by Simon Tilford
Many European policy-makers and business leaders believe that a country's economic growth prospects depend on its ability to capture a growing share of global markets. Indeed, European policy-makers are obsessed with national 'competitiveness' and genuinely appear to think that prosperity is synonymous with trade surpluses. Of course, imports have to be financed by exports. But the focus on trade competitiveness risks drawing attention away from Europe’s underlying problem, which is very weak productivity growth.
The idea of economic growth being determined by a battle for global market shares in manufactured goods is easy for politicians to grasp and to communicate to their electorates. Countries have little in common with firms, but referring to Deutschland AG, or UK plc, is conceptually attractive and seductively easy. Economies running external surpluses are regarded as 'competitive' irrespective of their productivity or growth performance. The trade balance is seen as a country's 'bottom line', as if countries were firms. The trade balance is nothing of the sort, but is simply the difference between domestic savings and investment or more broadly, between aggregate spending and output.
Governments obsessed with national competitiveness are likely to pursue damaging economic policies. If economic growth is seen as being dependent on the cost competitiveness of exports, governments will focus on things that might make sense for exporters but not for their economies as a whole. A fixation with exports leads to labour market policies aimed at artificially holding down wage growth, which redistributes income from labour to capital and exacerbates inequality. The secular decline in the proportion of national income accounted for by wages and salaries over the last 10 years in nearly every EU economy is a major obstacle to a recovery in private consumption. The flipside of the decline in wage and salaries – a steep rise in the proportion of national income accounted for by corporate profits – has not resulted in booming investment. This is no surprise. An individual firm can cut wages without undermining demand for whatever good or service it produces. But this does not work if all firms attempt this simultaneously. The resulting weakness of overall demand depresses companies' incentives to invest, and with it productivity growth.
In short, cutting the proportion of national income accounted for by wages, accepting a secular rise in inequality and boosting the proportion of national income accounted for by corporate profits is no way to deliver sustainable economic expansion. But it is what happens when governments believe that economic salvation lies in winning a growing share of export markets.
The EU's economic prospects will largely be down to its domestic rate of productivity, not the size of its trade surplus. There is a very strong correlation between growth in labour productivity and economic growth, which holds for countries with trade surpluses as well as those with deficits.
Unfortunately, the data show a remarkable decline in productivity growth across Europe, from around 3.5 per cent annually in the 1970s to barely 1 per cent in the 2000s. And productivity growth has been almost as weak in the eurozone's core as in its troubled periphery. Governments across the region should focus on raising productivity – not just in the most internationally exposed sectors like manufacturing, but in less tradeable sectors such as services too. Service sectors now account for around two-thirds of economic activity. Without stronger productivity across the service sector economic growth will prove elusive.
Why has Europe's productivity performance, with a few notable exceptions been so bad? There are two core problems. The first is inadequate skills levels. Europeans are terrifically complacent about labour skills. Some countries – the Nordics, the Netherlands – do well. The picture elsewhere is patchy at best. Germany has good vocational training, Britain more than its fair share of top universities, France good technical education. Other countries, especially in the south, perform poorly in most areas. The second cause is inadequate competition. In too many sectors, incumbents are protected. This is justified in terms of upholding 'social justice' or defending 'national champions'. What it leads to is so-called rent-seeking; the ability of particular groups in society to extract disproportionate rewards for their work. Where this tendency is strongest, productivity levels are weakest.
Europe's economic growth prospects may be poor. But this has little to do with what is happening elsewhere. Europe’s leaders will find that improving education and throwing open hitherto protected markets is a long and arduous task. But unlike the obsession with 'competitiveness' such reforms will lead Europe onto the path of sustainable growth.
Simon Tilford is chief economist at the Centre for European Reform.
Thursday, March 31, 2011
Wednesday, March 16, 2011
Turkey, the EU and the Mediterranean uprisings
by Katinka Barysch
The revolts in Tunisia, Egypt and Libya have brought home to many people that Turkey has become a force to be reckoned with in this region. Turkey enjoys lots of credibility in the Arab world. It has burgeoning trade ties and solid political relations with many Middle Eastern and Mediterranean countries. As the EU scrambles to revamp its own neighbourhood policy, it would do well to work closely with Turkey. Turkey would also gain. Sadly, there is little evidence of such co-operation to date.
Asked at a recent Aspen roundtable in Istanbul whether the EU and Turkey were co-ordinating their responses to the revolts in the Arab world, Ali Babacan, a veteran minister in the Erdogan government, said: "We work a lot with the Americans, like we do on Afghanistan, but not with Europe." The main reason, he said, was that his country's plan to join the EU was going nowhere.
The EU - in acknowledgement of Turkey’s growing international clout - has offered Ankara a foreign policy dialogue outside the accession process. But the dialogue has yet to start in earnest. Most of the interaction between Turkey and the EU still revolves around a largely blocked accession process. Foreign Minister Ahmet Davutoglu - at the same Aspen roundtable - added a second reason why foreign policy co-ordination had been slow to get off the ground. Turkey, he explained, did not bother to work with the EU because the EU's own neighbourhood policy was weak and inconsistent.
Davutoglu and his colleagues in Ankara should reconsider. The uprisings in the Arab world are spurring the EU to rethink its neighbourhood policy (see Charles Grant, 'A new neighbourhood policy for the EU'). They could also wreck Turkey's 'zero problems with the neighbours' approach to its region - which is already in trouble after Turkish attempts to mediate in several regional conflicts failed and Ankara fell out with Israel.
Although today's Turkey likes to see itself as a regional leader, its influence in the Middle East, and even more so in the Maghreb, is still rather fresh and fragile. During the Cold War years, Turkey was largely isolated in its neighbourhood. It clung to its NATO allies while viewing its southern neighbours as sources of Islamic extremism, Kurdish separatism and other potential security threats.
In the 1990s, there were initial attempts to make up with old adversaries like Syria and Iran. These accelerated after the AK party took power in 2002. Turkish mediation efforts, for example between Israel and Syria or Iran and the West, have produced no tangible results. But over the last decade, Turkey has created a web of political, economic and civil society ties with almost all of the countries around its borders. Turkey has scrapped visa requirements for Syrians, Tunisians, Lebanese, Libyans and Moroccans; it is building a free trade zone with various Mediterranean countries; and Turkish traders, builders and bankers are active across the region, as are Turkish business federations and other non-governmental organisations.
Bizarrely, as Kemal Kirisci points out in a recent GMF-IAI paper ('Turkey: Reluctant Mediteranean power'), Turkey's neighbourhood policy has moved from its security-obsessed origins to good old-fashioned European functionalism – the belief that economic integration and lots of low-level exchanges will bring political understanding and stability. The EU's Mediterranean policy has also involved scrapping trade barriers. And it talks about nice things such as democracy and good governance. But in reality it has taken a security-first approach, focusing mainly on fighting terrorism, fundamentalism, and illegal migration.
The revolts in Northern Africa have already forced the EU to think harder about how to help introduce democracy and create economic opportunities in its southern neighbours. Turkey, meanwhile, will probably move security back to the heart of its neighbourhood policy, especially if political upheaval spreads closer to its borders, and if some of the new regimes in the region start quarrelling with Israel or Iran.
Both Turkey and the EU will grapple with finding a balance between the objectives of stability and democracy in their neighbourhood policies. Unlike the EU, Turkey has not in the past claimed to be promoting democracy in the Arab world. Erdogan has managed to gain the admiration of the Arab street - partly through supporting Palestinians and criticising Israel - while at the same time snuggling up to some of the region’s most autocratic rulers, including Colonel Gaddafi, Mahmoud Ahmadinejad and Bashar al-Assad. Erdogan's initial reaction to the Arab uprisings was equally inconsistent. He called on Egypt's President Mubarak to leave and he welcomed Tunisia's move to democracy. But in the case of Libya, Erdogan has been holding out against sanctions and any kind of military intervention. And he has never criticised Ahmadinejad for rigging elections or Assad for clamping down on his opponents. In the new political environment, Turkey's standing in the Arab world will suffer unless its approach to democracy promotion becomes more coherent and consistent.
Turkey's ruling AK party, which itself has some roots in outlawed Islamist forces, has strengthened ties with various Islamist movements in its neighbourhood, including the Muslim Brotherhood in Egypt. The AKP could help turn such movements into electable political parties. However, at a time when the Erdogan government is accused of moving towards religious conservatism and political authoritarianism, collaboration with Islamists elsewhere would scare people inside Turkey and outside. They would ask whether Turkey was trying to promote democracy or Islamism in its foreign relations. Such suspicions would be mitigated if the AKP's ties with Islamists in Egypt and elsewhere were part of an EU-supported democratisation and institution-building programme.
The EU would also benefit greatly from working with Turkey - and not only because Turkey brings valuable regional links and expertise to the table. Having lost much of its kudos by focusing aid and political attentions on various autocratic regimes, the EU could regain soft power by working with Turkey - a country that still enjoys much esteem across the Arab world.
The revamp of respective neighbourhood policies could be an opportunity for the EU and Turkey to get serious about foreign policy co-ordination and thus improve their strained bilateral ties. Co-operation should go beyond political dialogue between Brussels and Ankara and involve business federations, foundations and other non-governmental organisations that can help Mediterranean countries become more stable and prosperous. Without this kind of co-ordination, rivalries and misunderstandings between the EU and Turkey could further undermine their bilateral relationship and the effectiveness of their respective neighbourhood policies.
Katinka Barysch is deputy director of the Centre for European Reform
The revolts in Tunisia, Egypt and Libya have brought home to many people that Turkey has become a force to be reckoned with in this region. Turkey enjoys lots of credibility in the Arab world. It has burgeoning trade ties and solid political relations with many Middle Eastern and Mediterranean countries. As the EU scrambles to revamp its own neighbourhood policy, it would do well to work closely with Turkey. Turkey would also gain. Sadly, there is little evidence of such co-operation to date.
Asked at a recent Aspen roundtable in Istanbul whether the EU and Turkey were co-ordinating their responses to the revolts in the Arab world, Ali Babacan, a veteran minister in the Erdogan government, said: "We work a lot with the Americans, like we do on Afghanistan, but not with Europe." The main reason, he said, was that his country's plan to join the EU was going nowhere.
The EU - in acknowledgement of Turkey’s growing international clout - has offered Ankara a foreign policy dialogue outside the accession process. But the dialogue has yet to start in earnest. Most of the interaction between Turkey and the EU still revolves around a largely blocked accession process. Foreign Minister Ahmet Davutoglu - at the same Aspen roundtable - added a second reason why foreign policy co-ordination had been slow to get off the ground. Turkey, he explained, did not bother to work with the EU because the EU's own neighbourhood policy was weak and inconsistent.
Davutoglu and his colleagues in Ankara should reconsider. The uprisings in the Arab world are spurring the EU to rethink its neighbourhood policy (see Charles Grant, 'A new neighbourhood policy for the EU'). They could also wreck Turkey's 'zero problems with the neighbours' approach to its region - which is already in trouble after Turkish attempts to mediate in several regional conflicts failed and Ankara fell out with Israel.
Although today's Turkey likes to see itself as a regional leader, its influence in the Middle East, and even more so in the Maghreb, is still rather fresh and fragile. During the Cold War years, Turkey was largely isolated in its neighbourhood. It clung to its NATO allies while viewing its southern neighbours as sources of Islamic extremism, Kurdish separatism and other potential security threats.
In the 1990s, there were initial attempts to make up with old adversaries like Syria and Iran. These accelerated after the AK party took power in 2002. Turkish mediation efforts, for example between Israel and Syria or Iran and the West, have produced no tangible results. But over the last decade, Turkey has created a web of political, economic and civil society ties with almost all of the countries around its borders. Turkey has scrapped visa requirements for Syrians, Tunisians, Lebanese, Libyans and Moroccans; it is building a free trade zone with various Mediterranean countries; and Turkish traders, builders and bankers are active across the region, as are Turkish business federations and other non-governmental organisations.
Bizarrely, as Kemal Kirisci points out in a recent GMF-IAI paper ('Turkey: Reluctant Mediteranean power'), Turkey's neighbourhood policy has moved from its security-obsessed origins to good old-fashioned European functionalism – the belief that economic integration and lots of low-level exchanges will bring political understanding and stability. The EU's Mediterranean policy has also involved scrapping trade barriers. And it talks about nice things such as democracy and good governance. But in reality it has taken a security-first approach, focusing mainly on fighting terrorism, fundamentalism, and illegal migration.
The revolts in Northern Africa have already forced the EU to think harder about how to help introduce democracy and create economic opportunities in its southern neighbours. Turkey, meanwhile, will probably move security back to the heart of its neighbourhood policy, especially if political upheaval spreads closer to its borders, and if some of the new regimes in the region start quarrelling with Israel or Iran.
Both Turkey and the EU will grapple with finding a balance between the objectives of stability and democracy in their neighbourhood policies. Unlike the EU, Turkey has not in the past claimed to be promoting democracy in the Arab world. Erdogan has managed to gain the admiration of the Arab street - partly through supporting Palestinians and criticising Israel - while at the same time snuggling up to some of the region’s most autocratic rulers, including Colonel Gaddafi, Mahmoud Ahmadinejad and Bashar al-Assad. Erdogan's initial reaction to the Arab uprisings was equally inconsistent. He called on Egypt's President Mubarak to leave and he welcomed Tunisia's move to democracy. But in the case of Libya, Erdogan has been holding out against sanctions and any kind of military intervention. And he has never criticised Ahmadinejad for rigging elections or Assad for clamping down on his opponents. In the new political environment, Turkey's standing in the Arab world will suffer unless its approach to democracy promotion becomes more coherent and consistent.
Turkey's ruling AK party, which itself has some roots in outlawed Islamist forces, has strengthened ties with various Islamist movements in its neighbourhood, including the Muslim Brotherhood in Egypt. The AKP could help turn such movements into electable political parties. However, at a time when the Erdogan government is accused of moving towards religious conservatism and political authoritarianism, collaboration with Islamists elsewhere would scare people inside Turkey and outside. They would ask whether Turkey was trying to promote democracy or Islamism in its foreign relations. Such suspicions would be mitigated if the AKP's ties with Islamists in Egypt and elsewhere were part of an EU-supported democratisation and institution-building programme.
The EU would also benefit greatly from working with Turkey - and not only because Turkey brings valuable regional links and expertise to the table. Having lost much of its kudos by focusing aid and political attentions on various autocratic regimes, the EU could regain soft power by working with Turkey - a country that still enjoys much esteem across the Arab world.
The revamp of respective neighbourhood policies could be an opportunity for the EU and Turkey to get serious about foreign policy co-ordination and thus improve their strained bilateral ties. Co-operation should go beyond political dialogue between Brussels and Ankara and involve business federations, foundations and other non-governmental organisations that can help Mediterranean countries become more stable and prosperous. Without this kind of co-ordination, rivalries and misunderstandings between the EU and Turkey could further undermine their bilateral relationship and the effectiveness of their respective neighbourhood policies.
Katinka Barysch is deputy director of the Centre for European Reform
Tuesday, March 15, 2011
What cuts in US defence budget will mean for the transatlantic alliance
by Tomas Valasek
The US defence budget seems set to fall as Washington begins to restore order in its finances. Spending on the military has reached such heights – $700 billion, or 20 per cent of the US federal budget – that it has become too large for deficit-cutters to ignore. Even traditionally pro-defence Republicans now argue that military expenditures need to be reduced along with other government expenses. Europe, too, will feel the pinch: many of the American soldiers currently based on the continent seem certain to go, and some joint weapons programmes will be cancelled. In case of future crises in Europe, NATO’s and the EU’s ability to respond will be tested. The US will expect Europe to lead but European allies themselves have been reducing forces and budgets.
Congress is poised to cut the White House’s request for defence for the fiscal year (FY) 2011 by $15-$20 billion. That might seem low relative to the $700 billion total but of that amount roughly $160 billion is set aside for operations in Iraq and Afghanistan, and will decrease as those conflicts wind down. And much of the remaining money is tied up in non-discretionary spending such as pensions and healthcare for military personnel (the latter alone costs the Pentagon over $50 billion a year). The brunt of the cuts in FY 2011 will therefore fall on the pool of $200-$300 billion that pays for purchases of new equipment, foreign military assistance, overseas bases and non-core military operations. Money spent abroad will be particularly vulnerable to cuts – more and more Americans say that the US government should look after its own rather than, say, wealthy Europeans (all foreign aid is in for big reductions).
The effect of US defence budget cuts on Europe will be five-fold. First, some of the 80,000 US soldiers left in Europe as assurance to NATO allies will most probably leave; Gates said in January 2011 that “it is clear that we have excess force structure in Europe”. The Balts and others in Europe who continue to fear possible trouble with Russia will wonder whether the US has enough forces ready to defend them. But their unease will be tempered by the many military exercises that the US held in the region last year. In 2010, Washington also successfully lobbied the rest of NATO to draft a defence plan for the Baltic. This was done in order to re-affirm US intent to uphold the alliance’s mutual defence pledge, and it seems to have worked: judging by mood at events such as this month’s GLOBSEC conference in Bratislava, the Balts and other Central Europeans are more at ease with Obama. Besides, as Stephen Flanagan of CSIS, a Washington think-tank, points out, “the 50,000 troops that will stay in Europe would be more than double the US ground presence in South Korea, where there is daily risk of imminent war.” Many of the new allies have been busy cutting defence budget themselves: they say that the fiscal crisis leaves them no choice, but the cuts also suggest that they feel little imminent threat from the East. This will make Washington less reticent about withdrawing troops from Europe.
Second, the military assistance that the US provides to help allies to modernise and re-arm will continue to fall. In the past decade, the US generously funded equipment purchases in Europe, with most money going to the new allies. Low-interest US loans allowed Poland to buy F-16 fighter jets, while Romania purchased C-130 cargo planes with US aid. But in recent years, assistance to countries such as Egypt or Pakistan has taken priority – of the $5.4 billion in 'foreign military financing', which the US set aside for 2011, $4.7 billion will go to Middle East and North Africa. The proportion of the aid going to wealthier and less strategic European countries will be slashed further when, as expected, the overall volume of military assistance falls. In the past, US defence companies would have had a decent shot at thwarting cuts in such assistance: they tend to be its main beneficiaries as most of the money ends up with them in the form of procurement orders. But the mood in the US is changing: Republicans in particular argue that the US government should not be in the business of funding new jobs, and that the best job-creation strategy lies in cutting expenses, thus restoring order in the federal budget. Should military assistance to Europe be slashed, as seems likely, programmes such as Romania’s planned purchase of F-16 fighter jets that are financed with US monies would likely be postponed or cancelled. With defence budgets falling in virtually all NATO countries, there is little hope that European allies would pick up the slack.
Third, US personnel on operations in Europe – in Bosnia-Herzegovina and in Kosovo – will likely be reduced or withdrawn altogether. Because their numbers are low to begin with, the short-term impact will be minimal. Only 20 US soldiers remain in Bosnia in a force that once counted 20,000 American troops. The US has about 800 soldiers left in Kosovo, where the overall NATO force is being reduced from 14,000 to 2,500. Should a new crisis break out in the Balkans, the Pentagon will be able to send more soldiers from bases elsewhere in Europe (primarily Germany). But this reserve force too is being reduced. The downsized Pentagon will be far less willing than in the 1990s to lead military operations in Europe. In the future, Washington will look to its allies to assume main responsibility for dealing with the Balkans and other crises on Europe’s periphery. The defense department’s resistance to a no-fly zone in Libya could be a sign of things to come.
Fourth, those European companies that do business in the US will lose some of their orders – but so will their US competitors. Signs of renewed protectionism have been few so far. While the Pentagon recently chose Boeing over a Franco-German consortium EADS to build a new generation of tanker aircraft, “this is mainly because Boeing’s planes were $2 billion cheaper”, says Andrew Koch, an analyst with Scribe Strategies and Advisors, a Washington consultancy. The European companies have worked hard to erase their US competitors’ advantage: the likes of BAE Systems and EADS pledge to build equipment in the US using American workers, so they are likely to have as many members of Congress on their side as their US counterparts. While competition for US defence contracts will toughen, European companies are not necessarily losing ground to US ones.
Fifth, the future of new weapons funded jointly by the US and its allies is in doubt. Already, the Pentagon has announced that it was pulling out of a US-German-Italian project to build a new generation of medium-range missile defences. This is in large part because the project, MEADS, has suffered technical problems. But the Pentagon, in announcing the decision, also cited financial constraints as a factor. The more the US cuts defence spending, the higher the risk that NATO’s own flagship, continent-wide missile umbrella could be at risk. Announced in November 2010, the system envisions combining future US radars and missiles to be stationed mainly in Central Europe with yet-to-be-developed European sensors and interceptors. But few European governments have come forward pledging money for it. It is not obvious why the US Congress would fund a programme to defend European mainland, which the Europeans themselves are unwilling to support.
Politically, cuts in US defence spending are sure to rankle in Europe. A setback to NATO’s missile defences could be particularly divisive, with new allies lamenting a chance to host US military bases, and with NATO losing one of its key initiatives, which it also has been hoping to use to entice Russia into a closer relationship. The effect of US reductions will be compounded by cuts to military spending in Europe: there is a risk that reductions on one side of the Atlantic will be used to justify corresponding cuts across the sea. NATO remains the most powerful military block in the world but it will lose some of its ability to handle multiple crises simultaneously.
The main challenge for US and European defence communities for the next few years will be to keep NATO’s mutual defence pledge credible: this will require allies to prioritise missions and to hone their ability to diffuse crises before they require deployment of large forces. Even if no such crises occur, the Americans and Europeans will be busy managing the political fallout from cancelled procurement programmes and reduced operations. To minimise damage, the Pentagon should keep allies apprised of its cost-cutting measures. For their part, the Europeans need to co-ordinate better their own reductions in defence budgets, so as to make sure that enough money and resources are left to cover any shortfalls that US cuts will create.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
The US defence budget seems set to fall as Washington begins to restore order in its finances. Spending on the military has reached such heights – $700 billion, or 20 per cent of the US federal budget – that it has become too large for deficit-cutters to ignore. Even traditionally pro-defence Republicans now argue that military expenditures need to be reduced along with other government expenses. Europe, too, will feel the pinch: many of the American soldiers currently based on the continent seem certain to go, and some joint weapons programmes will be cancelled. In case of future crises in Europe, NATO’s and the EU’s ability to respond will be tested. The US will expect Europe to lead but European allies themselves have been reducing forces and budgets.
Congress is poised to cut the White House’s request for defence for the fiscal year (FY) 2011 by $15-$20 billion. That might seem low relative to the $700 billion total but of that amount roughly $160 billion is set aside for operations in Iraq and Afghanistan, and will decrease as those conflicts wind down. And much of the remaining money is tied up in non-discretionary spending such as pensions and healthcare for military personnel (the latter alone costs the Pentagon over $50 billion a year). The brunt of the cuts in FY 2011 will therefore fall on the pool of $200-$300 billion that pays for purchases of new equipment, foreign military assistance, overseas bases and non-core military operations. Money spent abroad will be particularly vulnerable to cuts – more and more Americans say that the US government should look after its own rather than, say, wealthy Europeans (all foreign aid is in for big reductions).
The effect of US defence budget cuts on Europe will be five-fold. First, some of the 80,000 US soldiers left in Europe as assurance to NATO allies will most probably leave; Gates said in January 2011 that “it is clear that we have excess force structure in Europe”. The Balts and others in Europe who continue to fear possible trouble with Russia will wonder whether the US has enough forces ready to defend them. But their unease will be tempered by the many military exercises that the US held in the region last year. In 2010, Washington also successfully lobbied the rest of NATO to draft a defence plan for the Baltic. This was done in order to re-affirm US intent to uphold the alliance’s mutual defence pledge, and it seems to have worked: judging by mood at events such as this month’s GLOBSEC conference in Bratislava, the Balts and other Central Europeans are more at ease with Obama. Besides, as Stephen Flanagan of CSIS, a Washington think-tank, points out, “the 50,000 troops that will stay in Europe would be more than double the US ground presence in South Korea, where there is daily risk of imminent war.” Many of the new allies have been busy cutting defence budget themselves: they say that the fiscal crisis leaves them no choice, but the cuts also suggest that they feel little imminent threat from the East. This will make Washington less reticent about withdrawing troops from Europe.
Second, the military assistance that the US provides to help allies to modernise and re-arm will continue to fall. In the past decade, the US generously funded equipment purchases in Europe, with most money going to the new allies. Low-interest US loans allowed Poland to buy F-16 fighter jets, while Romania purchased C-130 cargo planes with US aid. But in recent years, assistance to countries such as Egypt or Pakistan has taken priority – of the $5.4 billion in 'foreign military financing', which the US set aside for 2011, $4.7 billion will go to Middle East and North Africa. The proportion of the aid going to wealthier and less strategic European countries will be slashed further when, as expected, the overall volume of military assistance falls. In the past, US defence companies would have had a decent shot at thwarting cuts in such assistance: they tend to be its main beneficiaries as most of the money ends up with them in the form of procurement orders. But the mood in the US is changing: Republicans in particular argue that the US government should not be in the business of funding new jobs, and that the best job-creation strategy lies in cutting expenses, thus restoring order in the federal budget. Should military assistance to Europe be slashed, as seems likely, programmes such as Romania’s planned purchase of F-16 fighter jets that are financed with US monies would likely be postponed or cancelled. With defence budgets falling in virtually all NATO countries, there is little hope that European allies would pick up the slack.
Third, US personnel on operations in Europe – in Bosnia-Herzegovina and in Kosovo – will likely be reduced or withdrawn altogether. Because their numbers are low to begin with, the short-term impact will be minimal. Only 20 US soldiers remain in Bosnia in a force that once counted 20,000 American troops. The US has about 800 soldiers left in Kosovo, where the overall NATO force is being reduced from 14,000 to 2,500. Should a new crisis break out in the Balkans, the Pentagon will be able to send more soldiers from bases elsewhere in Europe (primarily Germany). But this reserve force too is being reduced. The downsized Pentagon will be far less willing than in the 1990s to lead military operations in Europe. In the future, Washington will look to its allies to assume main responsibility for dealing with the Balkans and other crises on Europe’s periphery. The defense department’s resistance to a no-fly zone in Libya could be a sign of things to come.
Fourth, those European companies that do business in the US will lose some of their orders – but so will their US competitors. Signs of renewed protectionism have been few so far. While the Pentagon recently chose Boeing over a Franco-German consortium EADS to build a new generation of tanker aircraft, “this is mainly because Boeing’s planes were $2 billion cheaper”, says Andrew Koch, an analyst with Scribe Strategies and Advisors, a Washington consultancy. The European companies have worked hard to erase their US competitors’ advantage: the likes of BAE Systems and EADS pledge to build equipment in the US using American workers, so they are likely to have as many members of Congress on their side as their US counterparts. While competition for US defence contracts will toughen, European companies are not necessarily losing ground to US ones.
Fifth, the future of new weapons funded jointly by the US and its allies is in doubt. Already, the Pentagon has announced that it was pulling out of a US-German-Italian project to build a new generation of medium-range missile defences. This is in large part because the project, MEADS, has suffered technical problems. But the Pentagon, in announcing the decision, also cited financial constraints as a factor. The more the US cuts defence spending, the higher the risk that NATO’s own flagship, continent-wide missile umbrella could be at risk. Announced in November 2010, the system envisions combining future US radars and missiles to be stationed mainly in Central Europe with yet-to-be-developed European sensors and interceptors. But few European governments have come forward pledging money for it. It is not obvious why the US Congress would fund a programme to defend European mainland, which the Europeans themselves are unwilling to support.
Politically, cuts in US defence spending are sure to rankle in Europe. A setback to NATO’s missile defences could be particularly divisive, with new allies lamenting a chance to host US military bases, and with NATO losing one of its key initiatives, which it also has been hoping to use to entice Russia into a closer relationship. The effect of US reductions will be compounded by cuts to military spending in Europe: there is a risk that reductions on one side of the Atlantic will be used to justify corresponding cuts across the sea. NATO remains the most powerful military block in the world but it will lose some of its ability to handle multiple crises simultaneously.
The main challenge for US and European defence communities for the next few years will be to keep NATO’s mutual defence pledge credible: this will require allies to prioritise missions and to hone their ability to diffuse crises before they require deployment of large forces. Even if no such crises occur, the Americans and Europeans will be busy managing the political fallout from cancelled procurement programmes and reduced operations. To minimise damage, the Pentagon should keep allies apprised of its cost-cutting measures. For their part, the Europeans need to co-ordinate better their own reductions in defence budgets, so as to make sure that enough money and resources are left to cover any shortfalls that US cuts will create.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
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