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Financial Crises Creates Bleak Spending Outlook

Published: 7 September 2009

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By Andrew Chuter and Pierre Tran

LONDON and PARIS -Even during the economic boom of the last two decades, Europe has had a dismal record of spending money on defense. Now the financial crisis means prospects look even bleaker for many nations in the region.

Defense has often played second fiddle to social programs such as health and education when it came to European governments making budget allocations. Even in the United Kingdom, one of Europe's top defense spenders, the increases directed at social programs during the Labour government's period in office have dwarfed the small real-term cash increases for military programs, even though Britain has been fighting wars for much of that time.

It's not an even picture on spending growth across the region, though.

Europe is sharply divided between East and West on its recent spending record, according to 2008 figures released in June by the Stockholm International Peace Research Institute (SIPRI).

Across the globe, "only Western Europe has remained largely an exception to the trend of growing militarization," SIPRI said.

If the past is a guide to the future, the figures provided by SIPRI suggest that in Western and Central Europe, at least, the requirement to repair battered state finances offers little hope for defense spending improvements.

Between 1999 and 2008, Western and Central Europe saw just a 5 percent increase in spending, to $277 billion.

By contrast, Eastern Europe saw spending rise a whopping 174 percent over the same period to $43 billion.

In percentage terms, the two sides saw the smallest and largest rises anywhere in the world, SIPRI said.

In France, the defense budget resembles the cartoon character who runs off a cliff and stays up as long as he does by not seeing the gaping void below. The moment the character realizes there is nothing underfoot, he plummets into the abyss.

The economic crisis has thrown up the prospect of dizzying national deficits in the coming years, cutting visibility for defense finances to this year and the next. After 2010, a refusal to look down allows the military and industry to believe the commitments in the new six-year military spending plan and the defense and security white paper will be maintained.

"At some stage, we have to get back to running a normal-sized deficit. The borrowing will have to be repaid," said Jean-Pierre Maulny, deputy director of Institut des Relations Internationales et Stratégiques, a Paris think tank.

"When that happens, defense will suffer," Maulny said. "When the country starts repaying the debt, the return to Earth risks being hard for defense."

The Defense Ministry has brought forward funding for a 1.7 billion euro ($2.4 billon) defense stimulus package for 2009 and 2010, intended to cushion the shock of the downturn on the supply chain.

According to one defense consultant, if France does try to tackle the deficit in coming years, taxes will rise and spending will fall. Defense could be in the firing line.

After the next two years, "nobody knows," the consultant said.

The economic crisis and spiraling deficit could not have come at a worse time, as the Defense Ministry must pay for systems that are just now being delivered. These deliveries include the Tiger and NH90 helicopters, Caesar artillery and VBCI troop carriers. A batch of 60 Rafale strike fighter jets also must be ordered.

Even before the crisis, financing for 2009 and 2010 defense spending was only possible because extra funds of some 1.6 billion euros were found from the sale of ministry buildings and radio frequencies, to fund a total of 23.12 billion euros across the two years.

If the asset sales fail to go according to plan, or unbudgeted items arise, such as higher-than-expected maintenance for equipment deployed in Afghanistan, there could be shortfalls.

Prospective spending cuts will affect industry as large programs come under funding pressure and the military faces reduced capabilities. The French Army's ambitious 10 billion euro Scorpion modernization program of networked armored vehicles could fall victim, as it is relatively easier to stall projects that are not yet concrete, the consultant said.

But where Paris enjoys a measure of comfort absent from London and other capitals is the efforts by President Nicolas Sarkozy to maintain France's defense standing in the world, and the adoption of a six-year plan and white paper, which set public targets.

Such high-level political support makes it harder for the government to slash defense spending, the consultant said.

The 2009-2014 six-year military spending plan budgets 101 billion euros, a 12 percent rise over the previous total of 89 billion euros, with annual average equipment spending of 16.9 billion euros versus 14.8 billion previously.

The 2009 defense equipment budget is 17 billion euros, a 10 percent increase from 15.4 billion a year earlier.

Unlike the French government, Britain's two leading political parties have failed to support increasing or even maintaining future defense spending.

Neither the current Labour administration nor the rival Conservative Party are declaring their positions on future defense funding ahead of a general election scheduled to be held before the middle of 2010.

Labour and the Conservatives, who are currently a long way ahead in the opinion polls, are committed to the first strategic defense review in more than a decade once the election is over.

Shadow Defence Secretary Liam Fox told Defense News that the Conservatives haven't "decided what will happen with defense spending because we don't know where we are. We know there is a black hole [in Ministry of Defence finances]; it's hard to determine in opposition the extent of that.

"When we come through our strategic defense review and we determine what our priorities are going to be, we will fund those priorities," Fox said.

"A year into government, we will have a much better idea of where public finances are going. We will need a debate as to where we see defense in relation to the priority of other government programs. We will have to do what we believe to be right within the parameters of what the economy allows us in terms of public finances and the threats the nation faces."

But while the politicians aren't prepared to forecast spending levels, one of Britain's top military think tanks has offered its view, and it makes for grim reading.

The Royal United Services Institute in July said its best guess was that in the period of "2010 to 2016, defense budget reductions could run to around 10 percent to 15 percent in real terms."

The British government is grappling with a potentially massive equipment overspend in the current budget, which has seen programs delayed, reduced or canceled. Further cancellations are expected with the completion of the 2010 planning round or a strategic defense review, not expected to be completed until mid-2011.

Possibly fearing the worst, leading British industry executives, members of the Defence Industries Council, went on the offensive Sept. 1 in an effort to stimulate a public debate about the damage that defense cuts would do to Britain's military and the high-tech industry that supports it.

Britain's defense budget for 2010-11 is set at 36.9 billion pounds ($59.9 billion).

Elsewhere, a snapshot of likely national trends around the region showed a mixed picture:

■ Turkey's defense spending will mostly remain unaffected by the financial crisis, according to procurement officials.

Although the Turkish economy has slowed substantially since the financial crisis hit, the government has opted not to cut its budget for modernization programs.

"Our entire spending for new equipment, systems and modernization will be at the $3.7-$3.8 billion range, according to our estimates," a senior procurement official said.

Spending for 2010 will be around $4 billion, as foreseen earlier, he said.

"There is an understanding between the government and the military leaders that it's no time for spending cuts. Many ongoing programs are required urgently, and most contracts have available financing," the official said.

■ Russia's top officials, including President Dmitry Medvedev and Prime Minister Vladimir Putin, have repeatedly pledged not to cut defense orders despite the financial crisis and have even managed to increase spending on new weapons in 2010.

According to the deputy prime minister in charge of the defense industry sector, Sergei Ivanov, the government has approved a budget next year of 1.11 trillion rubles ($34.4 billion), up 1.2 percent from 2009. The government plans to continue financing the state defense order at this level in 2011 and 2012, he said.

Speaking at a government meeting Aug. 21, Ivanov said that 470 billion rubles will be spent on buying weapons in 2010 compared with only 330 billion rubles this year.

Financing strategic nuclear weapon programs, space missile defense and long-term re-armament contracts such as buying new fighter jets are the top priorities, Ivanov said.

But while Russia intends to fund military improvements, the government will have to maintain spending in the face of a deteriorating financial situation, which next year will see Moscow face a budget deficit of 3.4 trillion rubles, or 7.5 percent of gross domestic product.

■ Italy's parlous state finances have been further stretched by the economic crisis, prompting Finance Minister Giulio Tremonti to trim the budgets of all government ministries.

Defense has not been spared, with the minister's own allies admitting little distinction has been made between slashing fighter aircraft maintenance and reducing the number of photocopiers at other ministries.

Worst hit has been maintenance and operations spending, cut by 29 percent in 2009 to hit a low of 1.89 billion euros, with Tremonti planning further cuts.

That has prompted Defense Minister Ignazio La Russa to increase cash for military missions abroad - which is voted in parliament separately from the defense budget - and to make excess cash available to fill gaps in maintenance and operations spending in Italy.

Silvio Berlusconi's center-right government also appears more willing to procure new equipment using funds from the budget of the Ministry of Industry, thus boosting local procurement.

The two measures are not, however, a guaranteed cure-all. The mission funding is thought to cover just 20 percent to 40 percent of the hole left by this year's cut.

In the Nordic region, the slump means closer overall scrutiny of defense budgets, as the parliaments of Sweden, Norway and Finland face the demanding task of setting budget levels for 2010 over the next two months.

■ Denmark's $20.74 billion five-year defense budget, agreed to in July, is regarded as sufficient to meet the cost of international deployments, procurement programs and the operation of core land forces units over the next five years.

Although the budget will rise by $564.5 million in 2010-2014 compared with the previous five-year budget, the level of expenditure is insufficient to maintain existing units and activities.

Almost half of the Danes' Leopard 2 tank fleet will be shed, while the number of F-16 fighters available to the Air Force will fall from 48 to 30. Other land and naval capabilities will be dropped or reduced.

■ The Swedish government aims to freeze defense spending at $4.9 billion in 2010-2014, a political ambition that will force the Swedish Defense Forces to implement fresh economy measures.

Previous cost-saving programs since 2008 have included plans to restructure the Land Forces and reduce the number of battalions from 30 to just eight by 2015.

Future cost-saving programs may have serious implications for Sweden's defense support structures, with the government considering a proposal to merge important agencies, including the FMV, or Defense Materiel Administration, into a centralized organization.

■ Defense commanders in Finland fear that spending cuts could result in the closure of garrisons, reducing the defense force's capacity to fund new equipment procurement programs.

The risk of garrison closures is regarded as a long-term rather than short-term threat, given that Finland's parliament approved a 2 percent increase in monies available for military programs in the period 2011-2014. The $560 million increase will strengthen the defense force's spending power by $140 million per annum.

■ Norway's defense forces can expect to avoid any major cuts in spending in 2010-2014, against a backdrop of heavy government investment in the country's High North defense structures in the Arctic.

Some 60 percent of its defense budget, which will amount to $5 billion in 2009, will be spent on existing and new High North-centered defense systems, installations and military procurement programs. ■

Nabi Abdullaev in Moscow, Burak Ege Bekdil in Ankara, Tom Kington in Rome and Gerard O'Dwyer in Helsinki contributed to this report.