19th October 2011 EIN Seminar on Sustainable Budgeting in Europe1 SMART BUDGETS, SMART DEFENCE: SUSTAINABLE BUDGETING IN EUROPE 1 Adrian Kendry Senior Defence Economist and Head, Defence and Security Economics Political Affairs and Security Policy Division NATO 1 The comments and remarks made in this presentation are personal and do not necessarily reflect the views of NATO authorities

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe2 SMART BUDGETS, SMART TECHNOLOGIES, SMART DEFENCE Lessons from Libya and future operations Lessons from Libya and future operations Pressure on European defence budgets, defence inflation and defence affordability Pressure on European defence budgets, defence inflation and defence affordability Pressure on the European defence and technological industrial base (from primes to the supply chain) Pressure on the European defence and technological industrial base (from primes to the supply chain) Building Capability through Multinational and Innovative Approaches: NATO reform, common requirements, procurement and smart defence Building Capability through Multinational and Innovative Approaches: NATO reform, common requirements, procurement and smart defence

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe3 SMART BUDGETS, SMART TECHNOLOGIES, SMART DEFENCE Overcoming the transatlantic barriers to trade, export reform and licensing Overcoming the transatlantic barriers to trade, export reform and licensing Integrating Europe’s competitive advantages in emerging technologies in defence transformation through cost-saving unmanned platforms and reduced higher cost manned platforms and manpower Integrating Europe’s competitive advantages in emerging technologies in defence transformation through cost-saving unmanned platforms and reduced higher cost manned platforms and manpower Reinforcing the measures to avoid duplication between the EDA and NATO (Agencies and ACT) Reinforcing the measures to avoid duplication between the EDA and NATO (Agencies and ACT) Increasing the effective and transparent use of European defence resources and procurement Increasing the effective and transparent use of European defence resources and procurement

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe4 SMART DEFENCE AND ECONOMIC AUSTERITY Most European defence budgets have been cut less deeply than other sectors of governments spending in (Alliance commitments, contractual obligations, industrial concerns) Most European defence budgets have been cut less deeply than other sectors of governments spending in (Alliance commitments, contractual obligations, industrial concerns) Not sustainable over : fiscal deficits and debt management will lead to further cuts in force levels, capabilities, readiness and delayed procurement Not sustainable over : fiscal deficits and debt management will lead to further cuts in force levels, capabilities, readiness and delayed procurement Further pressure on defence expenditure reductions in the USA, UK and Germany Further pressure on defence expenditure reductions in the USA, UK and Germany

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe5 SMART DEFENCE AND ECONOMIC AUSTERITY UK, France and Germany are crucial for NATO Europe: 65% of all NATO Europe Defence Expenditure, 88% of Research and Technology UK, France and Germany are crucial for NATO Europe: 65% of all NATO Europe Defence Expenditure, 88% of Research and Technology USA projections for significant reductions through 2016 (Secretary Gates reduced the rate of increase in defence spending): the Obama Plans for deficit reductions indicate at least $400 billion cuts over 12 years (with current budgetary negotiations threatening to trigger an overall reduction of some USA projections for significant reductions through 2016 (Secretary Gates reduced the rate of increase in defence spending): the Obama Plans for deficit reductions indicate at least $400 billion cuts over 12 years (with current budgetary negotiations threatening to trigger an overall reduction of some $1 trillion) 2001: USA around 50% of NATO defence expenditure: 2011, USA approximately 75% 2001: USA around 50% of NATO defence expenditure: 2011, USA approximately 75%

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe6 WHAT IS SMART DEFENCE? Ensuring greater security for less money by working together with more flexibility Ensuring greater security for less money by working together with more flexibility Nations to pool and share capabilities, to set the right priorities and to better co-ordinate efforts Nations to pool and share capabilities, to set the right priorities and to better co-ordinate efforts Reduce bureaucracy and slim down structures Reduce bureaucracy and slim down structures Invest in Science and Technology and create greater coherence within Europe with multinational projects and closer links with the private sector Invest in Science and Technology and create greater coherence within Europe with multinational projects and closer links with the private sector NATO and EU intensification of practical cooperation (21 common states) NATO and EU intensification of practical cooperation (21 common states)

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe7 SECURITY AND THE EFFECTS OF BUDGETARY CONSTRAINTS European Allies must resist the temptation to disinvest too much in defence and allow transatlantic defence spending gap to widen any further European Allies must resist the temptation to disinvest too much in defence and allow transatlantic defence spending gap to widen any further For Taxpayers, in order to obtain more security for the money invested in NATO capabilities, there is the need for continuing reform For Taxpayers, in order to obtain more security for the money invested in NATO capabilities, there is the need for continuing reform The new NATO Strategic concept is an action plan: more effective, more engaged and more efficient The new NATO Strategic concept is an action plan: more effective, more engaged and more efficient 7

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe8 SMART DEFENCE AND ECONOMIC AUSTERITY NATO Secretary General: “Without proper investments, we run the risk of a Europe that is divided, weaker and increasingly adrift from the United States” NATO Secretary General: “Without proper investments, we run the risk of a Europe that is divided, weaker and increasingly adrift from the United States” “The financial crisis requires Smart Defence which ultimately promotes more coherence and effectiveness in defence spending in member states” “The financial crisis requires Smart Defence which ultimately promotes more coherence and effectiveness in defence spending in member states”

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe9 SECURITY AND THE EFFECTS OF BUDGETARY CONSTRAINTS At present, all Allies have to cope with the serious effects of the economic crisis and cuts are inevitable Need to be aware of the potential long-term negative effects if defence cuts are too large and disproportionate Need to be aware of the potential long-term negative effects if defence cuts are too large and disproportionate 9

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe10 THE STRATEGIC CONCEPT AND NATO AND THE EU In the strategic partnership between NATO and the EU, their fullest involvement in these efforts is essential In the strategic partnership between NATO and the EU, their fullest involvement in these efforts is essential NATO and the EU can and should play NATO and the EU can and should play complementary and mutually reinforcing roles in supporting international complementary and mutually reinforcing roles in supporting international peace and security NATO is determined to make its contribution to create more favourable circumstances to achieve these goals NATO is determined to make its contribution to create more favourable circumstances to achieve these goals 10

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe11 SECURITY AND THE EFFECTS OF BUDGETARY CONSTRAINTS Bilateral reinforcements of European capabilities will contribute to NATO’s overall capabilities Bilateral reinforcements of European capabilities will contribute to NATO’s overall capabilities Resource reform will underpin a broader transformation Resource reform will underpin a broader transformation Commitment to reforming the way in which NATO’s common funded resources are managed Commitment to reforming the way in which NATO’s common funded resources are managed 11

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe12 The impact of the Economic/Financial Crisis on the AFFORDABLE Supply of components and technologies for the production of defence capabilities? The impact of the Economic/Financial Crisis on the AFFORDABLE Supply of components and technologies for the production of defence capabilities? Will the DIRECT impact of the recession on defence budgets be reinforced by the INDIRECT impact of rising costs through further industrial consolidation and a shrinking supplier base? Will the DIRECT impact of the recession on defence budgets be reinforced by the INDIRECT impact of rising costs through further industrial consolidation and a shrinking supplier base? 12

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe13 NATO Common Funding and “doing more with less”: the risk of further underinvestment in capabilities NATO Common Funding and “doing more with less”: the risk of further underinvestment in capabilities Scarcity of public (tax) resources and defence in competition with health, education etc Scarcity of public (tax) resources and defence in competition with health, education etc National preferences and the pursuit of direct/indirect offsets National preferences and the pursuit of direct/indirect offsets Political and capacity responses to new NATO missions and operations in regions of instability Political and capacity responses to new NATO missions and operations in regions of instability Participation in NATO meetings and dialogue Participation in NATO meetings and dialogue 13

19th October 2011 EIN Seminar on Sustainable Budgeting in Europe USACHINA CHINAUSA JAPANINDIA INDIABRAZIL GERMANYMEXICO RUSSIARUSSIA BRAZILINDONESIA 9/28/