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Article Excerpt
[Below is an article developed from the entire April 2008 report which can be viewed at: http://www.csis.org/component/option,com_csis_pubs/task,view/id,4461/ type,1/.]
Since 2001, Europe finds itself increasingly involved in international military operations. NATO (North Atlantic Treaty Organization) responded to the attacks of 9/11 by invoking, for the first time in its history, Article 5 of the Washington Treaty--the Alliance's collective defense clause--and European military assets were deployed to the U.S., the Mediterranean Sea, and Afghanistan. Deployable rapid response forces were created by NATO (the NATO Response Force) and by the European Union (the Battle Groups). The EU (European Union) Security Strategy, formulated in 2003, lists combating terrorism, countering the spread of weapons of mass destruction, dealing with failed and failing states, and response to regional emergencies as scenarios that may require military intervention. National governments also increased their commitments to international security and stabilization efforts. They have deployed military forces to operations in the Democratic Republic of Congo, East Timor, Darfur, and Chad as well as contributed troops to the war on terror in the Horn of Africa and U.N. (United Nations) peacekeeping operations worldwide. And at home and abroad, European militaries are stepping up efforts to prepare for and respond to natural disasters and humanitarian crises. From 2001 to 2006, the total number of European troops deployed overseas has gone up from slightly over 65,000 to around 80,000. (1)
In light of this upsurge in military preparations and deployments, as well as some of the challenges associated with these deployments, it is important to track trends in European defense spending. Doing so can help answer many critical questions; for example, have defense budgets in Europe grown or declined, and by how much? How have European defense budgets fared given changes in national economies? How much are European governments spending on defense procurement and research and development (R&D)? Ultimately, if government spending is an indicator of the priority given to policy areas, understanding trends in defense spending can shed light on whether Europe is indeed serious about improving its military capabilities.
This report seeks to provide the data and analysis needed to answer these questions. It presents the defense spending trends of all European countries, including the 25 EU Member States as well as Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Norway, Serbia and Montenegro, Romania, Switzerland, and Turkey. (2) The data was gathered from various sources in an attempt to present broad European trends as well as in-depth analyses of specific countries. (3)
Key Trends
In constant 2006 U.S. dollars, total European spending on defense has increased slightly during the 2001-2006 timeframe. As shown in Figure 1, during this period the original 15 Member States of the European Union went from $234 billion to $242 billion for a 3 percent growth and 0.65 percent compound annual growth rate (CAGR), of which the six signatories of the Letter of Intent on defense (the LoI-6) accounted for the lion's share. The 10 new Member States went from about $11 billion to $13 billion, a 14.5 percent growth and 3 percent CAGR. For non-EU nations, which include NATO members Bulgaria, Norway, Romania, and Turkey, total spending dropped from almost $27 billion to just under $25 billion. (4)
The CAGRs in defense spending for most European nations were negative or slightly positive, see table 4. The only countries to show significant growth were Latvia (22 percent 6-year CAGR), Albania (10 percent), Estonia (9 percent), and Slovenia (8 percent). Of the larger EU countries, Poland, Spain, and the UK stand out with a CAGR of approximately 4 percent. When calculated as a share of GDP (Gross Domestic Product), the picture is even grimmer: only six countries show positive growth rates of defense spending as a share of GDP during the 2001-2006 period (Latvia with 10 percent, Slovenia and Albania with 4 percent each, Finland with 2 percent, the UK with 0.5 percent, and Spain with 0.1 percent), meaning that in most of Europe economic growth has outpaced growth in defense spending (see Table 5).
Though showing sluggish growth in overall defense spending, European spending on defense investments (defense procurement and research and development) might suggest a more positive trend in the way nations allocate their resources. Trends in defense investments have shifted over the six-year period and have been mirrored by trends in defense investment per soldier (see Figure 2). Beginning in 2004-2005, the positive growth in defense investment and in defense investment per soldier, measured in constant 2006 U.S. dollars, may be an indication of European commitment to force transformation. Between 2001 and 2006, total troop levels dropped by 12 percent, while defense investment per soldier rose by 26 percent. If these trends continue, it may mean smaller, better equipped European militaries in the years to come.
Detailed Data and Analysis
In order to properly measure trends in Europe's defense expenditure, it is important to first of all examine national spending levels in local currencies in current year and in constant year values. And in order to compare these countries' defense spending, it is important to look at their spending in U.S. dollars. Note that the defense expenditures of many countries would be significantly exaggerated due to recent dollar depreciation. Therefore, when analyzing these numbers, a careful comparison of the dollar and local currency values must be undertaken so as to eliminate the effect of a stronger euro or depreciating dollar. Failure to do so would overestimate the percentage of the increase in national spending.
Table 1 and Table 2 show the total defense expenditure in current local currencies and at the current U.S. dollar exchange rate, respectively. Looking at the CAGRs in figures 3 and 4, though they are both in current values, shows that the numbers are significantly higher in dollar terms. This is mainly due to the fact that the dollar has significantly depreciated against the euro during the six years, from 0.90 dollars per euro in 2001 to 1.25 dollars per euro in 2006. In addition to exchange rate fluctuation, inflation rates have also contributed to the difference in CAGR. According to several studies, there is a 10 percent annual rate of increase in the price of military equipment; and that is usually higher than the overall economic inflation. (5) However, this report considers only the influence of general economic inflation.
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To better reflect the reality of fluctuating exchange rates and inflation, Table 3 and Table 4 show countries' total defense expenditure in constant year values. As is evident from Table 4, the six major arms producing countries (the LoI-6) accounted for some 85 percent of total EU defense spending before the EU enlargement of 2004, after which their share dropped to 81 percent.
The 10 new members of the European Union spent between 4.83 percent and 5.02 percent of total EU defense spending, with an almost 3 percent CAGR over the three years since joining the EU. Though these countries have relatively small defense budgets, most have positive growth rates throughout the years. Two of the Baltic States, Latvia and Estonia, as well as Slovenia, have remarkable CAGRs of 22 percent, 8 percent,...
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