The news apparently took the financial community by surprise . EADS and BAE systems, who are the European giants in the fields of civil and military aviation, respectively, have announced they are in talks about whether to merge into a single 38 billion euro operation to create the world's largest aerospace manufacturer.

David Cameron and especially Nick Clegg, his LibDem deputy, are said to be broadly in favour of the deal. The arguments in favour go something like the following, according to people at EADS pushing for the deal.

There is too much duplication in European military procurement, and money is spent nationalistically and therefore inefficiently. A single European manufacturer would help against that. Europe would finally have a giant to compete on the scales of Boeing - which, lest we forget, has a large military component.

BAE Systems, which has close links to the States, has suffered from declining defence spending in the United States and the UK. In contrast EADS, which has endured many years of losses from absorbing the development costs at Airbus, has become a runaway success as a civilian airliner provider as a result of the growth of air traffic in Asia.

Airbus's A380 super jumbo, after rocky start, is selling steadily. However, EADS, though it has a military arm, is a less experienced military manufacturer than BAE - more importantly, it has far less penetration in the United States. BAE might be on its way down as EADs is on its way up, but they complement each other, goes the lobbyist spiel.

The idea is to list the company in both Paris in London - in the same way Royal Dutch Shell is listed in Amsterdam and London. To run the new company separate from political interference the EADs has so far endured, thus move beyond the micromanagement EADS has experienced under its Franco-German political control in the past, and thus grow faster than it has been so far.

Scepticism has been rife. Some British commentators fear their corporate managers are happy to sell off the national manufacturing crown jewels under pressure from the City looking for commissions. In this narrative, deal hungry Mergers and Acquisitions investment bankers and lawyers are circling around the company. Hundred million dollars in transaction and management fees have been touted as the cost of pushing through the merger. The City of London's deal men haven't faced the prospect of such a bonanza in years, since the crisis began. They must be salivating. The future of British manufacturing and a British skills base is a secondary consideration, say critics.

There is a lack of faith in some circles that the new entity will be free from national political control. The French government seems reluctant to relinquish its 15% stake in EADS, which currently allows them, and the Germans, who have a similar influence, to have a say in the strategy and the hiring and firing of senior executives. There are said to be various mechanisms in the proposal to prevent one nation taking over, but guarantees are one thing. Let's look at history.

Past transnational mergers involving UK and French companies have usually ended up with the UK drawing the short straw, not least because, at the end of the day, the British government is much more laissez faire than the French about such things. Latterly there has been a realisation that this can me a crucial laws of R&D facilities and skills expertise if you let go of the reins. Twenty years ago GEC and Alstom created a merger in order to become a world beating rail transport manufacturer. Today the skills have moved across the channel. Just this yeat International Power tried to runs its operations from two centres in France and the UK; but this year the French majority share owner bought out the UK minority owner. When expertise is offshored, the supply chain of hundreds of UK suppliers breaks up.

Criticism has been coming from particularly Germany too: according to the German press, the Germans trust neither the French nor the Brits, quite . One reason for merging with BAE, a company going through difficult times, is that company's privileged position on the Pentagon's procurement lists. BAE have worked hard to establish a good relationship with the Americans.

It comes down to the excellent security relationship between the US and the UK. That could change if France became a partner. France's relationships with the United States have been famously difficult for decades. France even pulled out of NATO 's military cooperation arm for 40 years. The new merged entity might have less access to American procurement dollars than before, if the Americas don't trust the French, which would seriously reduce the attractions of BAE in the eyes of continental Europeans' eyes. So suspicions are mutual. Some German commentators doubt where there really is any point in looking for synergy between a military aircraft manufacturer like BAE and chiefly civilian plane maker EADS. A further fear is that such military activity that EADS has engaged in has chiefly been carried out in Germany. Germany, too, fears loss of jobs, R&D and expertise if London became the capital of the merged entity's military arm.

My feeling is that British politicians don't seem to have thought this through. Or perhaps they have, and there is some horse trading going on behind the scenes. Britain is being seriously threatened by exclusion from the EU's centres of power. A closer federal union may yet be the result of the financial crisis with the Greeks, and Britain's being on the outside could have serious consequences for the city of London.

Defence is one area where Britain has expert, capacities and experience that Europeans really need. By throwing this "bone" to Europe perhaps the coalition feels it is re-establishing its European credentials.

Of course, the reason may be more banal. As Bernard Jenkin MP pointed out in the Daily Telegraph this week, the deal has been managed on the government side by Sir Jeremy Heywood, who used to be an adviser to BAE when he worked for Morgan Stanley. Who knows what golden parachute awaits him in industry when he quits his post as cabinet secretary, Jenkin speculated, mischievously. Who had really been pulling the strings behind the government decision: a conflict of interest here perhaps?

The next deadline is 10 October when the two firms will have to say, according to British legislation on mergers, whether they want to go ahead. But there have been rumours that this deadline will be extended, and that this story will run for a while. Institutional investors are also said to be concerned, a British parliamentary report is being drawn up, and the German parliament has hinted it may force a veto on the deal.

One genuinely good argument for the deal is that a British company will have a share in the hugely successful Airbus project from which BAE unwisely divested itself I 1996, reducing the British firms in the project to subcontractors, with all the consequent loss of security for workers at the wing-making plant at Broughton that entailed.

That has to be weighed against the fear that BAE will end up with effective political control from Paris, as has happened in many other joint ventures. And the deal could still face the veto from Germany, which has its own doubts about the deal. The story will run for a while yet.

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Pelle Neroth -- EU correspondent