Atlantic Council

From Tom Kington and Albrecht Muller, Defense News:  Italy and Germany have warned the U.S. 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 U.S., Germany and Italy have spent about $4 billion developing the Medium Extended Air Defense System (MEADS), the U.S. 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 U.S. 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 U.S. 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 U.S. 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, obtained by Defense News, 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 FY 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 U.S. to make definite plans.  (photo: MEADS International)