1. Adrian Kendry Senior Defence Economist Political Affairs and Security Policy Division NATOkendry.adrian@hq.nato.int 15/11/20091 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH

2. THE GLOBAL ECONOMIC CRISIS: WHERE NOW IN 2010? 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH2

3. 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH3  The Global Financial and Economic Crisis is deep, of uncertain duration and with prolonged effects  The negative impact on economic activity, industrial output, income, employment, trade and investment is very severe and damaging  The crisis can enhance the potential for international coordination and multilateral dialogue to strengthen decision-making in all areas

4.  According to IMF, global economic growth in 2009-2010 will be negative but 0.5% higher than forecast in April 2009  A “Jobless” Recovery? Rising Unemployment, business fragility and uncertain business and trade prospects on a global basis  WTO and the decline in international trade in 2009 (10% reduction in developed economies; 2-3% in developing economies) 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH4

5.  North America:  Restoration of Economic Growth: Real and Financial?  Continuing concerns over unemployment, consumer confidence, budget and trade deficits and rising oil prices  Euro Zone and EU:  Positive Growth between July-Sept 2009  Outlook remains fragile  UK and Spain remain in recession, with high youth unemployment  BRIC:  China and India growing above 6%  IMF growth forecast for Asia 2010: 5.75%  Russia economy contracts by more than 7% in 2009: 2010?  Brazil to renew growth at 5% in 2010 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH5

6. 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH6  April 2: The G20 Summit, London  $750bn to the IMF  New SDR Allocation of $250bn  April 3-4:The NATO 60 th Strasbourg and Kehl  Afghanistan  Albania and Croatia  21 st Century Challenges and the New Strategic Concept  September 14:The G20 Meeting, Pittsburgh: International Economic Cooperation  October 3-7:IMF, World Bank and OECD Meetings  November 14 and 9:APEC Summit, Singapore and G20 Finance Ministers

7.  IMF: Global economic growth 3% in 2010 (West- East disparity)  World Bank: Severe consequences (additional 90 million living in extreme poverty) for 43 low- income developing countries  Flat recovery in industrial production of major industrial countries  WTO: Even if growth restored to 2006-2007 rate, 2011 before global trade at 2008 level. Continuing danger of protectionism  OECD: global economy requires 90 million net new jobs in 2010 to prevent growing crisis of unemployment (and youth unemployment)  Economic recovery and the distribution of the LUV cycle 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH7

8. DEFENCE EXPENDITURES AND THE ALLIANCE 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH8

9. COUNTRY 85-8990-9495-9900-04200620072008 e $bn 2009e $bn Belgium2.71.91.51.31.1 5.5 Bulgaria2.83.01.3 Czech Republic 2.01.71.43.2 Denmark2.01.91.71.51.41.34.4 Estonia1.41.90.5 France3.73.32.92.5 2.466.2 Germany2.92.11.61.41.3 46.2 Greece4.53.94.13.22.72.610.0 Hungary1.61.21.31.9 1 Iceland has no armed forces: Albania and Croatia joined the Alliance in April 2009 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH9

10. COUNTRY 85-8990-9495-9900-04200620072008e $bn 2009e $bn Italy2.2 1.9 2.0 1.81.430.5 Latvia1.6 0.6 Lithuania1.2 0.6 Luxembourg0.8 0.7 0.6 0.2 Netherlands2.82.31.81.5 12.0 Norway2.92.82.21.91.5 5.9 Poland1.8 10.2 Portugal2.52.42.11.71.61.53.7 Romania1.81.53.0 1 Iceland has no armed forces: Albania and Croatia joined the Alliance in April 2009 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH10

11. COUNTRY 85-8990-9495-9900-04200620072008e $ bn 2009e $bn Slovakia1.61.5 Slovenia1.61.50.6 Spain2.11.61.31.2 19.0 Turkey2.52.83.2 2.21.813.3 UK4.43.72.72.32.42.560.5 NATO Europe 3.12.52.11.91.81.7300.8 Canada2.11.81.31.2 1.319.5 USA6.04.63.33.44.0 574.9 North America 5.64.43.23.33.8 594.4 NATO 4.53.52.7 2.82.7895.2 1 Iceland has no armed forces: Albania and Croatia joined the Alliance in April 2009 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH11

12.  Defence expenditures as of 2002 and personnel figures as of 2003 have been calculated on the basis of the revised NATO definition agreed in 2004.  This excluded expenditure on Other Forces from the totals reported to NATO, except in the case of those elements of Other Forces which are structured, equipped and trained to support defence forces and which are realistically deployable.  Most nations have reported defence expenditures according to this new definition. In some cases, this has resulted in a significant apparent decrease in defence expenditures (Greece, Hungary, Italy,  Luxembourg, Portugal and Turkey) 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH12

13.  The figures represent payments actually made or to be made during the course of the fiscal year. They are based on the NATO definition of defence expenditure  In view of the differences between this and national definitions, the figures shown may diverge considerably from those which are quoted by national authorities or given in national budgets.  Research and development expenditures related to major equipment are included in equipment expenditures and pensions paid to retirees in personnel expenditures. 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH13

14. 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH14 TRANSATLANTIC DEFENCE EXPENDITURES ($MILLIONS: CURRENT PRICES AND END 2007 EXCHANGE RATES) 200320052007DEFEX/ GDP e Remark FRANCE45,91852,90960,2692.4Constant: Single Service Acquisition GERMANY35,05538,05441,8361.3Constant: ITALY30,24233,52737,5251.8Declining RUSSIA14,356N/A39,3452.9*Growing UK43,14355,89463,2582.3 Constant Real EUROPE(NATO24)309,168 55% of US (X% Capabilities) EU/US Defence R&D: $69b/$9b US + CANADA 425,317516,557563,8184.0 2009: $515bn (but $710bn)

15. THE CRISIS AND ALLIED DEFENCE BUDGETS 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH15

16. “ The economic crisis has already had a marked, negative impact on defence budgets throughout the Alliance, which were in many cases already below the 2% target. This affects the willingness and ability of our governments to invest in the modern capabilities that we need. Declining defence budgets tend to encourage governments to spend their defence budgets at home.....good for your industries, but not always the most cost-effective approach” (Peter Flory, ASG Defence Investment, CNAD, 15 th October 2009) 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH16

17.  Allied Defence Budgets: What do they tell us? What are they for? Current and Constant Prices  Inputs and Outputs: what does defence spending produce in terms of capabilities?  Composition of Defence Expenditure: What is spent on personnel, equipment, operations and maintenance and R&D?  The global downturn in GDP, pressure on defence budgets and the ratio of Defence Expenditure to GDP 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH17

18.  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? 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH18

19.  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  National preferences and the pursuit of direct/indirect offsets  Political and capacity responses to new NATO missions and operations in regions of instability  Participation in NATO meetings and dialogue 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH19

20.  The Transatlantic Balance:  NATO Europe 34% and NATO North America 66% of Allied defence expenditures (dollars and estimated) 2008: diverging balance? (2009 estimate of North America at 73%)  Average non-NATO Defex/GDP 1999-2009: 1.4%  At least 14 Allies spend greater than 50% of their defence expenditures on personnel  Only 8 Allies spend more than 20% of defence budgets on investment and modernisation (equipment and R&D)  Economic crisis, defence protectionism and transatlantic defence industrial trade  European defence industrial consolidation: how to further develop common platforms and pooled resources? 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH20

21. 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH21 USA, EUROPE AND DEFENCE  Europe spends some 60% of US defence budget and derives some 20% of effectiveness  US R&D some 5X greater than Europe  Role of the European Defence Agency and Article 296: How can Europe achieve defence industrial integration and greater cost-effectiveness in the delivery of systems and capabilities?  Europe’s Challenge: Increasing the utility and effectiveness of personnel expenditures on the armed forces. Social stability and reintegration of displaced military personnel into dynamic labour markets  US Challenge: Balancing expenditures on replacement equipment (today’s conflicts) and next generation systems (tomorrow’s conflicts)

22.  ALLIED DEFENCE BUDGETS, THE GLOBAL ECONOMIC CRISIS AND NATO’S FUTURE SECURITY CHALLENGES 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH22

23.  Article 2 of the North Atlantic Treaty (“eliminate conflict in international economic policies....”)  Impact of crisis on Alliance and Partners: ◦DIRECT negative consequences (Common Funding, defence expenditure, capabilities, multinational weapons projects, missions and operations) ◦INDIRECT negative consequences: failed states, international economic aid, shifts in global balance of economic power, climate change, energy security, scarcity of water and food, migration, poverty and extremism 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH23

24. 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH24  Fragile States and the Changing Balance of Power  Cohesion in the Alliance  Energy Security  Climate Change  Water, Food and Resource Competition  Economic Poverty, Unemployment and Extremism  Migration  Demographic Insecurity  Organised Crime, Terrorism and Insurgency

25.  Forge greater international economic, political and security cooperation  Better regulation of financial markets and the banking sector to restore international confidence  Pursue the comprehensive approach to integrated planning for security and economic assistance: widen the building of integrity and governance across all sectors  Widen and deepen partnerships with nations who can make contributions to stability and security  Pursue common funded and multilateral programmes to mitigate pressure on national defence budgets 15/11/2009 NATO PARLIAMENTARY ASSEMBLY ANNUAL SESSION, ECONOMICS AND SECURITY COMMITTEE, EDINBURGH25