Pulling Out of MEADS Might Cost the U.S. More than Staying In

ROME and BONN, Germany — Italy and Germany have warned the United States that it could be liable for penalty payments of $400 million if it pulls out of a trilateral anti-missile program, almost exactly the sum U.S. politicians want to save by canceling U.S. involvement.

Although the United States, Germany and Italy have spent about $4 billion developing the Medium Extended Air Defense System (MEADS), the United States has opted not to procure it, and U.S. legislators have sought to pull out of this year’s development work — the final year of development scheduled.

Staying in the program this year would cost $400.9 million, and some legislators have argued it is not worth the expense for a system the United States has no plans to buy.

The decision has prompted repeated requests from Italy and Germany to stick to the development schedule, including a test firing against a ballistic missile planned this fall at White Sands, N.M., to allow the partners to harvest vital technologies.

Now, European officials have warned the United States that if it fails to provide this year’s funding by the end of March, it could be liable for penalty payments under terms of the memorandum of understanding (MoU). This means the United States might pay more to leave than to stay.

“There would then be a requirement for reimbursement, which has been estimated to be a minimum of $400 million,” said Gen. Enzo Vecciarelli, head of the armaments section at Italy’s defense procurement office and a member of the MEADS board.

Vecciarelli said Italy has not yet started talking to NATO about penalty payments. “We haven’t, and we hope we don’t have to,” he said.

The defense ministers of Italy and Germany also warned of a penalty in a Jan. 29 letter to U.S. Defense Secretary Leon Panetta. In the letter, the ministers state that “if the U.S. does not fulfill its funding commitment for 2013, Germany and Italy would need to interpret this as a unilateral withdrawal. Under the terms of the MoU, Germany and Italy expect formal notification of the U.S. intent to withdraw from the MoU (while funding up to the effective date of the withdrawal). In addition, funding for all contract modification and termination costs incurred as a result of the U.S. actions shall be paid by the United States.”

The letter continues: “We assure you that this is not negligible. In a first estimate the current U.S. position results in an economic damage to Germany and Italy of more than $400m. This is a result of development activities, which cannot be executed due to the missing [fiscal year] 2013 U.S. funding and the termination liability for terminating those contracts earlier.”

The letter suggests that the end of March is the deadline for the United States to make definite plans.

The U.S. Army — which administers the MEADS program — is working on a study due in May that will assess which MEADS components might be of use in any future Army missile defense projects. The Pentagon is preparing a response to the letter and had no comment, a Defense Department spokesman said.

Congress defied U.S. President Barack Obama by cutting money for the program in a bill authorizing funding for the U.S. military in fiscal 2013, although there still is a chance legislators will free up funds.

The air-transportable MEADS is 58 percent funded by the United States, with Germany and Italy funding 25 and 17 percent, respectively. Lockheed Martin leads an industrial team including the Italian and German units of European missile house MBDA.

An official at Lockheed Martin said the government oversight committee for MEADS met in early January and decided that a bridging contract for MEADS work until the end of March would be authorized, using funding from 2012.

“That coincided with a U.S. continuing resolution for MEADS, which expires on March 31,” said Marty Coyne, MEADS business development manager at Lockheed Martin.

In a Jan. 10 letter from the chairman of the MEADS board, Michael Hain, to Gregory Kee, the head of the NATO agency supervising MEADS, Hain wrote, “[T]here are conflicting interpretations of the MoU amongst partner nations which may result in a dispute, should U.S. FY2013 funds remain unavailable.”

The MoU refers to any partner who pulls out paying “all contract modification or termination costs” caused by the pullout, but it also states partners must give 180 days’ notice before pulling out and pay their share until they do so. Since the U.S. has not formally pulled out of MEADS, it could therefore be forced to stay onboard until close to the end of 2013 and then face reimbursement claims on top.

Vecciarelli said he was hoping the United States would still approve funding to complete the design and development stage.

“We see MEADS as fundamental to NATO’s integrated air defense,” he said. “We believe the second test launch this year will be a success, and I believe the U.S. would be able to find a solution.”

The German and Italian defense ministers, Thomas de Maiziere and Giampaolo di Paola, warned in their letter that dropping out of the MoU would “set a bad precedent for future transatlantic cooperation in principle. In particular one result would need to be the reconsideration of multinational cooperation in the context of NATO’s Smart Defense initiative.

“After the Canadian withdrawal from the NAEW&C [NATO Airborne Early Warning & Control] and AGS [Allied Ground Surveillance] programs, the current U.S. position would represent the second evidence in one year of the lack of reliability and as such set a bad precedent for future trans-Atlantic cooperation in principle.”

Speaking Feb. 2 at the opening of the Munich Security Conference, De Maiziere said, “Among allies there must be no uncoordinated drawdown of capabilities.”

A spokesman for MBDA Germany, the German part of the European missile house, said the company is following the budget talks in the United States “with concern,” adding that “MEADS is our largest development program.”

Before it threatened to pull out of the last phase of development, the United States had already decided not to procure the system. But Vecciarelli said, “If we can harvest the technology with Germany, then we can define a common system. We are talking to Germany now about a European solution, although continued cooperation in this field with the U.S. remains our preferred solution.”

Paul McLeary in Washington contributed to this report.