As the crisis in Ukraine unfolded in 2014, risk perceptions stirred across the European continent. Defense policy reassessments skewed depending on geography, but across Europe, there was a sense of renewed threat emanating from Russia.
By September 5, 2014, members of NATO were pledging to gradually increase their military investment levels in an effort to meet the Alliance minimum requirement of 2 percent of annual GDP allocated towards defense within a decade. The Wales Summit Declaration marked the point where splits within European defense funding commitments became readily apparent, a new Forecast International military market study on Europe’s defense environment indicates.
The immediate result has been a sharp divergence between the newer NATO nations along Europe’s eastern periphery and the older European NATO nations in terms of how government funding has been redirected towards their respective militaries.
For instance, the larger, wealthier nations of the European NATO establishment that form much of the military backbone for Europe – countries such as Britain, France, Germany, Italy, the Netherlands, and the U.K. – experienced flat or declining year-to-year defense allocations in 2015. The degree of change from 2013 defense earmarks to 2015 has either been negligible, as in France and the Netherlands (up by 0.3 percent and 0.5 percent, respectively), or has continued to shrink, most markedly in Spain (down 6 percent over the past two fiscal years) and Italy (a 14 percent net reduction).
Meanwhile, the trend among former Warsaw Pact countries and Soviet satellites has been the reverse, with demonstrably upward defense investment over the past two years. The three Baltic nations of Estonia, Latvia, and Lithuania – greatly alarmed by Russia’s actions in Ukraine – have substantially bolstered their consolidated military spending totals (Lithuania by 53 percent between 2013 and 2015), while the Czech Republic and Poland have followed suit.
The reality of the European defense-funding landscape at the present moment is that those countries closer to Russia’s borders, with fears of Kremlin designs on their sovereignty and determination to influence their policy-making approaches, are naturally worried by what they have seen in Ukraine. Their predisposed anxieties towards Russia are naturally heightened by Moscow’s support for Russian-speaking populations living outside its own borders, Russia’s willingness to support separatist elements, and Russian military exercises simulating strikes on neighboring countries.
While NATO has attempted to assuage the fears of the Baltic nations, these tiny countries are nonetheless moving to strengthen their own limited capabilities. Estonia’s military expenditures rose by 21 percent in real terms between 2013 and 2015, while Latvia’s rose by 13 percent.
For their part, the Czechs and the Poles increased defense spending by roughly 10 and 9 percent, respectively. These allocation bumps also paralleled increased tensions between Russia and NATO.
Despite some upticks in defense allocations in Central and Eastern Europe, the overall environment for European defense remains much the same as it has since the double-dip eurozone recession of 2012: flat or falling nominal budgets.
The combined defense expenditures of the European NATO nations in 2015 amounted to roughly $209 billion, a 4.5 percent nominal decline from one year earlier and an 11 percent slide from 2011. Forecast International expects combined defense spending to barely move over the near term, adjusting at an annual 0.5 percent on a nominal basis through 2020.
Going forward, the larger military-spending nations of Europe will remain prudent regarding defense allocations while continuing to voice their commitment to a stronger NATO. Deficit management will remain the principal focus over defense, and any response to issues such as Ukraine will be dealt with through diplomatic measures rather than military buildups. There is scant political desire anywhere in Europe for turning back to the previous manpower-heavy, full-spectrum military model of the Cold War years. Instead, efforts will continue being made to find areas where cooperation will allow partners to maximize assets and minimize overlap.
Forecast International’s research shows that within the European Union, total military spending among the 28 members has declined both as a percentage of GDP and as a consolidated expenditure. In 2010, for instance, the combined military spending of all EU member states represented 1.43 percent of total GDP and 2.8 percent of all expenditures. By 2014, these totals had dropped to 1.25 percent and 2.59 percent, respectively.
Perhaps more telling is that consolidated real-term defense spending by the EU partners dropped by EUR13.53 billion – or 7.74 percent – between 2010 and 2014. Significantly higher military spending would place too great a burden on the financial well-being of states already facing sovereign debt worries, much less be absorbed efficiently to net-positive effect.
As for the defense budget spikes occurring in Central and Eastern Europe, these appear more significant on paper than in reality because they start from a very low base. It is one thing to show commitment towards one’s own defense, which is what is happening in the Baltics, but another thing altogether to derive much in terms of capability from budgets totaling less than $500 million. Countries like these must always rely on security partnerships for strength.
Furthermore, while the upward budgetary trend in Central and Eastern Europe certainly demonstrates a re-prioritization of defense within government-spending plans, the question moving forward is whether it represents a brief stimulus or a real, long-term commitment towards bolstering overall military capability. Should tensions between Russia and NATO nations subside, will there be enough political willpower to follow through on the pledges made at the September 2014 NATO summit in Wales?
International Military Markets – Europe provides unparalleled analysis of emerging trends across the continent, as well as defense budget information for each country. It also provides a Market Analysis on the continent as a whole, complete with five-year spending projections.