we factor in the impact of any consequent general economic recession on output and demand for aerospace products.  

European aerospace hit by the fall out

The affect of public deficit reduction is already apparent in defence aerospace and the growing avalanche of unco-ordinated cuts in defence equipment spending across Europe will do little to improve either European capabilities or the efficiency of the European defence market. The good news may be that other regions could escape the fall-out and still buy European aerospace products. Perhaps. Maybe. A more fundamental breakdown in European cohesion would be much more damaging to the aviation community. External opposition to European emissions trading notwithstanding, more rather than less, European airspace integration would offer substantial improvements in the sector’s carbon footprint. Inter-governmental negotiations might take us to the same solution but without a strong central champion in the form of the European Union Institutions, agreement would be much harder to reach. Similarly, would the single European market in air travel survive? Would we revert to national representation on WTO subsidy issues? And how much would the aerospace industry lose in terms of collective R&D support through the European Union Framework programme?  This may be a little like cutting to the car crash but there are several British politicians and commentators already anticipating, and relishing an end to ‘Ever Closer Union’ and the rolling back of powers now held by Brussels. The EU does have its ‘difficult’ aspects but its processes and political context has encouraged a positive approach to aerospace. Much earlier in my writing career I explored the paradox of how Europe had achieved impressive strides in aerospace collaboration without much regard for, or interference from, the Brussels institutions. That is no longer the case.  

UK aerospace is European

Britain is different in some respects given its links with the US, especially in the defence sector but UK aerospace would be in a much weaker position independently, without the leverage of a larger economic entity. It certainly benefits hugely from the knowledge generated by European programmes and is less hampered by restrictions on technology transfer attendant on working as a junior partner with the Americans. The British ‘veto’ on a Treaty approach to solving the euro crisis and the appearance of political isolation it brought may not have an immediate impact on UK aerospace. There are still high hopes and expectations of closer co-operation on defence equipment procurement with the French, and the prospect of a more efficient approach to collaborative development that might follow. What is for sure is that we are moving into uncharted waters and a period of sustained uncertainty beckons. This does not auger well for industry that needs to look long term and be assured of a stable economic and financial environment.   Read Professor Hayward's incisive analysis of the aerospace industry every month in Aerospace International magazine.

Keith Hayward
20 January 2012