by Tomas Valasek

For decades, European countries cut defence budgets with little worry. The United States kept enough troops on the continent to deter all potential enemies, almost irrespective of how small European militaries became. But the US contingent has been steadily shrinking, and the pace of this downsizing now seems certain to accelerate because of the economic crisis. The Europeans should be worried – yet they will probably respond by hastening their own defence cuts.

The July 31st agreement under which US Congress increased the ceiling for national debt cuts defence spending by $350 billion over the next ten years, White House calculations say. However, the deal also calls for a joint committee of six Democrats and six Republicans to find ways to decrease the deficit by another $1.5 trillion. The lion’s share of those reductions is certain to come in the form of expenditure cuts (as opposed to tax increases). And these further cuts – even if spread across government departments – will include significant reductions in the Pentagon budget, beyond the $350 billion that it is already scheduled to lose. Military spending now consumes more than 20 per cent of the total federal budget (for comparison, in the UK the figure is 6 per cent). Assuming that the joint committee makes roughly proportional cuts among government departments, the Pentagon will lose another $250 billion; this would put total reductions in military spending at $600 billion over ten years.

There is also the possibility that members of the committee will fail to agree, which would be even worse for the US military. Under the borrowing agreement, such a failure would lead to an automatic imposition of a $1.2 trillion cut in government spending, half of which would come straight from the Pentagon’s budget (for accounting reasons, the final amount would be slightly less than half: $534 billion). Including the $350 billion in cuts agreed last week, total loss to US defence spending over the next ten years could thus reach nearly $900 billion. The Republicans have been traditionally supportive of defence spending so in theory they have strong reasons to work with the Democrats on averting such draconian cuts to the military. But Democrats want further deficit reduction to include tax increases, which the Republicans oppose. And the ‘new’ Republican party is considerably less pro-defence than it used to be in the days of John McCain and Bob Dole; its top priority now is deficit reduction. If Democrats insist on tax raises, there is a chance that Republican members of the joint committee would rather choose an impasse, even if this led to deep defence cuts.

Whether the final amount is $600 billion or close to $900 billion, reductions of such magnitudewill have considerable impact on contractors and allies around the globe. One mitigating factor is that the cuts will be calculated on the basis of future projected spending (which was scheduled to rise) rather than current spending. Also, after 13 straight years of increases, the defence budget has reached a monumental $530 billion in fiscal year 2011 (not including another $160 billion allocated specifically for the wars in Iraq and Afghanistan). However, much of this amount is committed to manpower and benefits. Military healthcare alone consumes around $50 billion a year, and Congress is unlikely to agree to reduce it before the 2012 elections. The brunt of the newly ordered cuts will therefore fall on relatively few budget categories. Research is likely to suffer (because it can be cut with little immediately visible impact) and so is procurement (because some new weapons have incurred controversial cost overruns).

Importantly for America’s allies, many of the cuts will lead to closure of overseas bases. These have no political constituency in the United States, and thus no defenders in Congress, which will have to approve cuts. Europe is certain to suffer disproportionately in any future base closures. The continent is not high on the Defense Department’s list of priorities and it is seen as relatively free from danger. The allies have capable militaries, which, the Pentagon believes, should be able to assure security of Europe’s periphery (in places such as Libya) with little US help.

Even before the latest cuts, in April 2011, the Obama administration ordered the withdrawal of one of the four remaining US brigade combat teams (BCTs) from Europe. This was a less dramatic reduction than the one that George Bush’s government initially ordered in 2004 – then, the Pentagon decided to cut half the BCTs but subsequently put the decision on hold because they were needed in Afghanistan. In reducing the cut to just on BCT in 2011, the Pentagon cited the need to assure allies (mainly in Central Europe) that Washington remains committed to their defence. But it now seems very probable that the Defense Department, under pressure to save money, will withdraw the second BCT after all.

Many US military facilities in Western Europe are in danger. Their number has gradually dwindled as the US reduced forces from the Cold War average of 311,000 to fewer than 80,000 today. Many more will now be closed. The US military sees the smaller bases in particular as a source of relatively easy savings. While installations such as the large US military hospital in Landshut, Germany are likely to fare well, the 700-strong US Air Force base in Lajes, Portugal, will probably go. Non-essential facilities such as the George C Marshall Center in Germany (a school for military officers, mainly from Eastern Europe and Asia) are also vulnerable.

These departures are certain to be unpopular with local governments around Europe, some of which will suffer a double or triple setback. In addition to expected US base closures, NATO and national governments have also been cutting budgets and forces. Portugal, which will probably lose Lajes, had recently seen NATO decide to close its ‘Joint Force Command’ near Lisbon. Germany plans to close many of its own bases to save money; it now stands to lose some of the US ones as well. The closures will cause tensions among local and national governments but the impact on transatlantic relations will be limited – because virtually all allied capitals are reducing forces, none will be in a position to complain. But the US and European militaries will lose some of the existing opportunities to train together. And the loss of schools such as the George C Marshall Center would deprive the allies of the ability to win the hearts and minds of young officers in dangerous parts of the world such as South Caucasus and Central Asia. 

With cuts to US defence budget looming, the US will also forgo its ability to pressurise the Europeans against reductions in their own spending. Apparently at the first meeting between Leon Panetta, the new Pentagon chief, and Liam Fox, the UK defence secretary, the two swapped lessons on how to cut budgets with least political pain. A year ago the US defence secretary would have sought to restrain the UK from cutting in the first place.

There is a real danger that cuts on one end of the Atlantic will encourage more cuts on the other end, thus degrading NATO’s credibility. While some of the bases that the United States is thinking of closing may well be redundant, NATO defence guarantees will lose their meaning unless the allies maintain a certain minimum number of forces and military installations. In theory, the Europeans should be responding to US force cuts by studying whether NATO is close to reaching this threshold, and whether they need to augment their forces to replace the departing US ones. But the opposite is likely to happen: without US pressure, many European governments will feel freer than ever to reduce military spending and forces. This may yet turn out to be the most significant and corrosive legacy of current US budgets cuts for allied security.

Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.

by Clara Marina O'Donnell

The EU is in the middle of a little noticed – but potentially important – debate about defence markets. For the first time, the European Commission could be authorised to help reduce barriers amongst the EU’s segmented national defence markets.

European defence markets remain drawn along national lines. Defence-related goods are exempt from EU single market rules. These exclusions were designed for only the most sensitive components of weapons, material and related technology. The trouble is that governments have used the national security argument to exclude everything, from bullets to uniforms, from open competition. And often national security has been little more than a cloak for protectionism.

Moreover, it is difficult to move defence goods from one member-state to another. Each country has cumbersome administrative procedures for export controls. As a result, defence companies with plants in several member-states have to negotiate different sets of national requirements when they want to move their components from one plant to another. The Commission has estimated that, within the EU, the direct and indirect costs of such barriers to transferring military goods amount to €3.16 billion a year. Since requests to move goods within the EU are hardly ever rejected, the value of such extensive and diverging national checks is questionable.

As Europe's paltry defence budgets are barely adequate to maintain today’s spending programmes, the current system makes little sense. So the Commission has proposed two new directives. The first is designed to open a substantial amount of defence procurement to EU competition. The Commission suggests new procurement procedures, specially tailored for defence needs (while recognising that some goods, like nuclear technology and cryptology, will always have to be exempted due to national security). The second proposed law aims to simplify procedures to move goods around the EU. It would encourage member-states to use so-called general licences. (Broadly speaking, goods which benefit from a general licence can move across borders without importers having to ask for specific licences to do so.)

The two draft directives have the potential to bring about significant improvements. Defence companies would get access to previously closed markets, while ministries of defence, and European taxpayers, would benefit from cheaper defence goods. Easier transfer of goods across the EU would make life a lot easier for defence companies. And delays in importing new kit needed by national militaries would be reduced.

In practice it remains to be seen what difference the directives, if agreed, would make. Member-states are trying to maintain maximum control of the initiatives. They get to decide what military goods are considered safe for general licences, and it is likely that only the least sensitive goods will qualify at the outset. In addition the cut-off point for military goods that are considered too sensitive to be subject to open procurement procedures has been left very vague. Here, too, member-states are likely to be very conservative for the foreseeable future.

The impact of the proposals, and particularly the procurement directive, will depend on the willingness of defence companies and the European Commission to contest decisions by member-states, and take them to the European Court of Justice. It is unlikely that large high-tech defence programmes will be open to competition for many years to come. Large defence companies will probably be unwilling to contest decisions made by their biggest customers: national defence ministries. But it is not unreasonable to foresee that in the medium term the directive could have a substantial impact on less sensitive defence sectors, low-value, high-volume goods such as rifles, tanks or even military catering. Defence ministries will have stronger incentives to open up such non-sensitive sectors as a way to cut costs. In addition, such goods are produced by a multitude of smaller companies across the EU that are not always dependent on one defence ministry. Some might conclude they have less to lose and be more willing to take a ministry of defence to court.

The most important impact of the directives would be the cultural shift they would represent. By adopting the initiatives, member-states would be accepting the Commission's oversight in an area they have hitherto jealously guarded. Defence ministries would no longer have the final say in their defence procurement.

The directives would be a minor but incremental step towards improving Europe's defence market. But it is far from certain that they will come into force. The timetable is tight. (The directives need to be agreed before the European Parliament’s term ends in spring 2009, otherwise the turnover of experts in the Commission and Parliament could postpone an agreement by several years.) In addition there are still serious stumbling blocks which member-states and the European Parliament need to agree on. Amongst other things some smaller member-states fear local industry might lose out from more open markets. The big defence companies are concerned about the impact on national research budgets and large-member states, in particular the UK, are trying to defend their case. Some member-states have admitted they will shed no tears if the whole package collapses. But it would be a mistake not to agree the package. With current defence budgets, Europeans cannot hope to maintain a proper defence industrial base without a new approach to their defence market. And if the EU really wants to reinforce its global role, it has no choice but to improve its military muscle.

Clara Marina O'Donnell is a research fellow at the Centre for European Reform.