One year after the failed mega-merger of EADS and BAE Systems, the question of defense-industry consolidation in Europe looms. But with most governments paring back defense spending and no large national or pan-European programs on the horizon, the urge to merge is waning among top aerospace and defense companies as they redouble efforts to stay competitive in an increasingly global market.

“In the 1990s and early 2000s, when defense spending was more stable, you had the promise of consolidation that could lead to more business, with the idea that pan-European programs would succeed national ones,” says Jean-Pierre Maulny, director of the Institut Relations Internationales et Strategiques (IRIS) here. “That promise is now gone, and the question for the future is not so much consolidation but the competitiveness of industry.”

On the heels of the unsuccessful merger attempt last year, EADS overhauled its governance structure to reduce interference from government shareholders and put itself on more equal footing with global competitors, notably Boeing. In July, the company changed its name to the Airbus Group and combined three of its weaker units—Airbus Military, Astrium and Cassidian—in response to shrinking defense spending in Europe.

“The page was turned with EADS 2.0,” says Luc Boureau, director general of Cassidian, which comprises a €14 billion ($19 billion) enterprise with 45,000 employees and more than 600 legal entities, many of which he says will be eliminated in the reorganization. “We'll be more competitive because we'll be able to reduce internal costs,” Boureau adds.

He notes that such savings may help in the short term, but with few new defense programs in Europe's future, some companies are collaborating on their own. In June, after France announced plans to buy U.S. Predator UAVs to meet short-term gaps in its intelligence, surveillance and reconnaissance (ISR) capabilities, EADS proposed a collaborative program with rivals Finmeccanica of Italy and Dassault Aviation of France to develop a new European reconnaissance drone.

“I am pleased to announce we are just now submitting a report about this call to the French government,” Boureau says. Although the project is unfunded, he says the companies are hopeful the proposal will find its way into France's new €190 billion military program law (LPM), a six-year budget plan to finance defense programs in 2014-19 that is working its way through the French parliament.

While the budget trims French defense spending through the end of the decade, companies that rely on both civil and defense aerospace programs for revenue say they expect to remain largely unscathed if the financial plan is carried out. “If the LPM is executed to the letter, the impact on Safran will be acceptable, with a reduction in business of €150 million a year expected,” says Michel Dechelotte, director of institutional affairs at the company, which has €15 billion in annual revenue split 80/20 between civil and defense, respectively.

In the meantime, Dechelotte says France and other defense powerhouses in Europe should focus their investments on a pan-European program capable of sustaining design expertise and production lines.

“You cannot forever solve the problem of a lack of government financing through consolidation or industrial monopoly,” Dechelotte says. What Europe needs is “a common program with a minimum number of different iterations,” he notes, one that pulls expertise from multiple countries into a single platform that can sustain the defense industrial base here.

“Defense industry jobs in Europe don't really depend on consolidation but on the length of production runs of a given product,” he says. Examples not to follow, he said, include Airbus Military's multiple versions of the A400M tactical airlifter and 20 distinct variants of Eurocopter's NH90 helicopter developed to meet a multitude of customer requirements.

“The cost of European equipment is no higher than anywhere else, but if you have short production runs, you can't get the per-unit cost down,” he notes. “This means we work in a fragmented way and cannot make our investments profitable.”

Helene Masson of the Fondation pour la Recherche Strategique here says the absence of a concerted effort to develop a common multinational defense platform has ramifications for Europe's ability to stay competitive through technology innovation as European capitals pressure companies to sell defense products abroad.

“It used to be just manufacturing that had to go international when looking for export contracts,” Masson says. “But with no new big programs coming in, companies have to find ways to sustain research and technology programs. So now the entire thing, including design, has to become internationally competitive.”

Masson says the dilemma for governments is the need to favor defense exports necessary for the survival of the industrial base while ensuring that Europe retains critical technologies.

“By 2020, the risk that we will lose technologies deemed critical for the industrial base here is relatively high, because you'll have an aging technology base that is not renewed by new programs,” notes Masson, who is coordinating the French contribution to a December European Union Council summit on defense that will set priorities and time lines for R&D in areas where capabilities are most needed. For example, Masson says governments could ring-fence key capabilities for export only among European nations while reviving mechanisms for cooperation in support of pan-European and trans-European programs.

“Nations should be able to use defense offsets to strike new partnerships and joint ventures, or develop local subsidiaries that might produce material at lower cost,” she says.

These and other collaborative pooling and sharing concepts will be addressed at the December summit. The outcome—a portion of which is to be funded through the European Commission's €1 trillion multiyear budget—is expected to harmonize defense commerce in Europe, and could enable the EU's executive arm to develop common military certification and standards, fund dual-use R&D and ultimately purchase and operate its own military hardware, including UAVs.

“EADS is giving strong support to this EU Council, especially for any decisions it might make for funding drones,” Boureau says.