Beast of burden
5 Apr 2017|

Image courtesy of Pixabay user geralt.

If Hawaiian-born Obama had done it, people would have said he had kahunas. But we’re talking about New York native Donald Trump, so the word is chutzpa. According to Fox News, Trump handed German Chancellor Angela Merkel a bill for US$374 billion in unpaid NATO contributions. And while the US and German governments deny that it’s the case, there’s no erasing Trump’s tweet from after the meeting:

‘…Germany owes vast sums of money to NATO & the United States must be paid more for the powerful, and very expensive, defense it provides to Germany!’

Perhaps the hand-delivered note would have been preferable.

But how much of the burden does the United States really shoulder on behalf of its allies? And are Trump’s indignant protests making a difference to what its European allies spend?

According to the latest official NATO reporting, only four of 26 European countries managed to meet the 2% of GDP NATO benchmark; Greece, Estonia, Poland and the United Kingdom. However, that might be an overestimate. The International Institute of Strategic Studies (IISS) only credits two countries—Estonia and Greece—with making it across the line. As for the big economies of France, Germany, Holland, Italy and Spain, they all fell below the benchmark with GDP shares of 1.8%, 1.2%, 1.2%, 1.1% and 0.9% respectively per NATO reporting.

In reality, the situation may be worse. IISS uses the NATO definition of defence spending inclusive of pensions, which can be a substantial share of the overall budget for some countries. As examples, they note that pensions account for 33% of Belgium’s defence spending, 24% of France’s and 17% of Germany’s. But including pensions is questionable. Not only do military pensions not produce any combat capability, they’re often just routine social security payments relabeled (as is largely the case with Australia’s means-tested Service Pension). Note that Australia and the United States separate the bulk of their veterans’ programs from their defence budgets.

With or without pensions, it’s clear that none of NATO’s European members come close to the 3.6% of GDP spent on defence by the United States. I’ve heard Europeans say that’s okay because the United States has security responsibilities in both Europe and Asia, so it makes sense for Europe to spend a lower share of GDP on defence. Of course, that’s just an admission that Europe is free-riding on US efforts in Asia, where Europe’s economic interests are vitally engaged. To be clear, EU exports to China, Japan and South Korea amounted to $290 billion in 2016, whereas the corresponding figure for the United States was only $221 billion.

Trump’s demands and Russian troublemaking have led to predictions of a ‘$50 billion Defence Boost for Western Europe through 2019’. That sounds impressive—until you crunch the numbers. Assuming the extra $50 billion is used to ramp up spending linearly over the three years to 2019, the result is an extra $25 billion in 2019. That’s roughly a 10% increase to the $254 billion non-US NATO defence expenditure in 2016. However, the IMF projects that real GDP for the European Union (a reasonable proxy for European NATO) will grow by 5.3% over the same period and inflation will compound to 4.7%.

So, all else being equal, the additional $50 billion will simply allow European NATO to tread water at their present level of 1.46% of GDP.

Some countries are making a visible effort to boost capability—Sweden, for example, is reintroducing conscription. But it remains to be seen if the Europeans will make the sacrifices necessary to significantly boost defence spending. Germany makes for an interesting case study.

Following her meeting with President Trump, Chancellor Merkel said that Germany had a plan in place to reach 2% of GDP by 2024, consistent with the 2014 NATO agreement for all members to reach 2% of GDP within a decade. Once again, however, the numbers don’t add up. Germany increased defence spending from €34.9 billion in 2016 to €36.6 billion in 2017 and has just announced plans to reach €38.5 billion in 2018. But, using IMF estimates of German GDP, it turns out that the resulting share of GDP only changes in the second decimal place, from 1.11% in 2016 to 1.17% in 2018. Even the target of €42.3 billion for 2021 will only result in a GDP share of 1.18%.

Reaching 2% of GDP by 2024 would require unfeasibly large hikes over the period 2021–2024. And the German Foreign Minister, Sigmar Gabriel, agrees. Speaking at the end of March, he said ‘It’s totally unrealistic to believe that Germany would increase its defence spending from €35bn now to €70bn.’ He added ‘I know no politician in Germany who thinks that this is something you can reach or that it even would be desirable to do so.’

Elsewhere in the larger economies of Europe, the picture’s mixed. The Italian and Spanish economies continues to struggle, with those countries’ defence spending tending downwards for the better part of a decade. As The Economist observed, they ‘would struggle to satisfy NATO while observing restrictive European Union budget rules’. Great Britain is keeping its head above the 2% line for now (but only by including military pensions). But budget pressures mean it may have to cut the size of its defence force to live within a constrained budget. France’s plans are unclear, but the head of their defence force has called for spending to grow from €32.7 billion in 2017 to €43.5 billion in 2022—which would result in the calculated GDP share increasing from 1.5% to 1.6% (or from 1.8% and 2.0% if the numbers are adjusted to include pensions).

So, despite earnest undertakings to the contrary, there’s no sign yet that the European members of NATO are going to make President Trump happy. Perhaps they think he’s bluffing. I’m not so sure.

This is the first of a series of extracts from the forthcoming 2017 ASPI Defence Budget Brief.