SMART BUDGETS, SMART DEFENCE: SUSTAINABLE BUDGETING IN EUROPE 1

1. SMART BUDGETS, SMART DEFENCE: SUSTAINABLE BUDGETING IN EUROPE1 Adrian Kendry Senior Defence Economist and Head, Defence and Security Economics Political Affairs and Security Policy Division NATO 1 The comments and remarks made in this presentation are personal and do not necessarily reflect the views of NATO authorities EIN Seminar on Sustainable Budgeting in Europe

2. SMART BUDGETS, SMART TECHNOLOGIES, SMART DEFENCE • Lessons from Libya and future operations • Pressure on European defence budgets, defence inflation and defence affordability • Pressure on the European defence and technological industrial base (from primes to the supply chain) • Building Capability through Multinational and Innovative Approaches: NATO reform, common requirements, procurement and smart defence EIN Seminar on Sustainable Budgeting in Europe

3. SMART BUDGETS, SMART TECHNOLOGIES, SMART DEFENCE • Overcoming the transatlantic barriers to trade, export reform and licensing • Integrating Europe’s competitive advantages in emerging technologies in defence transformation through cost-saving unmanned platforms and reduced higher cost manned platforms and manpower • Reinforcing the measures to avoid duplication between the EDA and NATO (Agencies and ACT) • Increasing the effective and transparent use of European defence resources and procurement EIN Seminar on Sustainable Budgeting in Europe

4. SMART DEFENCE AND ECONOMIC AUSTERITY • Most European defence budgets have been cut less deeply than other sectors of governments spending in 2010-2011(Alliance commitments, contractual obligations, industrial concerns) • Not sustainable over 2011-2016: fiscal deficits and debt management will lead to further cuts in force levels, capabilities, readiness and delayed procurement • Further pressure on defence expenditure reductions in the USA, UK and Germany EIN Seminar on Sustainable Budgeting in Europe

5. SMART DEFENCE AND ECONOMIC AUSTERITY • UK, France and Germany are crucial for NATO Europe: 65% of all NATO Europe Defence Expenditure, 88% of Research and Technology • USA projections for significant reductions through 2016 (Secretary Gates reduced the rate of increase in defence spending): the Obama Plans for deficit reductions indicate at least $400 billion cuts over 12 years (with current budgetary negotiations threatening to trigger an overall reduction of some $1 trillion) • 2001: USA around 50% of NATO defence expenditure: 2011, USA approximately 75% EIN Seminar on Sustainable Budgeting in Europe

6. WHAT IS SMART DEFENCE? • Ensuring greater security for less money by working together with more flexibility • Nations to pool and share capabilities, to set the right priorities and to better co-ordinate efforts • Reduce bureaucracy and slim down structures • Invest in Science and Technology and create greater coherence within Europe with multinational projects and closer links with the private sector • NATO and EU intensification of practical cooperation (21 common states) EIN Seminar on Sustainable Budgeting in Europe

7. SECURITY AND THE EFFECTS OF BUDGETARY CONSTRAINTS • European Allies must resist the temptation to disinvest too much in defence and allow transatlantic defence spending gap to widen any further • For Taxpayers, in order to obtain more security for the money invested in NATO capabilities, there is the need for continuing reform • The new NATO Strategic concept is an action plan: more effective, more engaged and more efficient EIN Seminar on Sustainable Budgeting in Europe 7

8. SMART DEFENCE AND ECONOMIC AUSTERITY • NATO Secretary General: “Without proper investments, we run the risk of a Europe that is divided, weaker and increasingly adrift from the United States” • “The financial crisis requires Smart Defence which ultimately promotes more coherence and effectiveness in defence spending in member states” EIN Seminar on Sustainable Budgeting in Europe

9. SECURITY AND THE EFFECTS OF BUDGETARY CONSTRAINTS At present, all Allies have to cope with the serious effects of the economic crisis and cuts are inevitable • Need to be aware of the potential long-term negative effects if defence cuts are too large and disproportionate EIN Seminar on Sustainable Budgeting in Europe 9

10. THE STRATEGIC CONCEPT AND NATO AND THE EU In the strategic partnership between NATO and the EU, their fullest involvement in these efforts is essential NATO and the EU can and should play complementary and mutually reinforcing roles in supporting international peace and security NATO is determined to make its contribution to create more favourable circumstances to achieve these goals EIN Seminar on Sustainable Budgeting in Europe 10

11. SECURITY AND THE EFFECTS OF BUDGETARY CONSTRAINTS Bilateral reinforcements of European capabilities will contribute to NATO’s overall capabilities Resource reform will underpin a broader transformation Commitment to reforming the way in which NATO’s common funded resources are managed EIN Seminar on Sustainable Budgeting in Europe 11

12. THE CRISIS, THE SUPPLY SIDE AND THE BETTER MANAGEMENT OF DEFENCE RESOURCES The impact of the Economic/Financial Crisis on the AFFORDABLE Supply of components and technologies for the production of defence capabilities? Will the DIRECT impact of the recession on defence budgets be reinforced by the INDIRECT impact of rising costs through further industrial consolidation and a shrinking supplier base? EIN Seminar on Sustainable Budgeting in Europe 12

13. THE POTENTIAL DIRECT IMPACT OF THE CRISIS UPON NATO NATO Common Funding and “doing more with less”: the risk of further underinvestment in capabilities Scarcity of public (tax) resources and defence in competition with health, education etc National preferences and the pursuit of direct/indirect offsets Political and capacity responses to new NATO missions and operations in regions of instability Participation in NATO meetings and dialogue EIN Seminar on Sustainable Budgeting in Europe 13

14. THE CHANGING BALANCE OF INTERNATIONAL ECONOMIC POWER: LARGEST ECONOMIES 2010 v 2050 EIN Seminar on Sustainable Budgeting in Europe 9/28/2011 14