Defense spending by countries in Europe has steadily declined since 2001 in constant Euros with the rate of decline accelerating the last few years, according to a new analysis by the Center for Strategic and International Studies (CSIS).
During the decline in spending, which was $348 billion in 2001 and $291 billion in 2011, representing a nearly 2 percent compound annual drop, the smallest cuts were made in the operation and maintenance (O&M) category followed by the equipment category, says the report, European Defense Trends 2012: Budgets, Regulatory Frameworks, and the Industrial Base. O&M spending slipped 6 percent from $72.1 billion in 2001 to $68 billion in 2011 while spending on equipment fell 14 percent from $59.4 billion to $50.9 billion in that time.
While the acquisition investment account remained relatively robust, spending on research and development has taken a big hit since 2001, falling more than 50 percent from $17.1 billion to $8.2 billion in 2010, the report says.
“IF that trend continues we’ll really start asking some hard questions, not just we but everybody I think about investments in future capabilities,” Guy Ben-Ari, one of the CSIS project directors for the report, said in a briefing yesterday. “This trend is quite worrisome for us.”
David Berteau, the other CSIS project director for the report, said the that there is a correlation between being competitive in the international defense marketplace with exports and R&D investments, “and there is a very strong possibility that this reduction in investment in research from a European company’s point of view could lead to a reduction in competitiveness in a global export market over time as well.”
Regarding sales by defense companies in Europe, specifically 21 publicly traded firms, the report says the defense industrial base has remained healthy despite overall declines in defense budgets, particularly in the investment accounts. The CSIS analysis show that between 2001 and 2011 that sales for the companies it is tracking increased from $76.7 billion to $120.4 billion in constant dollars.
The drivers behind the increase in defense industry revenues until 2008 were sales to North America and the rest of the world–excluding Europe–but since 2008 sales in markets outside of North America and Europe have driven the gains, CSIS says.
Most of the defense equipment spending within European nations is to domestic firms, CSIS data shows. In 2005, 82 percent of equipment spending on average went to domestic firms and in 2010 the average was 76.6 percent. On the other hand, collaborative agreements and programs within Europe saw an increase from 16 percent of equipment spending in 2005 to 22 percent in 2010, the report says.
Spending on equipment from outside of Europe fluctuated a bit, beginning at 2 percent in 2005 and rising to 3.4 percent in 2009 before falling to 1.4 percent in 2010, the report says.
On the regulatory front, procurement directives issued in 2009 that were designed to open the European markets to greater competition within Europe and to loosen restrictions on technology transfer within Europe have had minimal impact, the report says.
Berteau said that if the directives are implemented, the result would be a more competitive European defense industry and greater rationalization of capabilities as budgets decline. However, he said that so far it is “fair to say from our perspective that the results of the implementation so far have largely been inconsequential.”
The challenges to successfully implementing the reform directives include fragmentation within Europe, a number of export rules and offset requirements, and government interference, Berteau said.