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Western Europe Defense Spending Increase May Prove Temporary

September 11, 2016 (Photo Credit: UK Ministry of Defence)
LONDON — Made nervous by Russian aggression in the Ukraine and fears of terrorism caused by the Islamic State group, cuts in Western European defense spending have finally come to a halt after a 20-year decline.

Across the region, the once seemingly relentless reduction in defense budgets started to reverse last year, and while the expected increases for the rest of the decade are modest, they are at least heading in the direction the defense industry has long hoped for.

The question facing industry and analysts alike is whether that is a short-term bump or a longer trend that will survive a series of upcoming elections throughout the region.

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“Our calculations for the Western Europe nations show combined defense spending at $164 billion, [or €146 billion], this year,” said Dan Darling, the European analyst at Forecast International. “Over the course of our five-year projections, we expect that cumulative total to reach $182 billion by 2021 in nominal terms, an 11 percent overall increase at around $3.6 billion per annum based on an exchange rate of $1 equaling €0.8853.

“Most of this rise will be attributable to increased investments on the part of Germany and the UK, with the others all remaining largely stagnant or, in the case of France and the Netherlands, only increasing roughly equal to inflation."

But while the big military players in Western Europe are either increasing spending or at least stabilizing budgets, the biggest European defense increases are coming from those nations closest to Russia.

A report published by a group of European think tanks earlier this year estimated that while central and eastern European budget spending would rise 19.9 percent between 2015 and 2016, Western Europe would manage just a 2.7 percent increase.

Calculations by Forecast International cover Belgium, Britain, France, Germany, Italy, the Netherlands, Portugal and Spain while the think tank estimates also include minor nations like Austria, Ireland, Luxembourg, Malta and Switzerland.

The general uptick in spending across European alliance members allowed NATO to claim at its July summit meeting in Warsaw that the funding situation was at last looking up.

“Since Wales [the venue for the previous summit in 2014], we have turned a corner. Collectively, allies' defence expenditures have increased in 2016 for the first time since 2009. In just two years, a majority of allies have halted or reversed declines in defence spending in real terms,” the alliance said in its end-of-meeting communiqué.

That won’t distract the US administration from continuing to pressure European alliance members to do better on the spending front.

Only the UK, among NATO members in the Western European region, meets the alliances guideline of spending 2 percent of their gross domestic product on defense — and even then the British have had to juggle their definition of defense spending to edge above the target figure. 

“Regardless of which candidate wins the coming November election in the US, one should expect the same level of pressure to be applied by Washington on European NATO members as under the Bush and Obama administrations,” Darling said.

“Though a Clinton administration may prove more diplomatic in tone than a Trump administration, both would almost certainly call upon Europe to do more for itself monetarily and materially in the area of defense,” he said.

Whether further increases in Western Europe are sustainable likely depends, as in the past, on economic conditions over the coming years as much as the growing threat, according to Darling.

“With the ongoing deficit concerns, high sovereign debt levels and low economic growth rates across much of the region there could be some real pressures facing the European defense environment down the line. As was seen previously every time there has been an economic or debt hiccup in Europe, most governments have looked to squeeze savings from their respective defense ministries,” he said.

The European think tank report made a similar point when talking about the whole of Europe.

“Despite political commitments it’s too early to say whether the uptick in defense budgets will translate into a lasting increase in spending,” the report said.

Domestic Uncertainties

But while defense spending appears on the rise, the picture is clouded by political uncertainties in Western Europe. Spain still has no government after eight months and two elections. France, Germany and the Netherlands have general elections next year, and Italy has a referendum in October on constitutional reform, which could also be seen as a vote of confidence in the government of Italian Prime Minister Matteo Renzi.

Following the UK's vote in favor of leaving the European Union, known as Brexit, there is also the matter of the negotiations — likely to get underway next year — on the terms of Britain’s relationship with the EU, which will have significant consequences for the UK economy and possibly defense spending.

Analysts in London have previously said that while defense spending, which is hovering around the £35 billion (US $47 billion) mark, is currently ring fenced from cuts, it may not be immune if a significant economic downturn results from Brexit or other causes.

Trevor Taylor, a senior analyst at the Royal United Services Institute (RUSI), reckons the slump in the value of the pound after the exit vote could also pose a problem if it continues for any length of time.

The roughly 15 percent fall of the pound, if sustained, could increase the cost of British defense imports by “around £700 million per annum from 2018-19 — some 2 percent of the total defense budget,” Taylor said in a RUSI commentary published in mid-August.

Regardless of what happens in the upcoming Brexit negotiations, not everybody in the European Union has been wringing their hands at the impact on defense caused by the planned British withdrawal.

Some analysts believe that Brexit could actually be a blessing in disguise for European defense efforts, according to Pauline Massart, deputy director for European security at Brussels-based think tank Friends of Europe.

“The UK was never a fan of the European Defence Agency, nor of the [EU] battlegroups — which in any case are rather a moot point since they have never been used. The UK was always of the opinion that NATO was the way to go in defense and that any EU efforts would create duplication and be a waste of time,” she said.

Gen. Vincenzo Camporini, a former head of the Italian general staff, who is now the vice president and a security and defense analyst with the Rome-based think tank Istituto Affari Internazionali, told Defense News that the EU’s plans for a series of multinational battle groups run by an EU military headquarters could now flourish with the UK’s exit.

“The UK’s opposition to setting up the EU military HQ put a stop to it,” he said.

The prospects for European collaboration appear brighter after the leaders of France, Germany and Italy all stressed military cooperation when they met in Italy for a post-Brexit summit on Aug 22.

But Massart warned their statements were too short on detail to draw any conclusions.

“[German Chancellor Angela] Merkel, Renzi and [French President Francois] Hollande’s statements on this have been rather vague so far, and I’m unsure, considering these countries’ electoral calendars and pressures, that they have much room for maneuver,” Massart said. “I expect we’ll see more cooperation on internal security and counterterrorism and intelligence sharing than on proper ‘hard defense’ issues in the coming months."

Nuclear Budget

In France — the EU’s biggest defense spender once the British depart — the upcoming general election is unlikely to shift policy but could eventually result in further budget increases.  

The expected win for the conservative Les Républicains (LR) party in France against the Socialist party of Hollande would mean “no great difference” in defense policy, said Francois Géré, chairman of the Paris-based think tank Institut Français d’Analyse Stratégique.

The next president will inherit the present six-year military budget law adopted by Hollande and which runs to 2019.

All the candidates in the upcoming LR primaries have said they would bring military spending back to 2 percent of GDP. But those statements on the campaign trail are far from binding, said the analyst.

France presently spends €32 billion on the annual defense budget, or 1.5 percent of GDP.

A key budgetary factor will be upgrading nuclear weapons, notably the next-generation atomic-powered submarines.

Annual spending on nuclear weapons is expected to peak at €6 billion in 2025, around double the amount spent last year, said co-authors Jean Guisnel and Bruno Tertrais in their book, "The President and the Bomb." 

That figure represents about a third of the defense equipment budget, compared to the present estimated 10 percent.

The British have a similar problem, as a program to build four new Trident missile-armed nuclear submarines is set to swallow up to £41 billion over the life of the construction program, and at its peak will eat a large portion of the equipment budget. 

In July, Germany, Europe’s biggest economy, announced it intends to significantly increase defense spending by roughly 14.5 percent up to 2020 compared to an overall federal government spending increase of 10 percent.

If approved by the Bundestag, defense spending will rise from €34.29 billion this year to €39.18 billion in 2020.

That increase was in part a response to the threat from Russia and terrorism, but it was also part triggered by an embarrassing Bundeswehr report in 2014 on the material readiness of the armed services, which noted that the inventory of nearly every major German weapon system was deemed far short of requirements.

Much of the funding hike is going to fix the problem of forces hollowed out by a succession of defense spending cuts but capability improvements as well, particularly in the armored vehicle, ground-based air defense and maritime sectors.

The political impasse in Spain caused by the ongoing failure to form a government has meant the 2015 budget of €5.76 billion in 2015 has provisionally been repeated for 2016 and is likely to be repeated again next year.

Pierre Tran, Esteban Villarejo, Martin Banks, Lars Hoffman and Tom Kington contributed to this report.


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