Nato members' spending crucial to summit success

Nato member states spend more than $1tn on their collective defence annually. But, the alliance says, it is not enough.

Russia's annexation of the Crimea and the crisis in eastern Ukraine will dominate headlines at next week's Nato summit - perhaps the most important gathering of alliance leaders since the end of the cold war - but defence spending will be the most important, if least honestly addressed, issue.

Every member state will affirm its importance and Britain, the summit host, is certain to make a great deal of its status as one of just four nations within the alliance which in 2013 hit the agreed defence spending target of 2 per cent of gross domestic product or more. But London's spending is already teetering on the 2 per cent threshold and is almost certain to fall well below it in the coming months.

In fact, the US keeps the entire alliance afloat, spending $735bn on its military each year. The average Nato nation defence spend as a percentage of GDP is 2.9 per cent: remove the US and European Nato spends an average of just 1.6 per cent.

For the alliance an increasingly important issue is not just who spends but how. Smaller European members spend disproportionally on manpower: the biggest have more hardware but are poor at co-operating on joint projects. Amid this malaise, questions are being asked about whether Nato's administration needs more powers to solve these problems.

"The alliance needs to have an adult conversation about defence spending on the part of the Europeans," said James Stavridis, who until last year was supreme allied commander at Nato and is now dean of the Fletcher School at Tufts University in Massachusetts.

"It continues to be well below the 2 per cent [of GDP] minimum that they have all signed up to and over time an alliance where the US is spending two-thirds of the defence expenditures is politically very difficult to keep hanging together."

European defence budgets, analysis by management consultants McKinsey shows, fell $50bn between 2008 and 2012 and are projected to fall another $4bn by 2015.

After Russia's incursions into Ukraine, Poland, Latvia, Lithuania and Estonia have all said they will raise defence spending to above 2 per cent of GDP. But while laudable, this will only deal with a tiny part of the problem, adding up to an extra regional spend of just $1.5bn annually, according to analysis of Nato's own figures.

The onus is therefore on continental Europe's big defence spenders: Britain, France, Germany, Spain and Italy. Collectively, they spend $200bn on defence annually - but this is more than $61bn short of their 2 per cent Nato pledges.

"The overall picture is that we will continue to see decline in European defence spending," said John Dowdy, head of the global aerospace and defence practice at McKinsey. "Those who live in rougher neighbourhoods may see a need to increase, but the prospects in aggregate are modest."

The way shrinking budgets are spent will also become more of an issue for the alliance.

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>"We're hitting the point where we're just never going to make the 2 per cent." Mr Stavridis said. "But even if we got to it, [for many allies] it is eaten up with personnel costs and administrative costs . . . too little is spent on operations training [and] top end kit."

Member states which on paper come close to their defence expenditure targets - such as Greece with 2.3 per cent, Turkey with 1.8 per cent and Portugal with 1.5 - do not actually spend much on keeping their forces modern and deployable. Greece spends just 17 per cent of its annual budget on new equipment; Turkey 20 per cent; and Portugal 9.2 per cent.

Smaller countries spend substantially less: just 2.8 per cent of Belgium's military budget goes to new equipment and Slovenia spends a paltry 1.5 per cent.

Amid the budgetary gloom, Nato insiders are searching for ways to turn defence spending from a potentially fractious issue into one that allies can rally around.

One way could be for the alliance to begin looking atmeasures to increase efficacy, such as the number of troops and material which can be rapidly deployed to a Nato battle group, rather than simply abstract targets.

There may also need to be an honest recognition of where Nato has failed, some in the alliance believe. One strategy, "smart defence", was designed to foster interoperability between members and more joint projects to meet deficiencies. However, in practice Nato's biggest military powers simply opt out of projects because of their own narrow national interests. As a result, the scheme is used to pool resources for valuable but small-scale schemes for the smallest member states.

To improve co-ordination, Nato's biggest European allies may need to relinquish more power to a strengthened alliance administration, perhaps with enhanced ability to commission more of its own procurement programmes. The $1.6bn allied ground surveillance system - five cutting edge Global Hawk drones to be based in Italy due to start operating in 2017 - may point the way. Cyber space would be an obvious domain for Nato to take more of a lead.

With turmoil in Europe, the summit's decisions on defence spending could have profound significance for the alliance's credibility and will be closely watched outside Nato.

"It matters a great deal because of how the Russians see it. They think western leaders are pathetic - easily manipulated and outflanked by deft policy," said Michael Clarke, director-general of the Royal United Services Institute, a London-based think-tank.

" There is a growing sense among parliamentarians in Europe that the [downward spending] trend may have reached the bottom," he added. "If it has not - this summit may be judged as a historic failure."

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