Weather Reports, Defense Budgets, and Military Power
Budget Weather Reports
Since NATO allies committed to spending 2 percent of their GDP on defense, freshly released budget figures have been scrutinized and commented upon. Such daily budget weather reports are convenient to engage in “talking defense.” The 2 percent benchmark is snappy and plausible, and reminding governments to adhere it has the pleasant taste of arguing in favor of fair burden sharing.
Unfortunately, in reality, the size of defense budgets does not say much about future military power or the defense policy choices an individual country or NATO is facing. Debating defense through budgets implies that there is a direct link between what we spend and how much military power we have. Yet it is common knowledge that defense is a money-burning activity. The story of almost every bigger procurement program is that of cost overruns, underperforming equipment, and corruption.
Thus simply spending more and hoping that, by the action of an invisible hand, money will find its way into capabilities is wishful thinking at best. As new threats and challenges are foreseen, it may even be irresponsible to limit the assessment of transatlantic defense policy to a specific figure.
The debate needs to turn from policies that follow these figures to figures that follow policies. Spending more may be necessary. Yet because resources are scarce, the essential condition is to spend effectively and efficiently, which means linking input to output.
A “Retro” Debate: The Politics of Figures
Astoundingly, discussions around defense budgets seem to be stuck along the lines of those used in the 1960s. Back then, even among defense economists, defense was considered independent from political or economic concerns, reflecting only national strategic interests. Therefore, only the budget input mattered. The historical observation during the Cold War that greater defense expenditures produce visible increases in capability added to the prevalence of such an approach. However, this is only partly true. It mainly applied to those countries in which armies and defense industries represent a significant portion of GDP (such as Germany, France, or Britain). If that portion is large enough, greater investments combined with economies of scale result in improved military capability. This logic continues to be true for the United States, which benefits from the world’s biggest internal market and the largest share of defense exports.
However, as defense has become more intertwined with other domestic affairs, defense budgets increasingly reflect the balance between three domestic factors: strategic interest, political will, and economic viability. Defense thus needs to be put in perspective. The Ukraine crisis matters as a risk, but tangible threats exist beyond military ones that Europe cannot ignore.
Moreover, the old economic argument that investment in defense contributes to national welfare is no longer true. The defence sector simply no longer represents a large enough force in national economies. Since the end of the Cold War, European armed forces and defense industries have been shrinking, and economies of scale have been replaced by steadily increasing costs for ever smaller productions lots.
The harsh truth is that defense budgets as such tell almost nothing about military power. Moreover, budgets can hardly be compared across time and countries. Thus, many budget assessments deliver only a distorted picture that is of very limited use to the debate over military power or capabilities.
Indeed, NATO’s 26 European members define their national budget and accounting systems very differently, and change their systems over time. There are also many other effects that blur the picture of governments’ actual spending on defense. In some countries, defense research and procurement are partly financed from a budget other than defense, e.g. the ministry of economics. Costs for personnel can be shifted to other parts of the national budget, hiding the fact that necessary reforms in the area have not yet been implemented. Pensions are sometimes included, e.g. if the budget needs to increase, and then excluded again, such as in Germany. The defense budget can be used to subsidize other state functions. Since the Charlie Hebdo attacks in early 2015, France has deployed 10,000 additional soldiers at home to assure domestic security duties that police would normally conduct. While this has led to an increase of the budget by about €2 billion, it does not contribute to the military power of the country.
Moreover, the effectiveness of defense spending varies significantly across Europe. While there is a golden formula for spending on personnel and maintenance/procurement — a 50-50 percent split — in reality, personnel costs range from 30 to 80 percent. Especially since the end of the Cold War, defense budgets from Romania to Italy have become more important for social policy than for defense. Inflated defense personnel budgets serve primarily to generate employment in a nation’s armed forces and defense administration, instead of delivering needed capabilities.
What matters more than daily budget weather reports is the look into longer-term budgetary realities. They identify mechanisms in, structural changes for, and future challenges to the appropriate resourcing of defense, although on very general levels.
The defense budget has to reflect economic realities; Europe still and will for the next decade suffer from the effects of the fiscal and euro crisis. Moreover, security and economy have become closely interlinked. Europe’s debts and the cascading effects of a new euro crisis could be perceived as the biggest threat to European security and global stability. How could one expect governments to increase public debt when it is identified as the greatest risk?
Estimates regarding future budgets highlight that NATO’s 2 percent target is an illusion. While some countries have announced they will spend more and a few will likely meet the 2 percent benchmark, Europe as a whole will hardly be able to increase its defense budgets by €50 billion annually to reach the 2 percent mark by 2024. These announcements have to be seen from a long-term perspective. While some countries have indeed constantly increased their budget (Poland) since 2008, there has been an overall increasing tendency among European countries to spend less. Newly announced increases are starting from low baselines (Estonia, Sweden).
Some states matter more than others: Britain, France, and Germany. They may choose different paths in 2015: either decrease defense spending and fall below 2 percent (Britain, with a projected budget of €44 billion), try to stay right on 2 percent but probably fail (France, €39 billion), or increase the budget slightly but still stay clearly below 2 percent (Germany, €33 billion). Nonetheless, these countries represent about 60 percent of European capabilities. Other Europeans who will probably spend more percentage-wise — such as Estonia — unfortunately do not matter much in military terms. To reach 2 percent of Estonia’s 2013 GDP, the government has to invest about €0.5 billion — quite a lot for such a small country but a limited amount in terms of buying power.
Unfortunately, minimal increases matter little when confronted with yet another long-term trend called “defense inflation.” For the last 100 years, costs for defense equipment have increased by 5-10 percent annually. This marks an annual decrease of buying power that may well eat up more than the short-term budgets increases can offer.
Design to budget has become a transatlantic reality. Given the overall economic outlook, and unless there is a serious shift in prioritizing security over welfare, defense planning has to identify how much security can be offered through available resources. This is also the new reality for the United States. Sequestration means that for the foreseeable future, that country has to adapt its military forces to the given budget. This implies that the gap the United States has already left in European security may widen in the future, and that betting on the United States to fill the gap of missing EU capabilities may become ever more problematic.
Budgets and Military Capability: A Delicate Balance, Long Term
The close link between defense budgets and military capability only becomes visible when looking at input and output over a longer period of time. This more appropriate view is slightly more complicated, and requires a look into programs and long-term efforts to maintain forces’ readiness and assess their suitability.
There is a correlation between medium-term investment in defense and military capability. A multi-annual perspective of current and future programs and their changing costs reveals the extent to which future budgets are already bound to operate existing programs or keep up the readiness of forces.
Moreover, two important characteristics become apparent. First, procurements imply low costs in the early years, but outlays increase once the delivery takes off, followed by expenses for operation, maintenance, and upgrades. These lifecycle costs can last 30 to 50 years. Second, the costs of purchase vs. operation oscillate between 40/60 and 20/80, as a rule of thumb. Not taking these dynamics into account leads to budget overruns and cancellation of needed projects.
It is therefore difficult to define an annual budget as being too high or too low. Defense budgets are always composed of various sub-budgets, most of which feed long-planned projects and activities. Sharp increases and decreases in the overall budget are difficult to absorb and often lead to wasted money. It is neither possible to set up a meaningful procurement project overnight, nor can money be trimmed easily at any given moment.
On the contrary, hasty budget decisions create extra costs. Capabilities often involve a combination of platforms and systems. An air force is the combination of fighter aircraft, surface to air missiles, pilots, ground staff, and airfields. The challenge for military commanders is to find the most capable solution to ground enemy aircraft at minimum cost by assessing alternative mixes of platforms and systems. Once the solution is found and contracted out, any change in one element of the capability will have cascading downside effects on the others. Procurement becomes disproportionally more expensive per unit. A 5 percent cut in costs may end up meaning a 10 percent or more cut in capability terms. The same is true for budget cuts in force-multiplying elements of equipment — which is often very costly — like tankers for jet fighters. Moreover, the effect that budget cuts have on capabilities comes with considerable delay. While Germany cut the maintenance of its Eurofighters in 2010, the effects only became apparent in 2014.
Where Does Europe Put the Money?
The alternative perspective on the link between budgets and capabilities, especially in the case of NATO, consists of looking at how allies actually spend their money and examining where resources may be spent more efficiently. The future of European armed forces lies with multilateral operations, making a European view of their own capabilities necessary. Leaving the United States out of these examinations makes sense because Washington has a different level of ambition for what it aims to achieve with its armed forces, while U.S. military dominance would mitigate the marginal contributions European allies can make.
Europe suffers from capability redundancies and gaps because it is deeply fragmented. European states run many similar equipment programs and platforms in parallel. Almost every single country has its own type of armored fighting vehicle and, on average, two different types of armored personnel carriers. These capabilities are costly not only due to the production of smaller lots compared with joint procurement, but also because individual types of equipment often come with a specific supply and logistics chain, inflating the life-cycle costs.
At the same time, European allies already depend on each other. While almost every country has fighter jets, only a few have the necessary tankers to keep the jets up in the air for an extended period of time and even fewer have the electronic warfare platforms that both allow for jamming enemy air defenses and offer command and control to operations. Apart from six countries, all European powers are dependent on others in one or another area if they want to operate their planes in wartime. These dependencies will rise as we near the 2030 horizon.
Looking into European forces capability profiles, redundancies and ongoing critical specialization gaps are a costly fact of life. Freeing resources to close the gaps that NATO’s European allies show collectively can be achieved through reduction of redundancies and coordinated specializations.
Spending More, Cleverly
Spending more may well be a necessary requirement to maintain the current level of European capabilities, yet it is not sufficient. The money needs to be spent in the right areas, especially because resources will remain limited. Currently, Europeans tend to prioritize immediate spending over efficient spending. But with a missing value-for-money approach, the available level of capabilities may well be reduced over decades, compared to what can be achieved with potential extra resources.
NATO’s 2 percent target is here to stay in the political debate. However, those interested in capabilities should include the issue of efficiency in the discussions. Countries feeling especially exposed to new threats should have an existential interest in their allies not misappropriating defense budget lines. Southern and central European NATO allies should therefore lead an efficiency campaign within NATO.
Output: Deployability of Forces, Sustainability of Capabilities
Output could act as an alternative or addition to NATO’s 2 percent input goal, in order to better channel national efforts. Criteria should assess two types of output: deployability of forces and sustainability of capabilities. The two elements are linked. Deployability is about the short-term ability of allies to support common interest with forces and encompasses almost the whole bandwidth of capabilities that are required for typical NATO missions. Indeed, deterrence, defense, and crisis management all require, to a certain extent, different capabilities. Yet they all need as a basic condition the ability to deploy beyond national territory.
Having deployable forces tomorrow means not only caring about politically high-profile formations like the Very High Readiness Joint Task Force, NATO Response Force, etc. but also about the capabilities these formations will consist of in the future. Only an alliance that remains capable is able to effectively share the burden of defense.
Transatlantic partners need not to reinvent the wheel. NATO already assesses deployability. Moreover, the 2014 Readiness Action Plan points to areas where short-term engagement is needed and can be successful. The important information has to become publicly available to allow policymakers and taxpayers to debate alternative choices.
On capabilities, some criteria are available. The alliance’s 16 key shortfall areas defined in 2014 offer pointers where states should direct their efforts. However, these are too complex for political communication and they do not encourage a reallocation of defense resources in the interest of the alliance. They should be translated into political criteria as easily communicable as the NATO 2 percent goal. Two suggestions are outlined below.
1.European allies should commit to over the next decade. Such a commitment could take various forms. States could provide certain equipment, such as enablers, or increase the readiness of troops. This gives allies the freedom to determine how to best acquire and keep capabilities. In order to encourage efficiency, allies should also independently decide on the amount of resources they will spend on their capability contribution.
A successful implementation would improve capabilities by 20 percent over the next 10 years. This rather modest contribution by every European ally could ensure that they deliver constantly, reverse the trend of declining military power, and link national choices to the needs of EU and NATO. Moreover, such a long-term perspective takes into account that efficiency savings do not occur overnight.
2.NATO could publicly value contributions that prevent deficiencies from reaching critically low levels by establishing a . Some countries have gaps and deficiencies in their capabilities, while others possess considerable surpluses. Both should be compiled in a “Criticality Ranking.” A point system could honor contributions to scarce capabilities in particular. High surpluses, which indirectly signal wasted resources, would earn negative points. This would reward smaller armed forces for engaging in the specialization of important specific capabilities.
The ranking should offer a sustainability bonus to states that make an explicit commitment and designate 5-10 percent of their defense investment to compensate for the traditionally high inflation rate in this sector, thereby ensuring that their capabilities would still be available in ten years.
A European Defense Review would be the necessary starting point for such an efficiency drive. It would offer a sober assessment of the current and future European defense landscape, including opportunities for cooperation. This would foster a public debate on the defense that Europe can have and its contribution to NATO grounded in reality rather than pipedreams as well as provide indications of where already existing resources can have the most positive impact on capabilities.
While European allies have to make the main effort, the United States should not be standing on the sidelines. Most Europeans want the United States on board. Instead of being trapped in 26 bilateral defense relations, the United States should initiate and lead European cooperation efforts for short periods of time in view of enabling allies to substitute for specific U.S. capabilities.