As Europe Wakes to Defence Spending Shortfall, NATO Risks Losing US Investment

Contributor:  Defence Dateline Group
Posted:  03/14/2011  12:00:00 AM EDT
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Behind today’s recession led military budget debates lies a fundamental truth that is exacerbating the pain of defence retrenchment. This is that much of Europe has been under-investing in defence for years, by failing to meet self-imposed targets for spending as a percentage of GDP. The agreed rate set between NATO allies is a relatively meagre 2% of GDP, yet the scale of the failure is overwhelming. Out of 26 European NATO members, only four meet this defence-spending benchmark. 

The 2% target was created to maintain defence industrial capacity, capabilities and the trans-Atlantic military relationship through NATO burden-sharing. By failing to meet it, all three objectives are now in serious danger due to under-investment. How did this happen?
Europe and the peace dividend 
The primary driver has been the so-called “peace dividend”. As the Berlin Wall fell and the ominous threat of war with the Soviet Union faded into memory, European states naturally reaped the economic and social benefits of decreasing their military forces. The redirection of funding to social security models was irresistible in a threat environment in which a direct invasion of Europe had become a logical impossibility. Moreover, part of the political process of confidence building with a host of newly created European neighbours, and the old arch-foe itself, Russia, was for the “victors” of the Cold War to be seen to lower their weapons.
These twin imperatives of political inclusion and the need to reward European civil societies for their creation of the “New World Order” pushed military spending well down the list of Government priorities. Given that the early 1990’s were also a period of economic turbulence, the peace dividend was thus reflected in a direct reduction of defence spending in relation to GDP. The result? Whereas in 1989 all but one NATO member spent over 2% of GDP on defence (with the European average being 3.1%) by 1996 this had plummeted to an average of just 2.3%.

Intoxicated by peace
The signs that all was not well in European defence spending took time to manifest. For many years pro-activity on the part of France and the UK, who continued to pursue modernisation agendas, masked the growing inertia. Britain and France have tended (until the recent financial crisis) to view the 2% commitment as ironclad; and the fact these two countries accounted for over half of Europe’s total military expenditure was a smokescreen for the growing gap between targets and reality in the rest of Europe. 1990’s “big ticket” investment, such as the UK’s Type 45 Destroyer programme, the laying down of significant Eurofighter Typhoon orders and the continued rolling out of legacy systems such as France’s Leclerc T3 and Germany’s Leopard 2 MBT’s, all added to the illusion that European defence spending was only experiencing a temporary dip.

However, the series of military interventions by NATO in the Balkans in the late 90’s brought with them some home truths. The European allies’ complete lack of independent heavy-lift capability, integrated command and control equipment or robust logistical structures was laid bare for all to see. Europe appeared to be “drunk” on peace, and incapable of reacting in a military crisis.

Exasperated US officials, deriding their “demilitarised” allies, re-asserted the 2% commitment as a benchmark. To facilitate a push for re-investment, political rallying by France and the UK was accompanied by the creation of NATO’s Allied Command Transformation (ACT) in 2003, in the hope that European members would utilise Alliance expertise in targeted re-structuring. In fact, it was too late. Spending had reached such low levels that to raise them would have constituted a significant proportion of government budgets. There was no public enthusiasm, or political will, for such a change. Thus, by 2004, a year in which seven new members joined the Alliance, only 4 European members reached the 2% target. Worse still, this was not confined to smaller states, but included larger members such as Spain (1.2%), Italy and Germany (1.4% each).

Counting the cost of under-investment
For Europe’s industrial base, the collective failing of so many nations to commit to defence has created colossal under-capacity. Through these exclusive Defence Dateline Analytics (see table below), the cost of Europe’s defence deficit can be roughly estimated. In crude terms, the total shortfall between the 2% of GDP target and Europe’s actual defence spending amounts to $54.6 billion per annum (approximately £36 bn, based on 2010 figures). If the scale of this shortfall needs further illustration, this is essentially the equivalent of the UK’s entire annual defence spend, or around 25% of combined annual European military budgets.

The implications for industrial capacity are enormous. Even considering the structural imbalance between equipment and personnel in European defence budgets outlined last month, this shortfall represents billions failing to reach procurement funds. The result is that the total size of Europe’s defence industry is stunted, and the process has, in turn, reduced pre-existing economies of scale. For instance, individual projects such as the FREMM frigate programme or A400M heavy lift aircraft project constitute the entirety of available in-class options for many European buyers.
When these projects suffer over-run (such as the A400M has) or see significant order short-falls, as has been the case for FREMM, Europe has nowhere else to turn. Investing governments are then forced to step in to make-up the shortfall. The A400M, alone, needed €3.5 billion of additional public funds to finalise development in 2010. Lack of capacity only increases such inefficiencies.

Moreover, in these straightened financial times, the shortfall is sharpening the crisis for industry actor’s balance books. Defence giant Thales recently issued a warning that its 2010 financial results could show a €100 million loss on the back of lowered demand.  Similar profitability warnings have been aired by EADS and BAE, although the latter nonetheless posted a slight profit increase. Outside of these larger companies, whose extensive portfolios will likely see them ride out the crisis, the forecast is even more bleak. So, whilst the missing $54 billion would merely constitute healthier margins in times of plenty, in these times of loss, their absence is a serious industrial capacity killer.

Yet the bigger cost of this shortfall may prove to be political. US officials, previously sympathetic to the challenges of force modernisation in Europe, are showing signs of losing patience. Inevitably, it has been Afghanistan, and the division of labour within the war torn country, that has proven to be the last straw. Speaking in 2010, US Defense Secretary Robert Gates aggressively derided Europe’s military contributions, stating that; “the demilitarization of Europe — where large swathes…are averse to military force and the risks that go with it — has gone from a blessing in the 20th century to an impediment to achieving real security and lasting peace in the 21st”.

Burden-sharing has become a corrosive spectre in contemporary trans-Atlantic politics, enforced by European inadequacies in terms of both equipment and deployed troops. As NATO’s integrated command and control structures (backed up by extensive spare US capacity in helicopters and heavy lift) remain most European states’ only viable mechanism for foreign deployments, this is a serious concern. It may indicate that US interest in future European defence partnerships could decline in line with their ability to contribute. In short, Europe’s reliance on the US as the ultimate guarantor of its military security is being under-mined. As Robert Gates concluded in his frustrated diatribe; “2% is 2% is 2%. Period”.   

A brave new world?
These shortfalls need not prove terminal for Europe’s long term defence outlook. The European Commission’s new defence-specific Procurement Directive (aimed at opening up procurement tenders to EU level competition) and new organs such as the European Defence Agency and NATO ACT are offering under-funded departments improved efficiency in procurement.
Meanwhile, the continued leadership of Anglo-French initiatives experimenting with pooling and sharing provide encouraging signs in terms of industrial capacity. The agreed sharing of carrier resources, for instance, has protected the UK’s programme from being cut completely, whilst securing £50 million for Babcock International’s Appledore yard and maintaining British shipbuilding capacity in this area. Europe is at least aware of its own inefficiencies, and aiming to reform them.  
Unfortunately, the overriding message is crystal clear. There is a chasm in current European spending as a percentage of GDP that is making the current “budgetary winter” all that much colder. As the continent tries to look beyond the financial crisis; the future for Europe’s capabilities, industrial base and relations with the US may hinge around one key question.
Will Europe demonstrate the political fortitude and planning to produce the $54 billion in arrears? Perhaps not until decision makers, themselves, know precisely what it’s like to be left out in the cold. 
Jonathan Dowdall writes for Defence Dateline Group
Defence Dateline Group Contributor:   Defence Dateline Group

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