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German Army personnel in Georgia, August 2018

The 2% Target: Spending Increases and the Russian Threat

Malcolm Chalmers
RUSI Newsbrief, 8 November 2019
Defence Spending, NATO, North America, Europe
While all NATO countries have increased defence spending since 2014, the Alliance’s new members have done the most.

A Tale of Two Targets

In 1977, NATO responded to a growing Soviet military threat by agreeing that all member states should aim for an annual real increase in their defence budgets ‘in the region of 3%. Most states failed to fully meet this headline target. But it did make a difference.

Between 1980 and 1985, 12 out of the 14 member states for which data is available increased defence spending in real terms. By far the largest increase was in the US, which increased defence spending by 34% over this period. Of the major European states, the UK came closest to meeting the target, with a 12% increase. Other European members increased spending, on average, by some 7% in real terms over these five years.

Since 2014, NATO has responded to new concerns over Russia by adopting, and in large measure implementing, a further set of burden-sharing targets. But this time – as a result of both the different nature of the threat and altered intra-alliance dynamics – the most substantial changes in behaviour have not been in the US or UK but in the Alliance’s newer member states.

As in the early 1980s, the 2014 targets have helped to persuade member states to halt and reverse previous declines in spending. Between 2014 and 2019, every one of NATO’s member states increased defence spending in real terms. But the largest reported percentage increases have been in Lithuania (161%), Latvia (154%), Romania (89%) and Hungary (69%). NATO’s most powerful states, in contrast, increased spending by relatively modest amounts – the US by 4%, the UK by 7% and France by 9%. See Figure 1 and Table 1.

This stark difference in burden-sharing dynamics – between US-led rearmament in the 1980s, and Central European-focused rearmament today – reflects a broader shift in the geostrategic landscape.

In the 1980s, the primary concern of NATO leaders was to improve their aggregate military capability against powerful Soviet armed forces, many of which were deployed forward in East Germany and other Warsaw Pact states. Former senior officials, such as former Navy Secretary John Lehman, have argued that the more offensive military posture adopted by the US during this period, made possible by the sharp increase in its defence budget, helped persuade the Soviet Union’s leaders that it could no longer afford the growing burden the arms race was placing on its economy.

Today, in contrast, NATO’s central priority is not to out-spend Russia (it already does so by a margin of around sixteen to one, with Russia estimated to be spending some $63 billion on defence, using the NATO definition, in 2018) but to close off the risk of limited ‘fait accompli’ grabs on exposed Alliance territory. NATO’s members have therefore focused their efforts on strengthening deterrent capabilities on its eastward flanks, by increasing preparedness in the forces of the most exposed countries, by enhancing the forward presence of the Alliance’s most powerful militaries, and by prioritising capabilities for rapid reinforcement.

A Consequential Summit

At the 2014 NATO summit in Wales, all the member states who were spending less than 2% of their GDP on defence agreed to ‘halt any decline in their defence budgets’ and ‘to aim to increase defence expenditure in real terms as their GDP grew’. Both these aims have been achieved. Every one of NATO’s 28 member states (excluding Iceland) has increased its defence budget in real terms since 2014. The median real-spending increase has been 31%. This is by far the most rapid, NATO-wide, increase in defence spending in the Alliance’s history.

Figure 1: The Weight of the West – Spending in 2019 (billion $)

Source: NATO, ‘Defence Expenditure of NATO Countries (2012-2019)’, Communique, PR/CP(2019)069, 25 June 2019.

The summit also agreed that member states spending less than 2% of their GDP on defence ‘should aim to move towards the 2% guideline within a decade’. Substantial progress on this metric has been made. The number of European states meeting the 2% target has increased from two (Greece and the UK) to seven (these two, plus Poland, Romania and all three Baltic republics). 16 of the 19 remaining European states have increased the percentage of their GDP spent on defence.

This increase has not been driven by the three states who make the most difference to NATO’s aggregate combat power – the US, the UK and France. Rather, the largest increases have been in those ex-Warsaw Pact states who are most worried by Russia, know that their own efforts can play a critical role in defending against aggression (especially when on a small scale), and are most concerned to convince Allies of the seriousness of their concerns.

As a result of this concentration of spending increases in NATO’s smaller states, total NATO spending has risen by a relatively modest 8.1% in real terms over five years. NATO Europe as a whole has increased defence spending by a more impressive 18.5%. And the most exposed member states (the nine Central European states that were previously part of the Warsaw Pact) have increased spending by margins between 32% and a remarkable 161% in real terms. Even if some part of these latter increases is a result of more careful adherence to NATO counting rules, most of the growth appears to reflect substantial additional financial commitments from what remain some of the poorest members of the Alliance.

The American Giant

The US has contributed least, proportionally, to the post-2014 surge in NATO defence spending. According to NATO figures, US defence spending fell by 15% in real terms between 2010 and 2014, before increasing by 3.8% in the five years after the Wales Summit. Over the period since 2010, defence spending has declined from 4.81% to 3.42% of GDP.

The primary reason for this decline has been the sharp reduction in operational spending as a result of the reduction of forces from Afghanistan. But it also reflected conscious choices to reduce the priority given to defence as part of the wider response to the financial crisis. As a consequence, US defence spending, as a proportion of GDP, has returned to the levels of the immediate post-Cold War years. Spending increased significantly in 2018 and, provisionally, in 2019, driven more by growing concerns over China than because of NATO commitments. But fiscal constraints on further growth in the defence budget are strong, and the pull of the Indo-Pacific on additional resources even stronger.

Old Europe

Most other ‘old’ member states – the 14 states (excluding Iceland) who joined NATO during the Cold War – have been increasing their defence budgets more rapidly than the US since 2014, sometimes by large margins. After Luxembourg, the biggest increase has been in Turkey, whose defence budget grew by a remarkable 52.7% over the last five years, reaching 1.89% of GDP in 2019. Even as it closes on the Alliance’s 2% target, however, the purposes to which it puts its forces (notably in Syria) are often fundamentally at odds with the strategic objectives of other NATO allies.

Table 1: Old Members, Spending in 2019

Source: NATO, ‘Defence Expenditure of NATO Countries (2012-2019)’, Communique, PR/CP(2019)069, 25 June 2019.

After Turkey, the biggest increases in ‘Old Europe’ have been in the northern member states, who see themselves most directly affected by Russia’s new ambitions. These include Canada (a 36.8% real increase), Germany (25.0%), Norway (18.6%), Denmark (30.5%) and the Netherlands (31.4%).

While less dramatic in percentage terms, the increases in spending in Europe’s two most capable military powers have been highly significant in allowing key European capabilities to be maintained and modernised. After a 4.9% reduction after 2010, the UK increased spending by some 7% between 2014 and 2019, stabilising its defence burden at around 2.15% of GDP. France, in a similar pattern, cut spending by 3.6% between 2010 and 2014 before increasing it by 8.6% in real terms between 2014 and 2019.

Yet, like the US, neither France nor the UK has felt the overall Russian threat to be so serious as to merit a step change in defence spending. Nor has either power – in contrast to the 1970s – thought it necessary to redirect resources away from global commitments to focus on NATO. France is now spending a growing part of its defence resources on supporting its operations in the Sahel. The UK, for its part, has given top priority to modernising its Royal Navy, centred around two carrier battle groups and capable of supporting ‘Global Britain’ foreign policy ambitions.

Finally, the two larger powers of southern Europe – Italy and Spain – have reported significant increases in defence spending over the last five years, amounting to real-terms increases of 12.1% and 16.4% respectively. As of 2019, their defence budgets appear relatively low as a proportion of GDP, equivalent to only 1.22% and 0.92% respectively. But, in contrast to northern and eastern Europe, public concern over Russia is limited, with much greater concern over security threats (especially migration) emanating from North Africa. As a result of this public scepticism, these governments may have chosen not to take full advantage of the opportunities to report defence spending to NATO. In Spain, for example, one estimate suggests 2019 military spending is due to be €19.9 billion (or 1.67% of GDP), not the €13.1 billion (0.92% of GDP) reported to NATO.

New Europe

The most dramatic increases in spending since 2014 have been amongst the nine member states, formerly part of the Warsaw Pact, who joined NATO in 1999 and 2004. During their first decade of membership, most of these states were relatively modest in their ambitions for defence spending. But Russia’s aggression against Ukraine in 2014 changed this calculus, and five of these states now meet the 2% target, with two more (Bulgaria and Slovak Republic) approaching it. The four new NATO members from the Balkans (Albania, Croatia, Montenegro and Slovenia) are less focused on Russia, but have still posted significant spending increases.

Table 2: New Members – Former Warsaw Pact, Spending in 2019

Source: NATO, ‘Defence Expenditure of NATO Countries (2012-2019)’, Communique, PR/CP(2019)069, 25 June 2019.

The combined defence budget of NATO’s 13 post-Cold War members amounts to only 2.87% of total lliance spending. But their joint commitment to increased defence efforts is more important than this number suggests. Many of the most credible NATO scenarios for conflict, either with Russia or other adversaries, involve ambiguous, limited-aim, short-notice attacks, designed to take advantages of fragile states on NATO’s periphery. The role of local security forces in deterring and defeating such threats is crucial, raising the risks and costs of aggression for a potential adversary and buying time for reinforcement from NATO’s strongest, but more distant, members.

Table 3: New Members – Balkan Countries, Spending in 2019

Source: NATO, ‘Defence Expenditure of NATO Countries (2012-2019)’, Communique, PR/CP(2019)069, 25 June 2019.

The German Exception

As Europe’s largest economic power, Germany is often seen, especially from the other side of the Atlantic, as being the greatest – or at least most consequential – burden-sharing ‘sinner’. If Germany were to raise its defence budget to 2% of GDP, it would be spending $80 billion annually, more than 30% higher than the UK’s current level and 57% higher than France’s.

Germany has raised its defence budget more rapidly than either France or the UK over the last five years

Germany has raised its defence budget more rapidly than either France or the UK over the last five years, pulling slightly ahead of France in the process. Yet the chances of an acceleration of this trend appear small. Resistance to a more assertive and proactive role for Germany in European defence remains strong, especially (but not only) amongst a sceptical public. The fragmentation of German politics, together with wider economic troubles, means that the chances of achieving Chancellor Angela Merkel’s target of spending 1.5% of GDP by 2024 (2019 spending was 1.36% of GDP) are now declining.

Despite this, there is much more that could be done, and is now beginning to be done, to increase Germany’s contribution to collective defence. As a result of its 25% real-term spending increase since 2015, Germany now spends more on defence than France. But it is hard to argue that, taken overall, it has become a more capable military power than its Western neighbour. What it is doing is focusing its defence resources on capabilities, such as new mechanised brigades, that are directly relevant to territorial defence in central Europe. Much still needs to be done to increase operational readiness. Provided that current plans are fulfilled, however, these capabilities could provide a powerful complement to the wider-spectrum forces – nuclear and conventional – provided by France and the UK.

Conclusion

This article has sought to chart the remarkable changes in patterns of NATO defence spending that have taken place in the five years since the 2014 Wales Summit. Overall, it suggests that NATO’s member states – especially its European members – have been able to shift significant new resources into defence in response to a shared appreciation of an increased external threat. Moreover, in contrast to the last NATO spending ‘surge’ in the early 1980s, it has been European states – and most of all the smaller member states – who have stepped up to the plate most impressively. Not all the additional money has been spent wisely, many capability gaps remain, and many member states have hardly started to respond to the impact of new technologies on the changing character of modern conflict. But the last five years have shown that NATO remains as relevant as ever in coordinating, and cajoling, common efforts for collective defence.

Malcolm Chalmers
Malcolm is Deputy Director-General of RUSI.

BANNER IMAGE: German Army personnel in Georgia, August 2018. Germany is often seen as a burden-sharing ‘sinner’. Courtesy of US Army Europe/Kris Bonet

This article is part of a special series of pieces published in recognition of the NATO Engages Conference, co-hosted by the Atlantic Council, GLOBSEC, King’s College London, the Munich Security Conference and RUSI. NATO Engages will take place in London on 3 December 2019, the day before the Annual NATO Summit.

The views expressed in this article are the author’s, and do not represent those of RUSI or any other institution.

Author

Malcolm Chalmers
Deputy Director-General

Professor Malcolm Chalmers is Deputy Director-General of the Royal United Services Institute (RUSI). His research is focused on UK... read more

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