Politics

Higher NATO Defense Spending May Not Help U.S. Contractors

European countries would seek to spend dollars at home, analysts say

President Donald Trump gives a news conference with Secretary of State Mike Pompeo and national security adviser John Bolton at NATO headquarters in Brussels on July 12. (Jasper Juinen/Getty Images)

President Donald Trump emerged from the NATO summit in Brussels touting a renewed commitment from members to increase their defense spending, but U.S. defense firms might want to hold off on the champagne — at least for now.

Trump claimed that European leaders had pledged to accelerate their individual efforts to reach the goal of spending 2 percent of their country’s gross domestic product on defense, possibly hitting that target sometime next year rather than by 2024 as originally planned.

But even if that happens — NATO Secretary-General Jens Stoltenberg signaled agreement with Trump in principle on higher defense spending but did not commit to a specific time frame — analysts said that would not lead directly to a windfall for American defense contractors.

“There’s this double-edged sword to this U.S. desire that Europe” take charge of its own defense, said Byron Callan, a defense analyst for Capital Alpha Partners. The more Europe steps up its contributions, the more likely it is that it will seek to spend those dollars at home to benefit Europe’s defense industrial base.

As Callan wrote in a note to investors, European defense stocks outperformed U.S. defense stocks last week, an indication that investors think it is European weapons makers who will reap the benefit of any spending increases that follow the summit.

“The market perceives this as the first choices not being the American primes,” Callan said, referring to the biggest U.S. defense contractors. Defense dollars are seen as a source of good jobs in Europe as they are in the United States, he said, so why would Europe choose to support jobs in America over jobs in Germany, Italy or France?

“To me, [a boost in European spending] logically would point to more support for European industry versus U.S. industry,” Callan said.

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Decreases in NATO members’ defense budgets in the years before Vladimir Putin’s takeover of Crimea in 2014 created readiness problems in Europe just as they have in America, said Jorge Benitez, a senior fellow at the Atlantic Council’s Scowcroft Center for Strategy and Security who specializes in NATO and trans-Atlantic relations.

Training, joint exercises, maintenance and spare parts have been shortchanged by many NATO members trying to stretch their defense funding, he said.

Speaking from Brussels, Benitez said even if countries were able to increase their defense budgets quickly, not all would be prepared to spend it in ways that would benefit the alliance most. For example, England is accustomed to a more prominent role in international security and has the needed acquisition apparatus in place, while Germany does not.

Germany has intentionally dragged its feet in this regard, and the part of the German defense ministry that formulates long-term plans has had a hiring freeze and is understaffed by 1,000 people, he said.

“The alliance has more than doubled in size since the Cold War, so most of the members are new to these collective defense missions,” he said.

How to spend that money

Part of the challenge, said Rachel Rizzo, a fellow with the Center for a New American Security’s trans-Atlantic security program, is that individual members decide how to spend their own defense budgets. While the members from the Baltic states next door to Russia may view a Russian invasion as the biggest threat, members along the southern border may be more concerned with refugees fleeing unrest in Africa, she said.

“There isn’t a shared threat perception among allies, which makes it really difficult for the alliance as a whole to agree on where to focus resources,” she said from Brussels.

For Rizzo, the immediate threat is not so much that Russia will attack a member state and trigger Article V of NATO’s founding treaty, which states that an attack against any member is viewed as an attack on all members. More likely, she said, are Russian disinformation and propaganda efforts to interfere in local politics, which are actions more difficult to defeat and deter.

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NATO’s defense spending should focus more on the cyber realm and emerging domains of warfare, like space, she said.

“We focus so much on this idea of 2 percent, and it really is an arbitrary number,” Rizzo said. “It’s so much more important to focus on where and how the money is spent.”

Gordon Adams, a former international relations professor and author of several books on national security and defense budgets, said the issue with NATO is not that its members don’t spend enough on defense, but that there are too many redundancies in the capabilities different governments buy.

Remove the overlap, and there’s enough money to fund the needed capabilities, he said, but that’s very hard to accomplish politically. “The last bastion of national sovereignty is your military capability,” he said.

The Europeans don’t want to rely on American companies to produce their military gear. “They want to have a European defense and technology industrial base,” he said. “Why should they be any different than us? We want that.”

Trump makes it worse because instead of going over and talking to the Europeans, he goes over and bullies them, Adams said. The irony is that the predominant reason for the Europeans’ increasing their defense spending is that they’re beginning to worry about the reliability of the United States as an ally, he said.

“This is not a win for American defense contractors,” he said.

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