2% of GDP for Defence

Three months have passed since the Wales Summit where in the Summit Communique 28 Allied Heads of State and Government, among other significant decisions, made a pledge to halt declining defence spending and work towards its increase up to 2% of their Gross Domestic Product (GDP). The NATO leaders confirmed that Allies currently meeting the NATO guideline to spend a minimum of 2% of their GDP on defence will aim to continue to do so. Likewise, Allies spending more than 20% of their defence budgets on major equipment, including related Research & Development, will also continue to do so. However, those lagging behind will aim to move towards the 2% guideline within a decade with a view to meeting their NATO Capability Targets and filling NATO's capability shortfalls. Allies who currently spend less than 20% of their annual defence spending on major new equipment, including related Research & Development, will aim, within a decade, to increase their annual investments to 20% or more of total defence expenditures. The decision was also made to review and discuss the accomplishments on the annual basis[1]. 

International monetary commitments are not a new practice for international organizations and also for NATO this is not, indeed, the first time when defence spending is mentioned in the Summit Communiques. Almost 40 years ago 3% target for growth in defence expenditures was set in 1977 NATO Ministerial Guidance to answer nearly three times larger defence resource allocations of the Soviet Union. This commitment was then reflected in the NATO Summit Communique of 1978[2]. In the past 20 years a number of Summit Communiques devoted few lines on resources for defence. The language has been a reflection of the specific economic and security circumstances. One of the strongest languages with precisely identical wordings were used in the Riga and Bucharest Summits, respectively, in 2006 and 2008, encouraging nations to halt declining defence spending and aim to increase it in real terms. In this context, 2014 Wales can be marked as the Summit where Allied Heads of State and Government, after many years and in a much more explicit and stronger language, committed to devote precisely 2% of the GDP for defence and 20 % for defence investments within the next ten years.

Few reflections

First, this is not a new benchmark in NATO. However, only few member nations – Estonia, Greece, UK and the US – follow this guideline today[3], even though 2% has been NATO guideline for defence budget for almost 10 years now.  Taking closer look at the ten nations that joined the Alliance in the last three enlargement rounds, i.e., since 1999 - it is only Estonia with Poland (1,8% of GDP in 2013 and 1,9% in 2014[4]) following rather closely who fulfills this commitment.  As for the Baltic countries after 2004, Latvia was close to this guideline with 1.6% of GDP in 2008 just before the financial crisis hit the global economy. Lithuania was never higher than 1.4% of GDP in 2004, however, Estonia showed gradual progress since 2004 reaching 2% in 2012.

In the NATO context, the year of 2014 is certainly a very good year to make this high level transatlantic commitment to devote more for defence.

 

*Source: The Wall Street Journal http://online.wsj.com/articles/nato-leaders-to-vow-to-lift-military-spending-1409832341

Thus, secondly, this pledge highlights a long standing need to focus on decreasing defence budgets among European Allies. For a number of years, 2% benchmark has been abandoned for various national reasons, be it so called peace dividend, recent financial crisis or national demographic pressures. Above all, in many countries there has not been enough political support for strengthening defence capabilities, quite the opposite, there has been a large support to optimize and find more efficiencies in capability development, maintenance and employment. In many cases that has resulted simply in decreasing defence output. Another significant aspect is the rising defence spending in Russia and Asia. As the 2014 SIPRI released publication Trends in the World’s Military Expenditure shows, military spending fell in the West - North America, Western and Central Europe - while it increased in all other regions. China, Russia and Saudi Arabia are among the 23 countries that have more than doubled their military expenditure since 2004[5]. Russia, for instance, has increased its military expenditures by 108% since 2004 while its GDP growth was only 39%. Clearly the economic growth is not the key driving factor for the increases of the defence spending. Same time China’s defence spending has increased by 170% against 140% GDP growth.[6] Same statistics for the Western and Central Europe reveal a very different picture: on average military expenditures over the same time period fell by 6,5%. Thus, it is not only that Russia and Asia increase its defence spending, it is also much about Europe looking for optimizations and decreases in its military expenditures. The final important factor to mention is the recent dramatic changes in the European security environment which does not seem to be going away[7].  Thus – many factors together worked in making this defence spending pledge a high level public commitment.

Thirdly, besides being a long awaited outstanding issue for above mentioned reasons, the pledge certainly is supposed to strengthen transatlantic relations as the European NATO Allies are lagging behind in their defence spending in comparison with the United States for a number of years. Between 2007 (taken as the pre-crisis baseline) and 2013, the share of US expenditures has increased from 68 to 73%[8]. The US Administrations for a number of years have been quite outspoken and direct about this. One can recall the 2011 speech of the former US Defense Secretary Gates in Brussels where he pointed out that he has urged allies privately and publicly, often with exasperation, to meet agreed-upon NATO benchmarks for defence spending.[9] The same message has been heard for a number of times from the previous NATO Secretary General Anders Fogh Rasmussen. This line is certainly maintained by Jens Stoltenberg when he recently noted that all Allies are expected to shoulder their fair share of the burden. In terms of spending, in terms of capabilities, and in terms of contributing to our operations[10]. Thus 2014 Wales Summit was a very good moment to make such a pledge.

Fourthly, this pledge can certainly be treated as a helpful hand and encouragement to those Allied politicians who need additional arguments for the domestic political purposes as to why defence budget should stop its decline and has to be increased.

And finally or my fifth reflection point, a potential raise of defence spending among smaller and bigger member nations will have a different practical effect. Small nations with their relatively smaller GDP will always have a small defence budget and bigger ones will have a bigger one, however, at a certain scale these 2% might not make so much practical difference. Even if a small nation meets 2% (which I believe is a must for them), it can be still so small that it still does not allow procuring meaningful “forces”. On the other hand, for nations with relatively huge GDP it does not make sense to spend 2 % because the money would be so big that it would exceed all realistic needs of that nation. Very similar, in a way, argument is used by Germany. Germany cannot see herself to spend an amount equal to 2% of her GDP as such defence spending would make them a totally different military power in Europe. That again is another issue due to the evident historical reminiscence.

Situation in the Baltics

Out of three Baltic countries, Estonia is the only one which for the third year in row spends 2% on defence. The biggest differences among the Baltic countries appeared in 2008-2009, in the peak of the financial crisis. Estonia which was not hit so hard, kept increasing its defence budget as a share of GDP during these years even though in real terms the budget was affected by the declining GDP. Latvia decreased its defence budget for almost 50% in two years. Lithuania, another Baltic country that was harder hit by the economic crisis and that kept its defence spending on average around 1.1%-1.2 % since 2004, decreased the budget for more than 30%, going below 1% and up till now remained there.

Due to the events in Ukraine, 2014 is a year when the rhetoric’s among politicians on the defence spending significantly changed. Latvia with its recovering economy already in 2012 committed to reach 2% by 2020 writing it down in the State Defence Concept and strengthened it with a new law before the NATO Summit in Wales. On 3 July 2014 the Parliament adopted a Law on State Defence Financing. Though, not for the first time. The new law envisages a gradual budget increases each year with a clearly identified defence budget share of GDP each year. This, so called ‘ladder’ clearly ties the political promises into a realistic time schedule. Lithuania did not make similar legal commitment; however, the parties elected in the parliament this year strengthened their commitment to reach 2% by 2020. After the Russian aggressive actions in Ukraine, both countries were among the first ones to react in regards of defence budget increases. Currently Lithuanian defence budget is 0.89% and Latvia’s 0.91% in 2014.  Lithuania plans to raise it up to 1,1% of GDP and Latvia not less than 1% of GDP in 2015. Compared to 2014 defence budgets, this would mean 30% and 18% increases in nominal terms, but since the GDP is forecasted to grow (by 3,1%[11] in Lithuania and 2,9% in Latvia), it will likely be even bigger increase. Estonia as a regional leader in terms of defence budget growth, also plans to raise defence budget up to 2,05% of GDP which is 7% increase against the previous year[12]. The forecasted GDP growth is 2%[13].

To sum up, three points - first and foremost, it has to be noted that this defence spending pledge is the highest Allied defence related finacial commitment in many years. This is about what nations are ready to put in defence in the upcoming years in the light of the previously mentioned factors. Of course, defence output or what nations are ready to provide in terms of capabilities and manpower is another important indicator which is not covered by this article. Secondly, this pledge has created a substantial requirement for a follow up and certain progress. Thus, inclusion of the defence spending debate on the agenda of the summits and ministers regular meetings should be assured. This has been recently confirmed by the new Secretary General in a number of his public addresses. In the recent Policy Address, the new Secretary General confirmed his intentions to talk on this in all member nations he intends to visit and start to review the progress by June 2015 Defence Ministers meeting and in the future summits[14][15]. Third point on Latvia’a commitments – the budget after next Parliamentary elections in 2018 will be the best indicator of our national commitments in a longer term perspective.

The views expressed here are in a personal capacity and do not constitute the official position of the Ministry of Defence.


[1] Wales Summit Declaration, 5 September 2014, Paragraphs 14&15, http://www.nato.int/cps/en/natohq/official_texts_112964.htm?mode=pressrelease, last viewed 6 October 2014

[2] NATO Ministerial Guidance 1977, http://www.nato.int/docu/comm/49-95/c770517b.htm and NATO Washington Summit Final Communiqué, 1978, http://www.nato.int/docu/comm/49-95/c780530a.htm, last viewed 1 December 2014

[3] Financial and Economic Data Relating to NATO Defence, Press Release, 24 February 2014, http://www.nato.int/nato_static_fl2014/assets/pdf/pdf_topics/20140224_140224-PR2014-028-Defence-exp.pdf, last viewed 23 October 2014

[4] Basic Information of the Ministry of National Defence Budget for 2014, April 2014, http://en.mon.gov.pl/z/pliki/dokumenty/rozne/2014/11/basic_information_budget_2014.pdf, last viewed 5 October 2014

[5] http://books.sipri.org/files/FS/SIPRIFS1404.pdf, last viewed 6 October 2014.

[6] http://books.sipri.org/files/FS/SIPRIFS1404.pdf, last viewed 6 October 2014.

[7] Putin’s speech in the XI meeting of the Valdai International Discussion Club.

[8] NATO Secretary General’s Annual Report 2013, http://www.nato.int/cps/en/natohq/topics_106378.htm?, last viewed in 28 November 2014

[9] http://www.defense.gov/speeches/speech.aspx?speechid=1581, last accessed on 17 November 2014

[10] Keynote address by NATO Secretary General Jens Stoltenberg at the 60th Plenary Session of the NATO Parliamentary Assembly in The Hague, 24 November 2014, http://www.nato.int/cps/en/natohq/opinions_115098.htm, last viewed 28 November 2014

[11] European Economic Forest, Autumn 2014, 4 November 2014, Country Forecasts: Lithuania, http://ec.europa.eu/economy_finance/eu/forecasts/2014_autumn/lt_en.pdf, last viewed 6 October 2014

[12] Hobemagi T., Estonia's 2015 budget revenues to increase 7%, 24 September 2014, http://balticbusinessnews.com/article/2014/9/24/estonia-s-2015-budget-revenues-to-increase-7, last viewed 6 October 2014

[13] European Economic Forest, Autumn 2014, 4 November 2014, Country Forecasts: Estonia, http://ec.europa.eu/economy_finance/eu/forecasts/2014_autumn/lt_en.pdfhttp://ec.europa.eu/economy_finance/eu/forecasts/2014_autumn/ee_en.pdf,  last viewed 28 November 2014

[14]A Policy Address by Jens Stoltenberg, Secretary General, NATO October 28, 2014 , Brussels, http://www.gmfus.org/archives/a-policy-address-by-jens-stoltenberg-secretary-general-nato/, last viewed 1 November

[15] Keynote address by NATO Secretary General Jens Stoltenberg at the 60th Plenary Session of the NATO Parliamentary Assembly in The Hague, 24 November 2014, http://www.nato.int/cps/en/natohq/opinions_115098.htm, last viewed 28 November 2014

Publicēts 05. decembris, 2014

Autors Kristīne Rudzīte-Stejskala