FPI Bulletin: NATO Defense Spending

July 7, 2016

By NATO’s own standards, the alliance’s European member states should be spending substantially more on defense. If they reached the target of spending 2 percent of their Gross Domestic Product (GDP) on defense, total spending would rise by $100 billion per year–a 40 percent increase. Only the United States remains well above the 2 percent target, yet the Pentagon’s budget has fallen sharply since 2011. When NATO’s 28 heads of state and government convene tomorrow in Warsaw, they should chart a clear path toward greater investment in defense, including specific plans and benchmarks for reaching the target within the next six to eight years.

Signs of Life

After years of decline, military spending by NATO’s European member states rose by 0.6 percent in 2015. The alliance projects additional growth of 3.0 percent in 2016. These signs of recovery are a direct response to Russia’s annexation of Crimea and invasion of eastern Ukraine in the spring of 2014. In September of that year, at its summit in Wales, the alliance instructed all member states who were spending less than 2 percent of GDP on defense to begin moving toward that target. The alliance had established the 2 percent guideline at its Riga summit in 2006, yet did not include the goal in the official summit declaration endorsed by all member states. Before the Riga summit a NATO spokesman even explained, “Let me be clear, this is not a hard commitment that [member states] will do it. But it is a commitment to work towards it.”

While the instructions given at the Wales summit were also non-binding, they carried greater diplomatic weight and included three supporting provisions that laid out benchmarks for low spenders. First, the Wales declaration called for an immediate end to further reductions in defense spending. Second, the declaration called for spending growth consistent with overall GDP growth. Third, it called for member states to meet the 2 percent target within a decade.

Repairing the Long-Term Damage

The recent uptick in defense spending by NATO’s European members hardly compensates for the decades of decline that preceded it. From 1985 through 1989, the alliance’s European members spent an average of 3.3 percent of GDP on defense. That fell to 2.7 percent for 1990-1994, 2.2 percent for 1995-1999, and 1.9 percent for 2000-2004. By 2009, the average had fallen to 1.7 percent, and then fell to its low point of 1.45 percent in 2015. This year’s projected growth will only raise that figure to 1.46 percent of GDP—an indicator how much further the European allies must go to recover lost ground.

For monitoring long-term trends in NATO defense budgets, spending as a percentage of GDP is the most useful indicator, although hardly a perfect one. Wild swings in the value of member state currencies make it very difficult to compare different countries’ spending habits in real dollar terms. For example, the Euro was worth more than $1.40 in mid-2011, but only a bit more than $1.10 today. Even if European defense spending had remained constant over the past five years, translating it into dollars would create the impression that it had fallen by more than 20 percent. Measuring defense budgets as a percentage of real GDP avoids this problem. While GDP itself changes from year to year, it varies much less than the value of a particular currency. 

Why 2 Percent?

Prof. John Deni of the U.S. Army War College dismisses NATO’s 2 percent goal as arbitrary. “Why not 3 percent—or 1 percent?” he asks. In theoretical terms, Deni is right; there is no correct amount to spend on defense. Yet the history of the 2 percent target helps explain why it was chosen. In 2004, notes Danish scholar Sten Running, NATO’s political leadership directed its staff to develop a spending target, along with other measures of military input and output. The staff observed that 2 percent of GDP was the median level of spending for the alliance from the end of the Cold War until 2003. Thus, 2 percent was hardly an ambitious target; half of the allies already met the standard, and the rest did not fall short by too much.

The 2 percent target has also come under fire for measuring the wrong thing. The amount a nation spends on defense is only an input to the process of generating military power. What matters more is the output of the process—actual military forces. However, the process of translating fiscal inputs into military outputs is exceptionally complicated, whereas spending levels result directly from decisions made at the highest levels. In the words of Jan Techau, the director of Carnegie Europe, the 2 percent target is a “flawed but indispensable” indicator of “who is and who is not politically committed to NATO’s core task: European security.” Techau observes that “failure or success in meeting the target can easily be grasped.”

The value of the 2 percent benchmark is not an argument against the use of other metrics as well. As Techau notes, NATO itself developed a much more sophisticated set of metrics in 2011, but its reports are classified. Even so, there is enough information in the public domain to facilitate a more advanced discussion. For example, Greece is one of five NATO members that spends 2 percent of GDP on defense, yet Athens spends 70 percent of its budget on salaries and benefits. The result is a bloated and ineffective force. John Deni points out that Greece has deployed paltry forces to NATO missions in Kosovo and Afghanistan, whereas Denmark has sent much larger contingents despite having a far smaller army and spending only 1.5 of GDP on defense.

The lesson of such examples is not to discard the 2 percent target, but to ensure that it is the beginning of a discussion about burden sharing, not the end.

What to Do in Warsaw

In a new report from the Atlantic Council, General James Jones (ret.) and Ambassador Nicholas Burns (ret.) lay out a comprehensive agenda for reinvigorating the NATO alliance. Jones is a former NATO commander and Burns a former U.S. envoy to NATO. Jones and Burns describe NATO defense spending as “woefully inadequate” and call on individual member states to have their parliaments ratify the 2 percent target as a binding objective, since the alliance itself cannot do that. In addition, they believe that member states should have specific plans that describe planned increases over the next five years, so fulfillment of the 2 percent pledge cannot be deferred to the indefinite future.

While there should be no exceptions to the 2 percent rule, the military strength of the alliance depends most on the capabilities of the largest member states. Besides the U.S., this list includes the U.K., France, Germany, Italy, Spain, and Canada. Even if each of the 21 other allies hit the 2 percent target but these six failed to do so, Europe’s contribution to the alliance would not grow in a meaningful way. For now, British defense spending hovers at slightly above 2 percent of GDP, while France met the target as recently as 2009. In contrast, the others spend about 1 percent of GDP on defense. None has enjoyed robust economic growth in recent years, yet Poland and the Baltic States have shown that the political will can be summoned to approve major increases. The more important question may be whether Western Europe is prepared to take the Russian threat the threat as seriously as its neighbors to the east.

In addition to focusing on the amount of spending, it may be useful to widen the discussion beyond the defense and foreign ministry officials who typically focus on military issues. Luke Coffey of the Heritage Foundation, a former adviser to the British Minister of Defence, recommends that finance ministers play an integral in NATO deliberations, since they are the ones who have the greatest control over spending matters. “Educating finance ministers on the importance of military investment might help secure more defense spending in the long term,” Coffey writes.

Mistaken Criticism of NATO

During the current presidential campaign, NATO has become the target of unprecedented criticism that challenges whether the alliance itself is worth preserving, since European members allegedly take for granted that the United States will pay for their security while they spend their own tax dollars on domestic programs. It is true that the U.S. spends more than twice as much on defense as the rest of the allies combined. However, this is an apples-to-oranges comparison since the U.S. military plays a decisive role in East Asia and the Middle East, not just Europe.

In spite of persistent cuts, NATO’s European member states (plus Canada) still spend more than $250 billion per year on defense and have the ability to keep tens of thousands of troops deployed alongside American forces. Those numbers should be substantially higher, yet allowing the alliance to dissolve would only make it substantially harder to leverage European capabilities. While one may hope that a diminished U.S. commitment would spur the rest of NATO to act more decisively on its own behalf, the typical result of hesitant leadership is to promote buck-passing and narrowly self-interested behavior. In contrast, active leadership holds out the best hope for encouraging NATO to spend more on defense and to spend it more wisely.

Mission Statement

The Foreign Policy Initiative seeks to promote an active U.S. foreign policy committed to robust support for democratic allies, human rights, a strong American military equipped to meet the challenges of the 21st century, and strengthening America’s global economic competitiveness.
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