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Counting to two: analysing the NATO defence-spending target

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According to the latest edition of The Military Balance, only two member nations met NATO’s 2% defence-spending target in 2016, with the UK’s commitment notably dipping to 1.98%. Here, Lucie Béraud-Sudreau and Bastian Giegerich caution against setting too much store by the 2% figure when seeking to understand states’ defence capabilities and commitment to the transatlantic alliance.

By Lucie Béraud-Sudreau, Research Fellow for Defence Economics and Procurement, and Bastian Giegerich, Director of Defence and Military Analysis

September 2014, NATO’s heads of state and government agreed at the Wales Summit to make an obligation out of what hitherto had only been a recommendation: to spend 2% of their GDP on defence. Those who were spending less should undertake efforts to lift themselves to this level within ten years – by 2024. According to The Military Balance 2017 only two countries met this spending target in 2016, down from four in 2015. Estonia and Greece cleared the bar at 2.2% and 2.4%, and the United Kingdom just dipped below the threshold at 1.98% (2.0% when rounding to the nearest tenth) in 2016. Poland spent 2.1% of its GDP on defence in 2015, partially due to one-off extra funds for the payment of F-16 combat aircraft; however, it reached only 1.9% in 2016. While it is certainly headline grabbing and is supposed to have a mobilising effect in the political arena, is the 2% number actually relevant to understand states’ defence capabilities and commitment to the transatlantic alliance?

There are in fact three problems with the 2% target: how to count, how to figure out whether the money is actually well spent, and the fact that the gap between the ambition and reality has not closed in the past two years. Despite these issues, the 2% target has become increasingly prominent in the debates on European defence and security, and turned into a political constraint for government leaders. The UK, falling roughly £380 million (US$500m) short in 2016, has committed in its 2015 Strategic Defence and Security Review (SDSR) to uphold the 2% threshold. In recent years, the UK could remain above the 2% in part by including several spending items in the defence budget reported to NATO. In Germany, the 2016 Defence White Paper indicated that ‘the German government will and is determined to aim to spend two per cent of its gross domestic product on defence’, without giving a date, however. In France, the 2% target has moved to the forefront of the political agenda: in December 2016 the chief of the defence staff published an op-ed suggesting the defence budget should reach 2% of GDP by the end of 2022, i.e. by the end of the next president’s term. Across the Atlantic, the 2% figure became a strong symbol following Donald Trump’s first post-election interview to the European media, as he repeated comments hinting that US support could become conditional upon European states’ defence expenditure. President Trump seems to like things that can be quantified.

How does one count to 2%?

Given that a lot is riding on this benchmark, it is important to point out that there is no shared understanding of what makes up a defence budget. In its definition of ‘military expenditure’, NATO includes, besides defence ministry budgets, pensions, expenditure for peacekeeping and humanitarian operations, and research and development costs. Yet, the United Nations accepts another meaning of military expenditure, as states report different numbers to the UN than to NATO. For example, the UK reported £36.9 billion (US$57.7bn) to the UN but £39.8bn (US$62.3bn) to NATO in 2013, while in 2015 even the United States reported US$584.4bn to the UN and US$641.3bn to NATO (latest available data).

Where possible, the IISS tries to approximate the NATO definition; however, the necessary information is not always available, not even for European countries which are among the most transparent in an international setting. Even across European countries, governments do not all have the same definition of what they consider to be defence budgets. In Turkey for example, financial documents provide a budget figure for the defence ministry, but there is an additional figure for the defence industries’ under-secretariat. Even when combined, these two numbers likely do not cover all military-related spending in Turkey. To decide what numbers to count is the first hurdle when considering the 2% issue.

A second problem relates to the additional information needed to calculate the share of GDP. The IISS collects GDP figures from the International Monetary Fund’s (IMF) World Economic Outlook Database. However, GDP data can come from a variety of sources, such as national statistics agencies, but also the World Bank, the Organisation for Economic Co-operation and Development or the European Commission. Different GDP figures may therefore lead to different results when calculating the share of GDP spent on defence. In addition, because the IISS looks at defence spending worldwide, it uses the IMF’s GDP data in US dollar terms and to calculate the share of defence spending, exchange rates have to be applied. But, here again, exchange rates may come from a diverse range of sources – for The Military Balance, exchange rates are derived from the IMF data. These calculations also have an impact on the result for the share of countries’ GDP spent on defence: the US State Department’s World Military Expenditure and Arms Transfers report shows that there can be at least five different methods to convert military expenditure from local currencies to US dollars, which generate sometime very different results. Consequently, in some cases, whether or not states hit the 2% target is dependent on the data sources and definitions.

Going beyond the 2% figure

Leaving methodological issues to one side, arguably the 2% assessment only provides a limited representation of countries’ defence capabilities and commitments. Beyond the 2% defence spending target, it is worth noting that, while in absolute numbers real-terms defence spending did increase across European NATO member states in 2016 (going up from US$255.7bn in 2015 to US$256.5bn in 2016, or a real-terms growth of 0.3%), this rate was still well below the GDP growth of European NATO member states altogether – which was 1.8% in 2016. This shows that there remains a discrepancy between defence-spending discourse and reality (see chart).



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