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Brexit

Brexit, NATO and the Future of European Defence: A Cash Nexus?

Victanis Advisory Services GmbH
2018-12-19
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Defence relationships in the West appear to be becoming more transactional and influenced not only by shared political or cultural values and strategic alignment, but by financial and economic considerations. The future of NATO, the UK’s support to the EU in terms of defence and security and the barriers that exist to France and Germany, as the EU’s largest defence actors post-Brexit, potentially forging the core of an enhanced EU defence and security pillar, are all likely to be influenced by this element of transactional financial and economic imperatives. This will likely force changes within the western European defence and security community and will be positive ultimately for the defence and security industry more generally.

Introduction: ‘Brexit Fever’ Trigger Warning

In the current climate, to mention the term ‘Brexit’ in any context is to be confronted either with a slight, yet determinedly non-committal and withdrawn grimace, or alternatively a visceral and exasperated side-swipe of derision, depending on the views of the person and the freedom they feel to express them. What these reactions say about the actual feelings or beliefs of the people concerned often remains opaque.  What they very clearly convey, however, is that for many people, Brexit is still a highly emotional issue.

This is a problem for any of us trying to spy a path through the Article 50 process and beyond. Such is the level of emotion that even those who are supposed, through their experience and knowledge, to be able to identify the salient issues, weigh the implications in one area with the possible developments elsewhere and generally to be able to shed some dim light on what might constitute the future once all the cards have been played are often unable to do so because their emotional investment in Brexit blinds them to possible outcomes. In short, for many the intensity of feeling heightens the imagination in one or other direction, while simultaneously forbidding its exercise elsewhere.

In my view, whether this manifests itself in wildly optimistic and complacent wonderlands, or chaotic, catastrophic dystopias, neither general tenor of expression helps anyone.[1] Nor should the genuine uncertainty that will be a fact of life for at least the next 2 years be an excuse for anyone to fill this uncertain vacuum with their own emotionally wrought opinions masquerading as ‘expert analysis’ or even ‘informed comment’.

In this spirit, in what ways might Brexit, taking place as it does within the context of the changes in administration in the US as well as positive developments towards improved defence capabilities within EU members, impact the market for defence and security?

In terms of broad trends, European defence and security as opposed to, or aligned with, with the EU Common Security and Defence Policy) is currently being remoulded by 5 key forces:

  1. The withdrawal of the EU’s most capable defence and security member, the United Kingdom;

  2. The increase in the threat to the European periphery in the East posed by a policy of destabilisation of EU client states and EU members by Russia;

  3. The undermining of confidence in the EU project as a result of the failure to respond coherently to the migrant crisis, now in its fourth year; and

  4. The insistence by the guarantor of European security, the United States, that all members of the NATO alliance ‘pay their way’ in terms of their defence spending and contribution to NATO’s capabilities.

  5. Continued pressure on government spending.

To read: European Naval Developments and Commercial Options: All at Sea?

 

NATO and Trump

It is a question that has pointedly not been posed over the past 9 months (given that both have been spoken of as possibilities); Which undermines European security more; the collapse of NATO as an alliance or the collapse of the EU? That both might be envisaged as concurrent possibilities is, perhaps, a truly horrifying thought. However, by posing the question, not only are the claims that the EU is responsible for peace in Europe since 1945 challenged (at least in part), but also the question of whether, in the future, the EU can exist without NATO.

However, the opposite question is equally valid; can NATO survive without the EU? Trump’s insistence (and given that, if he has shown but one virtue since November, it is that he will follow through on the policies he has outlined, however vaguely) that NATO members pay their way is based on the fact that the US has paid a vastly disproportionate share of the costs associated with a credible defence posture in Europe.  But it is based also on the threat of a significant reduction in the US’ contribution or, implicitly, the country’s complete withdrawal.  The President’s alleged presentation of an actual bill to Chancellor Merkel during her recent visit to Washington, signals the US administration’s determination to affect movement on this matter as well as displaying a willingness to do so via highly transactional, even crude, methods. Germany’s immediate response was to plead that its defence spending is also bolstered by international aid payments which help prevent threats is unlikely, in this context, to cut much ice with the White House.[2]

NATO’s great success was in holding the line and eventually coercing the Soviet bloc into submission. Since the Iron Curtain came down, NATO has struggled to justify its usefulness in the world but with the resurgence in Russia’s willingness to project power and destabilise not just countries in the EU’s eastern ‘Marches’, but even in core NATO countries through attempts to influence elections within the US, France and Germany, NATO is once again apparently the vital element in credibly deterring Russia.

Just ask Poland. Or even Sweden. Or Finland. In fact, which is the more likely scenario; that the US will withdraw from NATO or that Sweden and Finland will join the alliance, having remained neutral throughout the Cold War and yet alarmed enough by the increased tension in the Baltic and incursions into Swedish waters, to re-introduce conscription?[3]

European NATO members therefore have every incentive to meet Trump’s demand for increased defence spending, caught between the need to respond to the threat of Putin and the prospect of the US deploying a transactional imperative to govern the level of its commitment to NATO, a ‘period of profound change’ for NATO[4]. Defence spending is very likely to increase significantly in key European defence markets such as Germany and France, as well as in the Netherlands, Denmark, Sweden, Finland and Norway. [5]

UK Defence and Brexit

Much outrage has been provoked by Theresa May’s Article 50 letter to the EU Commission, where she appeared to link defence and security with the negotiations to leave the EU and any subsequent trade deal agreed. In truth, this was less a threat to withdraw from cooperation around terrorism, which would be self-defeating and morally problematic for most people, but more to make two very obvious points.  One, if the EU is serious about developing a credible defence and security pillar, it will still need the close cooperation of the UK, and indeed NATO. Secondly, defence and security on the one hand, and trade and economics on the other, cannot be readily separated in the final analysis. In the long run, the basis of a strong defence is a strong economy and there cannot be one without the other. It seems most likely also this reference was made by way of an offer to the EU, and not simply a threat.

This point was made by one speaker I heard at a recent conference, where he spoke of the EU realising that the opposite was also true; you cannot have a successful economy if defence and security is ignored.  While this expert spoke of this ‘spillover’ effect being obvious for the EU and therefore is driving interest in the expansion of EU defence and security EU, he criticised the UK government for apparently failing to appreciate this linkage through talking up the UK’s defence capability whilst simultaneously exiting the Single Market and the EU, as though this showed the failure of the UK government to understand the link between the economy and security.

What he (and others) failed to see is that this linkage works both ways. For the UK government, a commitment to the defence of western Europe is founded on a strong economy. Mrs. May’s message was, if the EU wants to continue to rely on the full capabilities (and potentially its nuclear deterrent) of the UK in ensuring a credible European defence and security posture, there is little point in allowing those who would seek to punish the UK economically for the decision its people made on June 23rd to permanently damage the country’s economy.

At least that is the hope. The UK seeks to use its position as Europe’s strongest and most complete defence and security actor in order to protect its position within the trading infrastructure of the continent – despite leaving the EU along with the Single Market and the Customs Union. While the positive aspects of this are contained within the somewhat vague aspiration of forging a new ‘Special Relationship’ with the EU, the negative connotations are also implicit; EU defence and security requires cooperation with the UK and this will be impeded politically in the short-term and in reality over the long-term if the UK’s trading relationship with the EU is fundamentally fractured.

The EU: Establishing a Credible Defence and Security Pillar?

The UK, while also contributing a great deal to actual credibility of an EU Defence and Security pillar, had for many years attempted to obstruct many aspects of further development of defence cooperation suggested from time to time. Does the exit of the UK from the EU mean that the brakes are now off and moves towards a deepening EU-wide defence and security policy will accelerate?

Before considering what has been suggested and what may transpire, it is worth remembering the threat environment western Europe finds itself in, as earlier mentioned. The EU faces an increased terror threat both exacerbated and, alternately, facilitated by the various effects of the Schengen Agreement, the EU policy of open borders.  This in turn has served to undermine the EU bloc’s credibility in the eyes of many of its citizens as they ask the legitimate question, “Are you keeping us safe?”. At the same time, an aggressive and obstreperous Russia has heightened tensions significantly through its undermining of the Ukraine’s territorial integrity and the entire Ukrainian government’s legitimacy, as well as increasing intrusive military activity in the Baltic and the North Atlantic. Lastly, the cohesion of NATO, the most credible guarantor of peace and security in Europe over the past 50 years, has been called into question by the alliance’s largest contributor, the United States.

It would appear, therefore, that something needs to change. The question is, is it the EU itself, as the preferred mechanism for institutional innovation and coordinated European collaboration or does the potential for change lie with individual countries, bi-lateral arrangements between ‘the willing’ and ‘the capable’, ultimately, perhaps, coalescing in a strengthened NATO alliance?

Since Brexit, the EU has taken some moves at strengthening the EU in defence. EU High Representative Frederica Mogherini proposed Security and Defence Implementation Programme (SDIP) proposes establishing a joint planning HQ for EU operations, improving funding mechanisms for EU joint operations (Athena), strengthening the European Defence Agency (EDA) which is designed to help identify and coordinate opportunities for joint equipment development and improve equipment plan transparency across member states. These broad aims have been endorsed by the European Council.

However, these measures are very meagre when put beside the scale of the challenges European security faces and, even then, these measures have already been watered down. For example, the joint planning and operations HQ envisaged will only address ‘non-executive’ military missions, as opposed to actual military operations.  Some further changes at the periphery of the European defence market will attempt to make EU defence procurement more transparent within member states as well as a modest budget increase for the EDA.

However, none of this amounts to a new departure for the EU nor a threat to NATO, despite some of the more fevered imaginings of Leave campaigners during the referendum.  For, at the highest levels of security strategy within individual member states, there remains substantial differences as to whether Europe on its own can meet its security and defence needs or whether the US (and we may now add in, the UK) are essential also.  The latter view was the consistent view of the British government and led to the UK blocking many of the modest reforms proposed. But since Brexit, it has become clear that other member states share the view that NATO and the US are critical aspects of Europe’s security.  No longer able to let the UK do all the running, the Baltic states as well as Poland and others have made it clear that they do not see the EU as an adequate replacement for NATO.  It is unlikely that Germany does either, when push comes to shove.

A further example of the EU’s inability to develop a credible defence policy is the attitude of what is now the most capable EU member militarily after the UK’s departure, France. For many years, France pursued Germany in particular to develop a credible EU defence through innovations such as the Euro Corps and others.  Indeed, it was France who suggested a European Defence Community as far back as 1950 as part of the Pleven Plan. But the French became increasingly frustrated with the unwillingness of the German government to invest in capability and the further reluctance to actually deploy military personnel and assets, something the French are much more willing to do.  Not only does any deployment have to approved by the Bundestag, but the Budgetary Committee has to approve any defence expenditure over €25 million! A 2014 German Parliamentary report on the state of the German armed forces made the disparity with France and the UK in terms of actual capability stark.  It found, for example, only one of Germany’s four submarines was operational and only about half of its military transport aircraft. A mere seven of the German navy’s fleet of 43 helicopters were flight-worthy.

French frustration were expressed more recently by Francois Hollande when he said in October last year:

“There are countries that think there will always be a cover that will come and shelter them from every influence. There are some that think the conflicts…don’t concern them…So those European countries must be told – and I won’t stop doing so – that if they don’t defend themselves they will no longer be defended.”

Sound familiar? The accession of France to NATO was, in some respects, a comment simply on the practical limits of EU military capability and willingness to use force although there remain French politicians and government functionaries alike who would like to see France withdraw from NATO, including Mélanchon and Le Pen from the cast of French Presidential hopefuls for the last presidential election. In any case, the experience with its European partners was also instrumental in moving the French to agree with the UK, who also share a high level of capability alongside a willingness to deploy force when needed, the Lancaster House Treaty of 2010. These accords are a 50 year bi-lateral treaty that enhance defence cooperation between the countries including planning, training, joint deployment, coordinated command structures, nuclear deterrence and defence industrial cooperation.  It represents the singular expression of European defence outside of NATO structures and, for France, represents a radical alternative following the frustrations of the previous 20 years.

Nevertheless, it is the Anglo-French defence axis that has made most progress in aligning European capabilities and joint action simply by virtue of the fact that they are the two largest military powers in Europe. Both countries have been quick to renew their commitment to each other in the area of defence following the EU referendum which means in effect the UK remains a crucial partner of the EU in defence and security post-Brexit.

But the UK is also likely to be important in another critical aspect of European security; keeping the US engaged in NATO. Britain has already started to use the language of ‘Special Relationship’ with the EU in they same way as it has wearyingly deployed it in its relationship with the US.  Whatever the actual realities of the ‘Special Relationship’ with the US, it remains the case that the UK is best placed to engage on behalf of NATO allies with the US, especially in the era of Trump and his insistence on NATO partners paying their way.  Already Theresa May was able to modify Trump’s posture towards NATO allies and it may well be that there is a role for Britain as the link between the US and the EU, a role it attempted to play previously at times but can perhaps now play with more freedom and the conviction that comes from necessity.

Brexit and a changed threat environment have certainly set the pieces in motion as far as European defence and security is concerned.  However they coalesce, it seems reasonable that both the UK and its partners on either side of the Atlantic may begin to appreciate the pivotal role the UK can now potentially play, if they have not done so already.[6]

Implications for the Defence Industry in France, Germany and the UK

Can we draw any conclusions from all this as far as the prospects for the British, French and German defence markets are concerned? I think there are some ways in which we can tentatively point to potentially positive developments.

For Germany and France, recent terrorism, the threat from Russia and pressure from the US will mean that defence spending is likely to rise significantly.  This is especially the case with France as almost all the leading presidential candidates in the current election have expressed a desire to see the defence budget increase.  The incumbent CDU government in Germany likewise pledged to increase spending during the election in September, although if the blueprint for a coalition with the SPD remains unchanged German defence spending as a proportion of GDP will remain unchanged over the next 4 year budgetary period.

As the two countries improve their capabilities, it may also be likely that they look to increase the number of joint development programmes. The two countries already have a shared defence industrial base represented by Airbus’ defence and security businesses and more recently KMW and Nexter have merged to become KMNS (Krauss Maffei-Nexter Systems).  This may mean UK firms are more likely to be excluded in some areas such as communications, space and land vehicles, especially after the Article 50 process is completed.

However, in other areas the increase in spending in France and Germany may offer some opportunities that otherwise were not there.  The Franco-German defence industrial base is limited in some respects and cannot cover all aspects of military capability that a modern military requires. This means that they will need to look abroad for some niche capabilities but also for certain complete platforms. This may mean that these markets will not be a completely closed shop (not that they were ever very open in the past!) for the UK, especially given the extensive number of UK-based subsidiaries of French and German defence businesses. Defence support services are another area where UK businesses have long experience and the recent win by Babcock in France to supply flight training to the French Air Force is perhaps a sign of a gradually more open market for UK defence businesses than previously.

As for the UK itself, although spending has been maintained at 2% of GDP, there is a possibility that the logic of Brexit and Britain’s attempts to find a new place in the world puts upside pressure on the government to increase spending.  If the UK wants to trade on its so-called ‘defence and security surplus’ with the EU in the exit negotiations and if it wants to renew its close relationship with the US in order to enhance its standing in the wider world (as well as with European NATO partners) a credible defence capability is essential.  Given the growing threat environment, there is at least a fair wind behind the defence and security budget in the UK in the medium term.

It has been said that the impact of the weak pound will diminish the UK’s defence budget in real terms as it will be less able to procure equipment and systems from abroad, especially the US.  Most of these predictions extrapolate out the current value of the pound over the course of the current MoD Equipment Plan, some 10 years.  It is prudent to assume a weak pound will continue over the course of the next two years as the Article 50 negotiations take their course. The MoD already has adequate hedging mechanisms in place for this period but, in any case, how prudent it is to assume the pound will stay at this level for the next 10 years is more open to question.

Of course, one of the immediate advantages of a weak pound is to make UK defence exports more competitive and in an era of rising defence budgets not just in Europe but in the US, the Middle East and Asia Pacific this can only assist the UK defence industry as it seeks to become more successful in terms of exports. But their may also be a domestic competitive advantage for UK suppliers relative to their US and EU counterparts; even if the overall budget is constrained by the lower purchasing power of the MoD, it makes it all the more likely the share of defence spending with domestic suppliers is likely to rise.

Concluding Summary

  • Defence relationships between western allies have become influenced to financial and economic considerations to a higher degree than has been the norm.  A more transactional element has been introduced to defence and security relationships.

  • These new considerations, in addition to a significantly changed threat environment, have set in motion the potential for substantial change within western European defence community, involving NATO, the EU and individual countries acting on a bi-lateral basis.

  • One of the most likely outcomes is an increase in European defence expenditure, complementing the increases announced or already committed to in the US and the UK.

  • Brexit has little direct impact for industry except to say that European markets may actually be more open to UK business rather than less, although French and German markets have never been very open in any case.  A weak pound should be a benefit overall for a UK defence industry looking to improve exports and secure market share within the UK in the face of foreign competition.

 

brexit NATO and the future of European Defence

  

[1] ‘We need to end this puerile nature of the current debate that sees Brexit either as a catastrophe or a liberation.  It is not going to be either.’  Lord Hill of Oareford, former EU Commissioner for Financial Stability, Financial Services and Capital Markets Union in discussion with the Legatum Institute ahead of the Prosperity UK conference, 26/04/2017.

[2] German defence expenditure was 1.3% of GDP in 2014 (NATO target: 2%) and it spent 0.4% of GDP on development aid (UN target: 0.7%), rising to 0.6% in 2016 if domestic spending on refugees is included.

[3] Sweden and Finland attended the July 2016 NATO summit in Warsaw for the first time as ‘close partners’.

[4] Sarah Macintosh (UK Permanent Representative to NATO), speech at RUSI (24/04/2017)

[5] For the UK, insisting on increased military spending to support NATO is, ‘… an entirely reasonable expectation.’, ibid.

[6] I offer, by way of corroboration, no less than Dr. Henry Kissenger’s similar assessment of the potential role for the UK post-Brexit: “I thought of Britain returning to some of its more historic contributions of bridging the Atlantic and as a security leader of the western world.  I still hope that, as these negotiations develop, Britain will be able to continue its role in forming the Atlantic relationship, so that even if some links with Europe are being severed other links will be built with the United States.  But at the same time Britain will not leave Europe completely but contribute to an Atlantic partnership in a way that is more relevant to the emerging world.”  Quoted in The Guardian, 27th. June 2017

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