Power, as Chairman Mao once observed, grows out of the barrel of a gun. Unpalatable as that maxim may be in the post-cold war era, European leaders still smart at the realization that they lack both the muscle and the mind-set to solve global security problems--a message that was rammed home in uncomfortable fashion by the U.S. power play at last year's Bosnian peace talks in Dayton, Ohio. As American officials took charge of the negotiations, European delegates noted grimly that even if Europe had been able to muster the political will to intervene decisively in its own backyard, it lacked the means to do so: it has no European army, weak air and naval transport, ineffective spy satellites and not even the semblance of a European military-command structure outside of U.S.-led NATO.

That may be about to change. Although European Union ambitions to develop common foreign and security policies have yet to take concrete form, plans are afoot within NATO to develop what amounts to a separate European command and force structure that would enable European members of the NATO alliance to act collectively without direct U.S. involvement. Plans to integrate the 10-member West European Union into NATO will be proposed at an alliance meeting in Berlin on June 3. The decision to finally create a "European pillar" within NATO was reached at a summit meeting in Bonn last Friday by German Chancellor Helmut Kohl and French President Jacques Chirac. The proposed integration would make it easier for WEU and E.U. member nations to run their own military operations.

But significant as these developments are, a more accurate indicator of how seriously Europe is taking the security challenge is the growing realization on the part of key European governments that they must finally work together to bolster a defense industry that is in danger of being eclipsed by U.S. competition--even if this means adopting a politically risky and commercially combative "buy European" procurement policy.

The stakes are enormous. Industry sources estimate that U.S. companies already supply roughly 35% of Europe's total defense needs. And the Americans are far from complacent: they aim to increase their share of Europe's military market in the coming years. A recent study by the European Commission in Brussels warns that the 10 largest U.S. defense companies are twice the size of their 10 biggest European competitors, are far more profitable and are growing faster--aided by a weak dollar that helps make American weapons systems more affordable to governments anxious to hold down defense spending.

Can the Europeans mount a counteroffensive? Experience would suggest not. For the better part of 30 years, Europeans have talked tough about consolidation and cooperation to meet the U.S. challenge; in practice, they have clung to the old ways, jealously favoring their national champions. But with world markets and military spending shrinking dramatically, both governments and defense companies have seen the light and they are determined to act together. "Today we are underdogs, and we must, through cooperation, build up our industrial-technology base," concedes Manfred Bischoff, president of Daimler-Benz Aerospace, Germany's largest defense company. "Otherwise, we risk disappearing, and the Americans, whose domestic markets are closed to us, get it all."

Bischoff, whose company lost a record $1.8 billion in 1995, has been quietly holding talks with his counterparts in France and Britain as well as with senior defense officials in the three countries, which together account for some 75% of Europe's defense production. "We are about to open a new chapter in European defense history," says Dick Evans, chief executive of British Aerospace, whose defense arm helped power the company to pretax profits of $495 million last year, a spectacular 95% increase over 1994. British Aerospace, which nearly went bankrupt four years ago, has slashed its work force to 45,000, from 133,000 in 1988, and by any measure is the most financially sound of the European competitors.

Evans and other senior defense-industry officials in major European capitals promise they will apply strict criteria of profitability to cooperative ventures being planned by E.U. and WEU members--a new armored vehicle, a state-of-the-art military radar observation-satellite system, a military transport plane, an anti-air warfare frigate and an advanced fighter aircraft--all based on European equipment and technology, representing more than $20 billion in potential orders. Europe's new aim is to get away from cumbersome consortiums, in which the long-established approach has been to share out the work irrespective of whether it makes sense from a production standpoint. "From now on," says Evans, "we need, and hopefully will get, a new mechanism for future cooperation that will be profitable and under a single management."

Not in the cards, however, are U.S.-style megamergers that would create a single European aerospace-electronics defense giant. Instead, new, one-product niche companies will be formed. Their assets will be pooled and, most important, will be run by a single management empowered to control the combined operations from a single headquarters. Example: two jointly owned French and German companies were created last December--one in Paris and one in Munich--to produce radar satellites and missiles. This represents a radical departure from some 75 existing cooperative ventures, such as Eurofighter, Eurocopter and Euromissile, which over the past decade or more have proved cumbersome to manage and unprofitable in many cases.

Most surprising--and encouraging to the French and the Germans--is the quiet shift by Britain's defense establishment toward its Continental European allies. Britain has long been a larger customer of U.S. military equipment and technology than of its European allies and has also had more success in selling weapons systems, like the Harrier vertical-takeoff fighter, to the American armed forces. That coziness with Washington has not endeared the British to fellow Europeans. French and German defense officials are still fuming over Britain's order for 67 McDonnell Douglas Apache helicopters last year--a rejection of the French-German Tiger model--and they brush off Britain's disclaimer that its policy is based on "value for money." Yet, as a recent joint memorandum by Britain's Defense and industry ministries noted, "there are now signs that while significant differences in approach [to foreign procurement] remain, attitudes are changing."

That guarded diplomatic language reveals a growing conviction in London that, in light of Europe's failure to deliver in Bosnia, plus steadily improving relations between British Prime Minister John Major and fellow conservatives Chirac and Kohl, Britain is far more interested in helping to build what a senior Defense Ministry official in London describes as "a strong, viable European base" with, and for, British industry. Just last week a British-led European consortium was formed to bid on a $1.2 billion contract to supply the Eurofighter with its main missile system. Several additional billion dollars in sales would be generated in export orders.

Putting on pressure, France and Germany have let London know that Britain will be shut out of future collaboration projects if it doesn't help develop--and buy--more European products. "In a declining market, and despite our close ties to the U.S., we now realize we must draw closer to our European allies," says a British defense official. "We believe they are serious." Furthermore, as Foreign Secretary Malcolm Rifkind declared succinctly in a statement to the House of Commons, since it "will not always be reasonable" to expect the U.S. to lead in future crises, such as Bosnia, defense cooperation should be organized within NATO, but in such a way that "European countries are also able to act on their own when necessary."

Thus, in recent weeks, the Major government has announced full British participation in a new-generation air-defense frigate to be built jointly with France and Italy, a new armored utility vehicle planned with Germany and France, and what is expected to be Europe's biggest, single cooperative venture since the British-German-Italian Eurofighter, a large, long-range military transport plane to replace Europe's aging fleets of U.S.-built Lockheed Hercules and German-French Transall C-160s. And Britain confirmed last month that it was joining the fledgling French-German arms-procurement agency being established in Bonn to coordinate, independently of NATO, future French-German governmental purchases, research and development, and standardization.

France, with its stubborn resistance over three decades to consolidation of its defense industry and its we-won't-play attitude toward the Eurofighter, has often stymied European cooperation. But that attitude is also changing. "I want to have a defense industry that is more efficient, more modern and less costly," President Chirac announced during a nationwide TV interview Feb. 22, citing growing worldwide competition for arms sales from the U.S. Getting there, however, won't be easy. While Britain's industry is already concentrated around two major poles--British Aerospace and the General Electric Co.--France has no fewer than eight companies struggling to compete, most of them unwieldy state-owned concerns that are mired in debt.

Chirac threw down the gauntlet by announcing his intention to merge Aerospatiale, France's large state-owned aerospace company, with fighter-plane-maker Dassault Aviation and to privatize the Thomson defense-and-electronics group. Returning the $15 billion-a-year Thomson group to private ownership after 14 years of state control is not expected to pose major problems, and government sources say shares will be floated by the end of this year. Far more difficult, contentious and potentially embarrassing for Chirac is the proposed merger between Dassault and Aerospatiale.

Since 1976, successive French governments have been trying to merge the two companies, but owning only 46% of the Dassault shares makes the government's task difficult and delicate, particularly since the personal ties between Chirac and the wealthy, influential Dassault family are close, dating back to the President's childhood, when his father, a banker, served as close adviser to company founder Marcel Dassault. Dassault's son, Serge, now in control, is resisting the merger and refuses to negotiate seriously with anyone but Chirac. The two men haven't met since Feb. 18, when Dassault reportedly firmly insisted that there was no synergy whatever between the two companies and that Chirac's plan amounted to plundering.

Sources close to both men insist that Chirac won't budge and that the merger will go through. Louis Gallois, the widely admired president of Aerospatiale and an enthusiastic supporter of merging his far larger company (annual sales: $10 billion) with the far smaller Dassault ($2.3 billion), claims that investment bankers are already bidding for roles in the deal and that a government-led steering committee, including Dassault and himself, plans to complete detailed recommendations by June. "Chirac is no longer just a family friend, and the nation's interests come first. Dassault must accept this," says a government insider. "And we are convinced he has no choice." Intensified pressure on Dassault to give in is expected to come following last week's issuance by Belgian judicial authorities of an international arrest warrant for Dassault in connection with an alleged bribe paid by the company to win a Belgian air force contract in 1989.

Meanwhile, in Washington, the Clinton Administration is watching events with mixed feelings. It is encouraged, on the one hand, that Europe seems determined to take more responsibility for military intervention in future crises and more determined to establish a "European pillar" within NATO, but on the other it is wary. "The means, as the French are describing it, also distresses us,'' says a senior State Department official, a reference to what French Defense Minister Charles Millon has repeatedly described as a "European preference" in future purchases, meaning a position severely limiting U.S. imports into Europe.

U.S. shipments to the Continent may indeed fall. But if that happens, the hope must be that it is not the result of European protectionism. The more desirable reason would be that Europe has finally put its defense industry on a sounder footing and can actually compete with the military juggernaut on the other side of the Atlantic.