J. David Patterson
Executive Director, National Defense Business Institute, University of Tennessee

Global Economic Health and Global Security are Inseparable

ABSTRACT

Economic instability is moving through Europe. The European Union is scrambling to shore up the finances of the countries most affected. Greece has received a temporary reprieve, with Germany agreeing to lead the way as the European Union provides €750 billion ($953 billion) in financial aid. But this assistance comes at a price back home for Germany. The German people are not universally in favor of providing Greece with financial assistance and many in Germany see this assistance as an assumption of a wider European Union economic responsibility. The specter of other countries with the same economic woes as Greece is not comforting. In the United States, Standard & Poor (S&P)’s lowered the debt rating on Spain’s debt by a full step in April 2010. This downgrade comes on the heels of the December 2009 assessment by S&P that Spain’s debt could reach 90% of Gross Domestic Product (GDP). Meanwhile, U.S. lawmakers are concerned that U.S. debt has reached historic levels and many believe the answer is to cut defense spending in order to meet the needs of the domestic agenda. We therefore expect to see a fall in defense spending in the immediate future. Does a reduction in defense spending mean a reduction in global security? This paper explores the impact of defense spending and what actions should be taken to help promote global security.

INTRODUCTION

There has historically been a linkage between the global economic environment and the willingness of Alliance nations, including the United States, to invest in defense. When economic times are good, nations are inclined to invest more heavily in their own national security as well as in Transatlantic and Western European Alliance-based defense programs. The reverse is equally true: When economic times are challenging, individual national domestic agendas take considerably more prominence-often displacing security interests.

We are in the latter situation at present: The prospect of a decline in defense spending in the United States is real and the U.S. Defense Department leadership is laying the foundation for a reduction in funding for defense programs, despite some rhetoric to the contrary. In fact, there is a lack of enthusiasm for defense spending throughout the western defense alliances as all member countries face overwhelming domestic economic pressure. In order to better understand the nexus between nations’ inclination to spend more of their national treasure on defense-thereby fortifying their contribution to global security-and the general global economic climate at the time, we must first look at the economic health of individual nations and how these nations have reacted in hard times.

DISCUSSION

The following is a short analysis that uses timely sources and commentary to assess events happening now. Of course, with time what is reviewed here will be dated. However, for the purpose of the International Workshop on Global Security, it should be current.

Economic Health of Alliance Nations

The discussion at the 26th International Workshop on Global Security on “The Business of Global Security in a Stressed Global Economy” was foundational in discussing this subject. Though the immediate effect on defense spending was a secondary consideration at that time, the subsequent loss of the equivalent of a full year of the world’s GDP, or over $50 trillion (Patterson, 2009), has had a major impact that is clearly apparent now.

It is no secret that Europe is facing what may be its most daunting economic crisis in modern history. Debt is overwhelming NATO and EU countries whose staunch and dependable support of “collective defense” has been historic and effective. Again, to provide perspective, though Greece has been the focus of attention in the economic crisis, all European countries as well as the United States have experienced deep economic woes. The key indicator of economic health is how well a nation can sustain and service its debt.

Using currency as an indicator, the European debt crisis has done significant damage to the value of the euro. The euro has fallen to its lowest level since 2006. Within the EU community, Greece has been the barometer for the direction of the currency. Greece’s budget deficit in 2009 was nearly 14%, with a total debt of 120% of GDP. According to Bloomberg’s financial assessment, the fall in the value of the euro is a clear indication that the fiscal crisis is “spreading from Greece” and undermining confidence in the euro. (Czuczka and Worracate, 2010)

On May 10, 2010, European nations agreed to prop up Greece with loan packages of more than €750 billion ($953 billion), but there is no guarantee that the euro’s decline will be halted. The International Monetary Fund’s contribution will be €250 billion ($315 billion), the largest loan arrangement in the history of the fund. (The Economist, 2010) Investors, particularly in the U.S., have demonstrated their concerns with recent sell offs of stocks on the U.S. Stock Market. The week of May 17, 2010, the Dow Jones dropped over 300 points and posted the worst close since February, due principally to worries over debt in the U.S. and Europe. Those who frequently comment on European and U.S. debt issues expressed alarm regarding the debt in both the U.S. and Europe. William Stone, Chief Investment Strategist for PNC Wealth Management, described the recent market weakness specifically as “concern that the European sovereign debt problems will morph into another global economic downturn.” (TheStreet, 2010)
The U.S. Stock Market is not the only financial indicator to react to European economic conditions. Great Britain’s FTSE 100 index has fallen 14% since worries over the eurozone’s debt crisis came to the forefront, and it has declined nearly 8% over the course of the year. (Frearson, 2010)
Furthermore, it is not clear that providing financial assistance to Greece will indeed stem the economic problems that all of Europe is facing. In reaction to the Greek bailout, many countries in the euro region have begun the fiscal tightening of the availability of loans. This will slow any momentum toward a swift and substantial economic recovery. (Czuczka and Worracate, 2010)

Though Greece is the focus at the moment, other European countries face similar debt problems. As Raphael Minder explained in The New York Times, Spain is rapidly becoming a member of the staggering debt club. S&P’s recent de-rating of Spain’s debt rating from AA+ to AA is not on par with Portugal’ rating of A-, but nevertheless indicates the impact of Spain’s private sector indebtedness of 178% of GDP and an unemployment rate of 21%. (Minder, 2010)
The crux of the problem for Western European allies is the investment required in domestic welfare programs. A recent European Commission report stated that the percentage of Europeans older than 65 will have nearly doubled by 2050, making the financial burden on those still working a cause for real concern. Whereas in the 1950s, there were seven workers contributing to retirement accounts for every retiree, by 2050 there will be only 1.3 workers supporting every retiree. (Erlanger, 2010)
What was unthinkable just ten years ago is now becoming a reality: European countries are looking at reducing spending on domestic social programs. Michael Weissenstein, a journalist for the Associated Press, recently wrote that “Deep budget cuts are underway across Europe. Although the first round of cuts are mostly focused on government payrolls—the least politically explosive target—welfare benefits are looking increasingly vulnerable.” The German government, for example, is planning to cut €3 billion ($3.78 billion) from its domestic budget and is looking at reducing unemployment benefits in order to do so. The proposal would involve lowering the amount paid to out of work Germans from 60% to less than 50% of their last recorded salary before taxes, a reduction of almost 17% in annual unemployment benefits. (Weissenstein, 2010)
According to Weissenstein, other nations are making the same hard choices. The week of May 24, 2010, the United Kingdom revealed a plan that cuts government payrolls and expenses by £6 billion ($8.6 billion) and also requires the unemployed to make a real effort to find jobs in order to be eligible for unemployment benefits. (Weissenstein, 2010)

The economic conditions in Europe have not been lost on U.S. industry, particularly those in the defense business. CEOs of major defense companies like Honeywell and United Technologies Corporation have expressed their concerns. These fears center on the amount of sovereign debt in Europe as well as on the precarious position of the euro. (Malone, 2010)

As all European countries increasingly focus on domestic agendas and priorities, cutting defense spending will be a more and more attractive option. The irony of the economic circumstances in which Europe, and by association the United States, find themselves is all too clear: The European welfare state built after World War II as “the keystone of a shared prosperity meant to prevent future conflict” may be the very thing contributing to instability. (Weissenstein, 2010)

The Effect of Stressed Economies on Global Security

Defense Secretary Robert Gates recently made a speech at the Eisenhower Library in Abilene, Kansas on the occasion of the 65th Anniversary of the Victory of World War II in Europe. His remarks portend how the United States is reacting to economic pressures. He stated that:

“The attacks of September 11, 2001, opened a gusher of defense spending that nearly doubled the base budget over the last decade, not counting supplemental appropriations for the wars in Iraq and Afghanistan. Which brings us to the situation we face and the choices we have today—as a defense department and as a country. Given America’s difficult economic circumstances and parlous fiscal condition, military spending on things large and small can and should expect closer, harsher scrutiny. The gusher has been turned off, and will stay off for a good period of time.” (Gates, 2010)

GRAPH TO BE INSERTED

On the graph above, the dashed line depicts the variation in the procurement account for the U.S. Department of Defense. It shows the willingness of the U.S. to buy military weapons and equipment over the years from Fiscal Year (FY) 1960 to FY 2010. The amounts are in then year dollars to show the appetite for defense spending historically in any one year. The dotted line is the expenditure on research and development and shows less variation over that same period. Thesolid line shows the percent change in GBP from one fiscal year to the next. We can see that when the highest spikes in the percent change in GDP are followed by significant negative changes in percent change, these variations correspond to high spikes in the procurement account followed by significant reductions in defense spending on weapons and equipment. The significance of this rough comparison is that where the highest spikes occur in the percent change in GDP, the reductions in defense spending were the greatest in U.S. history. The situation we see today may therefore foretell an equally drastic reduction in U.S. spending on weapon systems.

Another indication that there will be pressure on defense spending due to the general economic conditions is the unwillingness of other countries to share the current burden of global security or step up to new defense funding challenges. Again, David Ignatius describes this issue:

“NATO members in Europe were mostly failing to meet their defense spending commitments even before the financial crisis that hit Greece, Spain, Portugal, and other nations. They will be even less likely to share burdens now that they have to fund a trillion-dollar financial bailout for the eurozone...”

The debt crisis, both in Europe and the U.S., has significant U.S. national security implications and Pentagon analysts have made the issue the subject of a senior leadership study. An analysis this year inside the U.S. Defense Department pointed out that of the top 25 nations with the most debt, the United States ranked number 19. (Ignatius, 2010)
Though seemingly paradoxical or at least ill timed, the financial woes of the United States are driving the U.S. to put pressure on European nations to meet their fiscal obligations to NATO. This comes at a time when European countries are least capable of doing so. Admiral James Stavridis, NATO Supreme Allied Commander Europe, is holding firm for NATO members to honor their obligations to devote 2% of their GDP to NATO. In comments made to the Atlantic Council in Washington, D.C., Stavridis emphasized that the 2% goal was not “unreasonable” considering the wealth of NATO member nations. (Bennett, 2010) However, in 2008 only five of the 26 NATO countries had met the target of 2% of GDP spending on defense. One of those countries, oddly enough, was Greece, who continues to meet that commitment. (Neuger, 2010)
Admiral Stavridis’ request for NATO nations to hold to the 2% goal notwithstanding, the realities of Europe’s economic straights have prompted defense spending to be put under a microscope throughout Europe. Stavridis also has called for finding ways to reduce NATO spending. One area he is focusing on is the rank structure. At a breakfast for defense writers in Washington, DC on May 17 of this year, Stravridis suggested there could be “significant cuts of both flag officers—generals and admirals—as well as staff for the U.S. and NATO allies.” (Lubold, 2010)

Other NATO countries are also looking at cost saving measures. The Dutch are reviewing a number of options to cut costs by as much as €2.1 billion ($2.67 billion). (Kerres, 2010) Greece is evidently inclined to make whatever adjustments in defense spending it must. Greek Defense Minister Panos Beglitis has made it very clear that he is going to cut his country’s defense budget by 12%, from €6.8 billion ($8.6 billion) to €6 billion ($7.6 billion), which will be roughly 2.8% of Greece’s GDP. (Defense News, 2010) The Italian government recently announced that it is planning a 10% reduction in its defense budget. In an effort to cope with its debt, Italy’s “emergency debt reduction package” will hit the Italian defense budget hard in 2011, leaving the military in serious funding difficulties since this new defense budget reduction will come on top of a 20% cut in the military operations and maintenance account. (Kingston, 2010)

Additionally, the U.S. is trying to get the NATO allies in Europe to assume responsibility for the missile defense mission. This would levy an additional burden on European members but result in significant savings for the U.S. (Malone, 2010). However, getting Europe to shoulder the missile defense burden—or at least share it—is not the only initiative on the table. In May 2010, the NATO Strategic Concept Expert Group issued its recommendations as to how NATO should focus its strategic efforts in the coming decade. It was the first strategic review since 1999. What made this project unique was that the members spent considerable time assessing how to make NATO more economical, efficient, and effective. One of the key recommendations was to have NATO countries better pool their resources to achieve economies of scale, making “more efficient use of our money.” (NATO Strategic Concept Expert Group, 2010) James Neuger, who followed the deliberations of the Strategic Concept Expert Group on behalf of Bloomberg, quotes NATO Secretary General Anders Fogh Rasmussen as saying that, “This is about much more than just money: It’s also about security. Too deep cuts at the expense of future security may also have damaging economic implications.” This makes it clear, however, that there will certainly be cuts to defense budgets in reaction to national economic pressures. (Neuger, 2010)

It was clear that the state of the European and U. S. economies played a significant role in the recommendations of the NATO Strategic Concept Expert Group. Ambassador Madeleine Albright, the chairman of the NATO Panel, summed it up for the other delegates by explaining, “We take note of the fact that taxpayers are the same for most of the countries [in NATO and the EU]. It’s important to be efficient and try to figure out ways where the two organizations can co-operate so there is not a duplication.” (Pop, 2010)

CONCLUSIONS

As the allied nations in Europe and the transatlantic partners feel the financial pressures of the global economic conditions, concerns for security in each individual country as well as collective defense objectives may be forced to the bottom in terms of national priorities. There is clearly great economic stress on both Europe and the United States, and the debt they carry is an ever-present reminder of that stress. Our imperative is global security, in both good and bad economic times.
While global economic conditions demand timely and difficult decisions, we all stand to benefit from good government decisions that reinforce the need for fielding existing, adequate capabilities in order to drive down costs. None of us can afford to invest large sums of our nations’ resources in striving for an exquisite capability solution at the expense of a good capability solution with growth potential. The best approach is always to adopt low cost, high value alternative solutions that are the result of thoughtful deliberation. Otherwise, we risk waiting until budget realities drive us to make poor decisions—ones that all too often end up being expedient, precipitous program cancellations.

To conclude, the lesson of the times is that there is never a good rationale for waste in a nation’s budget. In his speech at the Eisenhower Library, Secretary Gates also reminded the audience of the words of his predecessor on September 10, 2001: “Every dollar squandered on waste is one denied to the warfighter.” Global security and global economic health are indeed inseparable topics, causing us all to pay increasing attention to the cost of defense.