european defense trends - center for strategic and international

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Ë|xHSKITCy065998zv*:+:!:+:!ISBN 978-0-89206-599-8

November 2010

project directors

Guy Ben-AriDavid Berteau

lead author

Joachim Hofbauer

contributing authors

Roy Levy Gregory Sanders

Eu

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Defen

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CSIS

European Defense TrendsBudgets, Regulatory Frameworks, and the Industrial Base

A Report of the CSIS Defense-Industrial Initiatives Group



project directors


lead author

Joachim Hofbauer



November 2010

2

About CSIS

In an era of ever-changing global opportunities and challenges, the Center for Strategic and Inter-national Studies (CSIS) provides strategic insights and practical policy solutions to decisionmak-ers. CSIS conducts research and analysis and develops policy initiatives that look into the future and anticipate change.

Founded by David M. Abshire and Admiral Arleigh Burke at the height of the Cold War, CSIS was dedicated to the simple but urgent goal of finding ways for America to survive as a nation and prosper as a people. Since 1962, CSIS has grown to become one of the world’s preeminent public policy institutions.

Today, CSIS is a bipartisan, nonprofit organization headquartered in Washington, D.C. More than 220 full-time staff and a large network of affiliated scholars focus their expertise on defense and security; on the world’s regions and the unique challenges inherent to them; and on the issues that know no boundary in an increasingly connected world.

Former U.S. senator Sam Nunn became chairman of the CSIS Board of Trustees in 1999, and John J. Hamre has led CSIS as its president and chief executive officer since 2000.

CSIS does not take specific policy positions; accordingly, all views expressed in this publica-tion should be understood to be solely those of the author(s).

© 2010 by the Center for Strategic and International Studies. All rights reserved.

Cover photo: “The Blue Marble, ” NASA, Visible Earth (http://visibleearth.nasa.gov/)

Library of Congress Cataloguing-in-Publication Data

European defense trends: budgets, regulatory frameworks, and the industrial base : a report of the CSIS Defense-Industrial Initiatives Group / project directors: Guy Ben-Ari, David Berteau. p. cm. Includes bibliographical references. ISBN 978-0-89206-599-8 (pbk. : alk. paper) 1. Defense industries—Europe. 2. Industrial pol-icy—Europe. 3. Europe—Armed Force—Appropriations and expenditures. 4. Europe—Armed forces—Procurement. 5. Europe—Defenses. 6. Europe—Military policy I. Ben-Ari, Guy, 1973- II. Berteau, David. III. Center for Strategic and International Studies (Washington, D.C.). Defense Industrial Initiatives Group.

HD9743.E922E956 2010 338.4’73550094—dc22

2010008979

Center for Strategic and International Studies 1800 K Street, N.W., Washington, D.C. 20006 Tel: (202) 775-3119 Fax: (202) 775-3199 Web: www.csis.org

| iii

List of Charts, Figures, and Tables v

Acknowledgments ix

Executive Summary x

1. European Defense Spending 1

Macro Trends 1

Regional Analysis 11

2. The European Regulatory Framework for the Defense and Security Market 22

A Fragmented Defense and Security Market 22

The Key Regulatory Challenge 22

Fixing the Key Regulatory Challenge 23

Additional Regulatory Problems and Corresponding Reform Efforts 26

Ramifications for Non-EU Countries 29

Summary 30

3. The Financial Health of the European Industrial Base Supporting Defense 31

The CSIS ESDS Index 31

Market Dynamics: Defense Spending and Industry Revenue 32

Profitability 34

Investment 37

4. Trend Analysis 39

Offsetting Budget Declines with Troop Reductions 39

Changes in Demand Alter the Defense Market and Its Participants 40

Effect on the Financial Health of the Defense and Security Industrial Base 42

Government and Industry Responses Will Determine Regulatory Reform Impact 43

A Defense Market Supporting Greater International Involvement 45

Summary 49

contents

iv | iv | european defense trends

5. Key Indicators for Future European Developments 51

List of Appendixes 53

Appendix 1: Methodology 54

Data Sources 54

Data Analysis 54

Methodology for Defining Regions 55

Scope of Europe for the Report Analysis 55

Defense Spending Categories 55

Companies in the CSIS ESDS Index 56

Countries with Complete Time Series Data 56

Appendix 2: Key European Defense Data by Country 57

Appendix 3: Total and Per-Soldier European Defense Spending by Country in Euros (2001–2009) 58

Appendix 4: Total and Per-Soldier European Defense Spending by Country in Dollars (2001–2009) 60

Appendix 5: Total and Per-Soldier European Defense Equipment Spending by Country (2001–2009) 62

Appendix 6: Total and Per-Soldier European Defense R&D Spending by Country (2001–2009) 64

List of Acronyms and Abbreviations 66

About the Authors 67

contents | v

Charts, Figures, and Tables

Charts

Chart 1 Total European Defense Spending and Defense Spending per Soldier (2001–2009) 2

Chart 2 Total European Defense Spending by NATO Defense Spending Categories (2001–2009) 4

Chart 3 Total European CAGRs for Defense Spending Categories (2001–2009, in 2009 euros) 5

Chart 4 Per-Soldier European Defense Spending by NATO Defense Spending Categories (2001–2009) 6

Chart 5 Per-Soldier European CAGRs for Defense Spending Categories (2001–2009, in 2009 euros) 7

Chart 6 Distribution of Total European Defense Spending by NATO Defense Spending Categories (2001–2009) 7

Chart 7 Changes in Total European Defense Spending by Defense Spending Categories (2001–2009, in 2009 euros) 8

Chart 8 Total European Defense Spending by Region 12

Chart 9 Per-Soldier European Defense Spending by Region 13

Chart 10 Total European Defense Equipment Spending by Region 14

Chart 11 Per-Soldier European Defense Equipment Spending by Region 15

Chart 12 European Defense R&D Spending by Country (2001–2009) 17

Chart 13 Total European Defense R&D Spending by Region 17

Chart 14 Per-Soldier European Defense R&D Spending by Region 18

Chart 15 CSIS ESDS Index: Revenue and European NATO Defense Spending (2001–2009, in constant 2009 billion euros) 32

Chart 16 CSIS ESDS Index: Revenue Mix by Geographic Origin (2003, 2009, in constant 2009 billion euros) 33

Chart 17 CSIS ESDS and MSCI Europe Industrials: Gross Margin Comparison (1998–2009) 34

vi | vi | european defense trends

Chart 18 CSIS ESDS and MSCI Europe Industrials: EBIT Margin Comparison, Revenue Weighted (1995–2009) 35

Chart 19 CSIS ESDS and MSCI Europe Industrials: EBIT Margin Comparison, Index Average (1995–2009) 35

Chart 20 CSIS ESDS and MSCI Europe Industrials: Cash Flow Return on Investment, Revenue Weighted (2001–2009) 36

Chart 21 CSIS ESDS and MSCI Europe Industrials: R&D as Percentage of Revenue, Index Average (1995–2009) 37

Chart 22 CSIS ESDS and MSCI Europe Industrials: CapEx as Percentage of Revenue, Index Average (1995–2009) 38

Chart 23 Defense Equipment Spending for EDA Member States (2005– 2008) 41

Chart 24 European Troop Deployments vs. Total Troop Numbers 46

Figures

Figure ES Summary of Findings xiii

Figure 1 European Defense Spending (in 2009 euros) 3

Figure 2 Regional Breakdown and Per-Soldier Defense Spending (in 2009 euros) 11

Figure 3 Total and Per-Soldier European Defense Equipment Spending (in 2009 euros) 16

Figure 4 Total and Per-Soldier European Defense R&D Spending (in 2009 euros) 19

Figure 5 Key EU Regulatory Reforms for Defense Procurement 24

Figure 6 Reformed EU Regulatory Framework for Defense Procurement 25

Figure 7 New Intra-EU Transfer Regulations for Defense-related Goods (Directive 2009/43/EC) 28

Figure 8 European Troops Deployed and Deployments as a Share of Total Troops (2009) 47

contents | vii

Tables

Table 1 Summary of Macro-level Defense Spending Data (2001–2009) 10

Table 2 Regional Total Defense Spending and Equipment Spending Data (2001–2009) 20

Table 3 Regional R&D Spending (2001–2008) 21

| ix

The Defense-Industrial Initiatives Group (DIIG) at CSIS would like to thank the various individu-als who contributed their time and expertise to this report. Stephen Flanagan, senior vice presi-dent and Kissinger Chair at CSIS, provided invaluable insights on the initial draft. The Europe Program at CSIS, under the leadership of Heather Conley, added important political-military perspectives. Colonel Jean-Christophe Noel, French military fellow at CSIS, and Manuel Lafont Rapnouil, visiting fellow at CSIS, provided an additional and valuable European viewpoint. The initial work of Wan-Jung Chao, former research consultant with the Defense-Industrial Initiatives Group at CSIS, in analyzing European defense spending provided an important starting point for this report. The contributions of Roberta Fauriol, editor, and Divina Jocson, desktopping manager, of the CSIS Publications Office were invaluable. Last but by no means least, DIIG staff Jesse Ell-man, Priscilla Hermann, David Morrow, Lindsey Ohmit, Stephanie Sanok, and Matthew Zlatnik provided excellent contributions.

acknowledgments

x |

executive summary

The European defense market consists of three key elements: the national defense budgets, the Eu-ropean defense acquisition regulatory environment, and the European defense and security indus-trial base. This report assesses each of these three elements for 37 European countries. Expanding upon the CSIS research on European defense spending published in 2008, it integrates the analysis of these elements to provide a broader basis for assessing trends in European defense policies and capabilities. To capture only real effects, all monetary trends in this report are assessed on a constant 2009 basis unless otherwise noted.

European defense budgets exhibit two key but opposing trends. One is that total defense spending in Europe adjusted for inflation declined from 251 billion euros in 2001 to 218 billion euros in 2009 (a negative compound annual growth rate of 1.8 percent) . This trend cuts across all defense spending categories, with the fewest cuts made in the O&M/Other spending cat-egory (consisting predominantly but not exclusively of operation and maintenance spending), fol-lowed by Equipment spending .1 The apparently opposite trend is that aggregate spend-ing on a per-soldier2 basis actually grew significantly in constant terms, from 73,000 euros in 2001 to 91,000 euros in 2009 (a compound annual growth rate of 4.1 percent) . This positive per-soldier trend is present for all defense spending categories except Infrastructure spending. It reflects that across Europe military end strength has declined faster than defense spending. These two seemingly opposite trends require further analysis.

Smaller budgets and reduced force structure can have negative impacts on military capabilities and missions. These negative impacts could be mitigated if Europe were to take specific, conscious actions, such as increasing specialization, including in its defense industry. However, there are several factors that inhibit specialization, including perceived national interests. Moreover, Euro-pean defense acquisition regulations have in the past provided a breeding ground for duplication of effort and inefficiencies in the allocation of resources. Both national interests and the regulatory regime lead to insufficient economies of scale and the noncompetitive nature of many defense solicitations.3 Some of that situation may be changing, however. In recent years, the European Union has initiated a series of important regulatory reforms with the aim of modifying many bu-reaucratic hurdles and reducing the fragmentation in Europe’s defense market. If these reforms are successful, the European defense market may become more open and competitive.

1. A more detailed explanation of these defense spending categories, including relevant caveats and data availability issues, is available in the Methodology section of this report (Appendix 1).

2. Per-soldier spending is based on the number of all active military personnel, including conscripts unless otherwise noted.

3. Erkki Aalto, Daniel Keohane, Christian Mölling, and Sophie de Vaucorbeil, Towards a European Defence Market, Chaillot Paper no. 113, European Union Institute for Security Studies, November 2008, 6, http://www.iss.europa.eu/uploads/media/cp113.pdf.

executive summary | xi

A more open and competitive European market could help produce or at least support a bet-ter overall European defense posture. For that to happen, though, the European defense indus-try needs to be sufficiently competitive to sustain itself in a global market. To help understand the financial health and robustness of European defense and security companies, CSIS created a European Security, Defense, and Space (ESDS) index. Key financial metrics reveal that for the past decade the European defense sector has been performing on par with—and occasionally even exceeding—its commercial industrial peers in Europe. This fact should lend support for a regula-tory environment that supports a more open, competitive European defense market. Overall, that industry and market may permit Europe to sustain adequate military capabilities in the face of further spending and end strength cuts.

This report conducts groundbreaking assessments of the interplay of these key trends in Europe—defense budgets, the defense acquisition regulatory framework, and the financial health of the European defense and security industrial base. Our analysis yields five major findings or op-portunities for defense policy development:

Finding 1.The trend of declining total European defense spending offset by increases in per-soldier spending indicates that the substantial troop reductions within the European armed forces have outpaced budget reductions. As a result, European states are able to spread constant or reduced resources across fewer service members. If per-soldier spending increases were directed at improving the quality of military forces, this could sustain or possibly even improve European defense capabilities.

Finding 2.If spending were to concentrate on improving quality (as in Finding 1), European defense demand structure could change by focusing on smaller, more expeditionary-capable forces. Geopolitical realities of global threats and defense challenges should affect how European states will allocate their defense resources. If current trends persist, relative spending priorities will continue to shift toward Equipment spending , largely sustaining both military capability and the size of the current European defense market. This provides the opportunity for European militaries to focus on more advanced, more expensive equipment. If this path were followed, it could not only sustain military capabilities, it could also create further incentives toward collaboration in defense acquisition.

Finding 3.This changing demand structure (described in Finding 2) could affect the European defense and security industrial base. A possible resulting trend toward acquiring more sophisticated equip-ment in smaller orders could generate pressure on margins and cash flows because of lower rev-enue. Should the latest European Commission (EC) directives successfully open national defense markets to EU-wide competition, margins might face additional strains because of increased com-petition. To the extent buyers collaborate across national lines, orders may be larger but also less frequent, and companies may be willing to reduce margins to win them. Under such circumstanc-es, companies will seek growth and profits by taking shares from one another, posing a challenge for national governments as market-share losses for some will translate to job losses, mergers, or

xii | xii | european defense trendsxii | european defense trends

both. Absent national subsidies, the global financial market could force some companies to aban-don the defense sector if cash flows fall to levels uncompetitive with other opportunities. Fewer industry participants ultimately may mean less innovation and fewer capabilities in some sectors.

Finding 4.The ways in which European market participants respond to regulatory reforms—on both the demand and supply sides—will determine the impact of those reforms. Actions of European gov-ernments and defense companies in the coming years will affect the long-term size and composi-tion of the industrial base and of the armed forces themselves. Different responses of the market participants toward new regulations are unlikely to alter the market-driven trend toward more consolidation in the European industrial base supporting defense. However, they will determine when, and under which specific circumstances, this consolidation might unfold.

Finding 5.The changes unfolding in the European defense market—on the demand and supply side as well as in the regulatory domain—are creating opportunities to free up and reallocate defense resources and to expand collaborative procurement and research and development (R&D) programs. For example, European states have the potential to use freed-up resources coupled with specializa-tion to upgrade their military equipment and improve their ability to participate in international operations. In this sense, the evolving European defense market provides an enabling framework for European states to respond to the most pressing defense challenges they face.

executive summary | xiii

Figure ES. Summary of Findings

Source: Analysis by CSIS Defense-Industrial Initiatives Group.

Figure 1: Summary of Findings

- Offse�ng budget declines with troop reducons

- Changing demand structures alter defense market and its parcipants

- Need sufficient financial rewards to a�ract connous investment

- Responses to regulatory reforms will determine their impact

- Opportunity to create a defense market supporng greater internaonal

involvement

Defense budgets

Absolute spending declining; per-

soldier spending increasing

Industrial base

European defense and security

companies on par with –occasionally exceeding – their

peers

Regulatory framework

Important regulatory reforms

iniated

Figure ES displays the summary of findings for the report. Overall, the CSIS trend analysis of key elements of the European defense market demonstrates that political will is as important a de-terminant for future European military capabilities as is the availability of resources. This includes, in particular, the will to collaborate across national boundaries, to refrain from transferring too many resources out of the defense sector, to reallocate resources more efficiently within defense budgets, and to draw down force levels where appropriate to offset potential future declines in total budgets. Of particular note are the expected fiscal budget and market pressures created by the global economic recession on all three dimensions of the European defense market. This pres-sure, if responded to properly, could foster the political will within European capitals to remove or minimize inefficiencies in the European defense market in demand, supply, and regulations. CSIS will continue to monitor progress on these trends and update them each year in future versions of this report.

| 1

Macro Trends Presenting defense spending trends in Europe as a whole, this section covers the period from 2001 to 2009, discusses total defense spending and spending per soldier for 37 countries,1 and shows trends in overall European defense spending by functional defense spending categories. To capture only real effects, all monetary trends in this report are assessed on a constant 2009 basis unless otherwise noted. Past evaluations of European defense spending focused on total spending and spending as a share of gross domestic product (GDP). This report assesses total and per-sol-dier defense spending to broaden the analytical prism and provide a new perspective on aggregate European defense trends.

Macro trends: summary Assessing European defense spending reveals two key opposing trends:

1. Total defense spending declined from 251 billion euros in 2001 to 218 billion euros in 2009, adjusted for inflation (a compound annual growth rate of negative 1.8 percent). This decline affected all defense spending categories, with the smallest cuts to the O&M/Other defense spending category (consisting predominantly but not exclusively of operation and mainte-nance spending), followed by Equipment spending; and

2. European defense spending on a per-soldier basis grew significantly from 73,000 euros in 2001 to 91,000 euros in 2009 (a compound annual growth rate of 2.8 percent). This trend holds true for all defense spending categories except Infrastructure spending.

The root cause for these seemingly opposing trends is likely the significant troop reductions within the European armed forces, which have outpaced reductions in total defense spending. (Note: Given that the data are from 2001 to 2009, they do not capture the full impact of the ongo-ing economic recession.)

Macro trends: total defense spending In real terms, between 2001 and 2009 the majority of European states have cut or only slightly increased defense spending, leading to a drop in aggregate defense spending—from 251 billion euros in 2001 to 218 billion euros in 2009 (in constant 2009 euros)—for the 37 countries stud-ied in this report. Despite a short growth phase in 2005 and 2006, the overall compound annual growth rate (CAGR) is negative 1.8 percent (see Chart 1). It is also noteworthy that in 2009, only four European NATO members met the Alliance’s minimal requirement of spending at least 2 percent of their GDP on defense.

1. Despite being a member of NATO, Iceland is not included in this analysis as it has no armed forces.

1 european defense spending

2 | 2 | european defense trends

Per-soldier spending (Chart 1) does not replicate this downward trend in defense spending. Aggregate European defense spending was 73,000 euros per soldier in 2001, peaked in 2008 at almost 97,000 euros, and decreased slightly to around 91,000 euros in 2009, representing a CAGR of 2.8 percent. Defense spending per soldier rose in 30 of the 37 countries assessed.

That the drawdown in troop numbers has outpaced overall spending cuts probably largely explains the discrepancy between per-soldier spending increases and total defense spending de-creases. Total active duty military personnel in the 37 countries analyzed declined by 34.3 percent from almost 3.5 million military personnel in 2001 to around 2.3 million in 2009.

Chart 1. Total European Defense Spending and Defense Spending per Soldier (2001–2009)

Sources: NATO Defense Expenditures; SIPRI Military Expenditure Database; IISS Military Balance; analysis by CSIS Defense-Industrial Initiatives Group.

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chapter 1 ◊ european defense spending | 3

Figure 1 provides a country-by-country comparison of total and per-soldier defense spend-ing. The distinction between total and per-soldier defense spending (Chart 1) is an important one. Analyzing total defense spending provides insight into the overall resources a country or region is investing in its defense but not into the quality of the forces that the budget supports. Analyzing defense spending per soldier may be utilized as a proxy variable for qualitative aspects. Incorpo-rating both units of analysis makes for a more complete understanding of spending trends.

Figure 1. European Defense Spending (in 2009 euros)

Sources: NATO Defense Expenditures; IISS Military Balance; maps from the Center for Disease Control and Maptitude; analy-sis by CSIS Defense-Industrial Initiatives Group.


Macro trends: defense spending categories The downward trend in total defense spending extends, in varying degrees, to all functional de-fense spending categories (see Chart 2 and Chart 3) but does not unfold in a linear manner (see Table 1 on page 10); for example, total Equipment spending had initially bottomed out in 2004 and 2005, and then increased steadily until 2008, before reaching its absolute low point for the observed timeframe in 2009.

Chart 2. Total European Defense Spending by NATO Defense Spending Categories (2001–2009)

Note: A separate breakdown for R&D spending is not available from NATO; R&D spending is instead included in the Equip-ment and the O&M/Other categories. In addition, the combined category aggregates do not match the aggregate val-ues displayed in Chart 1 due to restricted data availability for these spending breakdowns. Only countries with complete time series data are included in the aggregates of the respective categories. Ten countries have complete time series for all the categories. An additional six countries have complete time series for the NATO categories, and an additional five countries have a complete time series for the R&D category. Appendix 1, Methodology, lists the individual countries with complete time series data.

Sources: NATO Defense Expenditures; analysis by CSIS Defense-Industrial Initiatives Group.

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Due to insufficient data, it is not possible to break down budgets for all 37 countries into the various accounts. While this fact restricts the representativeness of insights from the functional budget analysis, the data available for the Equipment, Personnel, Infrastructure, and O&M/Other categories still represent 90.4 percent of total European defense spending. In R&D, the complete time series data are available for 15 countries, representing 82.3 percent of total European spend-ing. A more detailed explanation of these defense spending categories, including relevant caveats and data availability issues, is available in Appendix 1, Methodology.

Chart 3. Total European CAGRs for Defense Spending Categories (2001–2009, in 2009 euros)

Note: The OECD data source was added to provide a separate budget breakdown for R&D spending, which is not avail-able from NATO. The NATO data source subsumes R&D spending in the Equipment and the O&M/Other categories. Consequently, R&D spending also influences in part trends displayed for those two NATO categories. R&D spending is therefore accounted for twice in this chart, once directly in the R&D category and once combined in the Equipment and the O&M/Other categories. Only countries with complete time series data are included in the aggregates of the respec-tive categories.Ten countries have complete time series for all the categories. An additional six countries have complete time series for the NATO categories, and an additional five countries have a complete time series for the R&D category. Appendix 1, Methodology, lists the individual countries with complete time series data.

Sources: NATO Defense Expenditures; OECD Main Science and Technology Indicators; analysis by CSIS Defense-Industrial Initiatives Group.

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Contrary to total spending patterns, with the exception of Infrastructure spending, all catego-ries exhibit positive trends on a per-soldier basis in the 2001–2009 timeframe (see Chart 4 and Chart 5). Yet the order of relative change differs somewhat for this frame of analysis, with R&D displaying a lower growth rate than Personnel spending. Both had a similar rate of change for total spending.2

Overall, European defense budgets are Personnel-heavy, with around 52.5 cents of every de-fense euro going into this category in 2009 (see Chart 6). Meanwhile, only 20.1 percent of defense budgets are allocated toward Equipment (including R&D spending directly related to major equip-ment). While countries have begun realigning defense budgets, such changes occur slowly, as the majority of spending elements are locked in over longer time periods—for instance, long-term acquisition projects or established military pay structures.

2. The ranking variations between both units of analysis can be explained by the different data sources for R&D spending and the NATO spending categories. The discrepancy in Charts 3 and 5, for instance, is a function of different troop reduction rates for both sample groups. See Appendix 1, Methodology, for more details.

Chart 4. Per-Soldier European Defense Spending by NATO Defense Spending Categories (2001–2009)

Note: A separate breakdown for R&D spending is not available from NATO. This spending is instead included in the Equip-ment and the O&M/ categories. Only countries with complete time series data are included in the aggregates of the respective categories. Ten countries have complete time series for all the categories. An additional six countries have complete time series for the NATO categories, and an additional five countries have a complete time series for the R&D category. Appendix 1, Methodology, lists the individual countries with complete time series data.

Sources: NATO Defense Expenditures; IISS Military Balance; analysis by CSIS Defense-Industrial Initiatives Group.

14.6 14.4 17.1 17.6 17.7 18.1 19.3 19.7 19.1

43.7 43.851.0 53.2 55.0 54.8 55.0 54.5 50.0

2.4 2.3 2.6 2.8 2.5 2.8 3.2 3.0 2.317.8 17.720.0 20.9 22.1 22.4 24.9 24.9

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Chart 5. Per-Soldier European CAGRs for Defense Spending Categories (2001–2009, in 2009 euros)

Note: The OECD data source was added to provide a separate budget breakdown for R&D spending, which is not avail-able from NATO. The NATO data source subsumes R&D spending in the Equipment and the O&M/Other categories. Consequently, R&D spending also influences in part trends displayed for those two NATO categories. R&D spending is therefore accounted for twice in this chart, once directly in the R&D category and once combined in the O&M/Other and the Equipment categories. Only countries with complete time series data are included in the aggregates of the respective categories. Ten countries have complete time series for all the categories. An additional six countries have complete time series for the NATO categories, and an additional five countries have a complete time series for the R&D category. Appendix 1, Methodology, lists the individual countries with complete time series data.

Sources: NATO Defense Expenditures; OECD Main Science and Technology Indicators; IISS Military Balance; analysis by CSIS Defense-Industrial Initiatives Group.

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Chart 6. Distribution of Total European Defense Spending by NATO Defense Spending Categories (2001–2009)


18.6 18.5 18.8 18.6 18.2 18.5 18.8 19.3 20.1

55.6 56.0 56.1 56.3 56.5 55.9 53.7 53.4 52.5

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R&D in Europe between 2001 and 2008 dropped by 16.3 percent, from 12.3 billion euros in 2001 to 10.3 billion euros in 2008 (see Chart 7; see also Chart 12 on page 17.)3 As a share of total defense spending, R&D decreased from 6.3 percent in 2001 to 5.4 percent in 2008 for the 15 countries with complete time series data in R&D spending. By contrast, R&D spending per soldier for those countries rose from roughly 6,700 euros in 2001 to 7,200 euros in 2008. However, the decline in total R&D spending indicates that European states are investing less in homegrown in-novations for future military capabilities.

For the other four defense spending categories—Equipment, Personnel, Infrastructure, and O&M/Other—incremental adjustments shifted the relative spending mix, primarily in the later years, from Personnel and Infrastructure to Equipment and O&M/Other spending (see Chart 6). One explanation could be that savings in Personnel and Infrastructure costs— due to manpower drawdowns—financed costs of ongoing international operations and Equipment based on emerg-ing operational requirements. The latter could be considered a positive development, as European states appear increasingly to invest in the immediate modernization of the capabilities of their armed forces.

However, integrating the absolute changes for each defense spending category into the analy-sis alters this picture (see Chart 7). In fact, resource transfers among different categories do not drive relative shifts in allocations. Instead, these shifts reflect disproportionate distribution of

3. In this context it should be noted that the relative size of R&D spending to overall defense spend-ing for countries for which data is available is inflated for some countries because it is supplemented, often by considerable amounts, from other government R&D budgets. See Appendix 1, Methodology, for more details.

Chart 7. Changes in Total European Defense Spending by Defense Spending Categories (2001–2009, in 2009 euros)

Note: The OECD data source was added to provide a separate budget breakdown for R&D spending, which is not avail-able from NATO. The NATO data source subsumes R&D spending in the O&M/Other and the Equipment categories. Consequently, R&D spending also influences in part trends displayed for those two NATO categories. R&D spending is therefore accounted for twice in this chart, once directly in the R&D category and once combined in the O&M/Other and the Equipment categories. Only countries with complete time series data are included in the aggregates of the respective categories. Ten countries have complete time series for all the categories. An additional six countries have complete time series for the NATO categories, and an additional five countries have a complete time series for the R&D category. Appendix 1, Methodology, lists the individual countries with complete time series data.

Sources: NATO Defense Expenditures; OECD Main Science and Technology Indicators; analysis by CSIS Defense-Industrial Initiatives Group.

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

-20

-15

-10

-5

0

Equipment Personnel Infrastructure O&M/Other R&D (2001-2008)

Chan

ges

in s

pend

ing

(in p

erce

nt)

hang

es in

spe

ndin

g (c

onst

ant

2009

, in

€bi

llion

s)

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

-25

-20

-15

-10

-5

0

Equipment Personnel Infrastructure O&M/Other R&D (2001-2008)

Chan

ges

in s

pend

ing

(in p

erce

nt)

Chan

ges

in s

pend

ing

(con

stan

t 20

09,

in €

billi

ons)

Change (constant 2009, in € billions) Change (in percent)


budget cuts among categories. Therefore, the increased share for Equipment does not indicate that Europeans are spending more on Equipment. Rather, this category has suffered fewer cuts, thus increasing only its relative share of the smaller defense budget pie. Sparing Equipment spending from significant cuts might not be driven exclusively by a heightened focus on acquiring more ad-vanced equipment. Another possible reason might be the growing need to replace or reset equip-ment inventory used in ongoing operations. A further rationale might be the difficulty in shrink-ing or eliminating equipment programs already in process, whether due to contractual obligations, political challenges, or some other reason. In this regard it is worth noting that U.S. trends since the 1960s have shown that in time of defense budget cuts, procurement spending has traditionally decreased at a faster rate than total defense spending.

The next section will examine specific regional patterns of defense spending.


Tabl

e 1:

Sum

mar

y of

Mac

ro-l

evel

Def

ense

Spe

ndin

g D

ata

(200

1–20

09)

2001

2002

2003

2004

2005

2006

2007

2008

2009

Tota

l Def

ense

Spe

ndin

g in

co

nsta

nt 2

009

billi

on E

uros

250.

624

3.4

234.

623

4.3

238.

924

0.4

237.

123

3.3

217.

7

Def

ense

Spe

ndin

g pe

r So

ldie

r in

con

stan

t 20

09 E

uros

72,9

8973

,992

84,0

4186

,511

88,8

0791

,909

96,5

1396

,737

91,2

74

Troo

p N

umbe

rs3,

433,

230

3,28

9,10

02,

791,

814

2,70

8,16

42,

690,

064

2,61

5,14

72,

465,

608

2,41

2,10

82,

384,

563

Tota

l Equ

ipm

ent

Spen

ding

in

cons

tant

200

9 bi

llion

Eur

os42

.640

.940

.239

.739

.740

.640

.640

.939

.6

Tota

l Per

sonn

el S

pend

ing

in

cons

tant

200

9 bi

llion

Eur

os12

7.2

124.

211

9.9

120.

412

3.3

122.

811

5.8

113.

010

3.4

Tota

l Inf

rast

ruct

ure

Spen

ding

in

con

stan

t 20

09 b

illio

n Eu

ros

7.1

6.6

6.1

6.4

5.6

6.3

6.7

6.2

4.6

Tota

l O&

M/O

ther

Spe

ndin

g in

con

stan

t 20

09 b

illio

n Eu

ros

51.7

50.1

47.0

47.3

49.6

50.1

52.5

51.6

49.4

Tota

l R&

D S

pend

ing

in c

on-

stan

t 20

09 b

illio

n Eu

ros

12.3

12.9

12.2

11.4

10.6

11.5

11.4

10.3

n/a

Not

e: O

nly

coun

trie

s w

ith c

ompl

ete

time

serie

s da

ta a

re in

clud

ed in

the

agg

rega

tes

of t

he r

espe

ctiv

e ca

tego

ries.

Ten

cou

ntrie

s ha

ve c

ompl

ete

time

serie

s fo

r al

l the

cat

egor

ies.

An

addi

tiona

l si

x co

untr

ies

have

com

plet

e tim

e se

ries

for

the

NAT

O c

ateg

orie

s, a

nd a

n ad

ditio

nal fi

ve c

ount

ries

have

a c

ompl

ete

time

serie

s fo

r th

e R

&D

cat

egor

y. A

ppen

dix

1, M

etho

dolo

gy, l

ists

th

e in

divi

dual

cou

ntrie

s w

ith c

ompl

ete

time

serie

s da

ta. T

he o

nly

exce

ptio

n is

Ital

y in

the

R&

D c

ateg

ory,

whi

ch is

incl

uded

des

pite

dat

a fo

r 20

03 a

nd 2

004

mis

sing

. Sw

itzer

land

is n

ot

incl

uded

in t

he a

ggre

gate

s fo

r an

y of

the

per

-sol

dier

spe

ndin

g ca

tego

ries.

The

R&

D s

pend

ing

cate

gory

is n

ot m

utua

lly e

xclu

sive

with

the

NAT

O d

efen

se s

pend

ing

cate

gorie

s du

e to

dif-

fere

nt d

ata

sour

ces.

Due

to

thes

e ca

veat

s, t

he c

ombi

ned

budg

et c

ateg

ory

aggr

egat

es d

o no

t m

atch

the

agg

rega

te v

alue

s fo

r to

tal d

efen

se s

pend

ing.

Sour

ces:

NAT

O D

efen

se E

xpen

ditu

res;

SIP

RI M

ilita

ry E

xpen

ditu

re D

atab

ase;

OEC

D M

ain

Scie

nce

and

Tech

nolo

gy In

dica

tors

; IIS

S M

ilita

ry B

alan

ce; a

naly

sis

by C

SIS

Def

ense

-Ind

ustr

ial I

nitia

-tiv

es G

roup

.


Regional AnalysisThis section presents an in-depth analysis of defense spending for eight European regions: Eastern Europe; Non-aligned Eastern Europe (i.e., Eastern European countries that were not members of NATO or the EU during the years 2001–2009); Northern Europe; Southern Europe; Western Europe; and France, Germany, and the United Kingdom, which are treated as individual regions due to their size. The goal of this assessment is to discern regional patterns in European defense spending and examine their causes. Figure 2 presents the composition of regions, and Appendix 1 discusses the methodology for defining the regions. Table 2 and Table 3 (pages 20–21) provide key underlying data for the analysis conducted in this section.

Figure 2. Regional Breakdown and Per-Soldier Defense Spending (in 2009 euros)

Note: Western Europe does not include per-soldier spending data for Switzerland.



Summary Overall, the regional analysis yields several insights. First, the United Kingdom, France, and Ger-many are responsible for the majority (53.2 percent) of European defense spending. Second, the Eastern European region shows the most growth in total and per-soldier spending. Third, Non-Aligned Eastern Europe and Southern Europe appear to be on a contrasting trajectory with East-ern Europe: while total defense spending in the former two regions is sharply declining, spending growth in Eastern Europe is outpacing the rest of Europe, although it lost some of its momentum in 2009. Economic difficulties are likely exerting downward pressure on Southern European defense spending. The same assessment probably holds for the Non-Aligned Eastern European re-gion. Until 2009, robust economic growth and emerging responsibilities due to new memberships in NATO and the EU are both possible reasons explaining why Eastern European states increaseed defense spending.

Regional analysis: total defense spending A regional comparison reveals the large French, German, and British contributions to total Eu-ropean defense spending (see Chart 8). Together, these three accounted for 116.0 billion euros in 2009, representing more than half of European defense spending. The only region that spent more than any of these three individual countries is Southern Europe, which includes the fourth- and fifth-largest spenders, Italy and Spain.

Between 2001 and 2009, most regions experienced declining defense budgets. Southern Europe and Non-Aligned Eastern Europe showed the sharpest declines, with negative CAGRs of 4.7 and 8.8 percent, respectively. The key contributors to these trends were economic and budget-ary challenges, as well as considerable inflation rates in certain countries in these two groupings. The Eastern and Western Europe regions diverge from the trend of declining budgets, showing small positive CAGRs of 0.7 and 0.4 percent, respectively. In Eastern Europe, the desire to close

Chart 8. Total European Defense Spending by Region

Note: Non-Aligned Eastern Europe does not include data for Bosnia-Herzegovina and Montenegro.


France Germany

UK

Western EuropeNorthern Europe

Southern Europe

Eastern EuropeNon-Aligned Eastern Europe

Aggregate Europe Line

0

10

20

30

40

50

60

-10 -8 -6 -4 -2 0 2Tota

l def

ense

spe

ndin

g (2

009,

in

€bi

llion

s)

2001-2009 CAGR (in percent adjusted for in�ation)


the defense capability gap with Western European partners and concerns regarding Russia likely constituted the main impetus behind this trend.4

In defense spending on a per-soldier basis, the regional analysis reveals growth rates for all regions but France. For total per-soldier spending values, a northwest-southeast divide exists, with the United Kingdom leading this category ahead of the Northern European region and a cluster of Germany, the Western European region, and France (see Chart 9). The remaining regions—Southern Europe, Eastern Europe, and Non-Aligned Eastern Europe—trail behind. With regard to growth rates, Eastern Europe has outpaced other regions, with a CAGR of 8.2 percent, followed by Northern Europe and Germany with 5.8 percent and 2.1 percent CAGRs, respectively. This suggests that the Eastern European region is narrowing some of its capability gaps vis-à-vis other regions.

For the Eastern European region, increases in total spending contribute to the growth in spending per soldier. For Non-Aligned Eastern Europe, however, gains in defense spending per soldier are exclusively a result of troop reductions outpacing budget cuts. The difference between the two Eastern European regions might stem from membership in the EU and/or NATO, which would suggest future growth in the budget allocations of Albania and Croatia, both of which joined NATO in 2009. However, more time will be necessary to validate this assertion.

4. Lorenzo Cortes, “NATO Response Force Drives Modernization of East European Forces, Jones Says,” Defense Daily International, April 2, 2004, http://www.accessmylibrary.com/coms2/summary

_0286-6206863_ITM; Nicolas Kulish, “Eastern Europe is Uneasy over U.S. Ties with Russia,” New York Times, July 16, 2009, http://www.nytimes.com/2009/07/17/world/europe/17europe.html.

Chart 9. Per-Soldier European Defense Spending by Region

Note: Western Europe does not include data for Switzerland. Non-Aligned Eastern Europe does not include data for Bosnia-Herzegovina and Montenegro.


France

Germany

UK

Western Europe

Northern Europe

Southern Europe

Non-Aligned Eastern Europe

Eastern Europe

Aggregate Europe

0

50

100

150

200

250

-2 -1 0 1 2 3 4 5 6 7 8 9

Def

ense

spe

ndin

g pe

r so

ldie

r (2

009,

in

€ th

ousa

nds)

2001-2009 CAGR (in percent adjusted for in�ation)


Regional analysis: equipment Total Equipment spending by region is led by France and the United Kingdom, each of which spent around 10 billion euros in this category in 2009. Following at a considerable distance are Southern Europe with around 8 billion euros and Germany with 6 billion euros in 2009. The West-ern and Northern Europe regions and the Czech Republic, Hungary, and Poland form the third cluster at the bottom of this category (see Chart 10). Eastern Europe was relabeled for this analysis as Czech Republic, Hungary, and Poland to prevent invalid conclusions due to lack of available data. In aggregate those three countries display the largest CAGR (5.8 percent) over the nine-year period. By contrast, one of the two top-spending regions, the United Kingdom, experienced a negative CAGR of 1.1 percent. Southern Europe experienced the largest relative contraction of all the regions in Equipment spending. (Note: For the Non-Aligned Eastern European region, analy-sis was possible only for total defense spending due to lack of data.)

Chart 10. Total European Defense Equipment Spending by Region

Note: Western Europe does not include data for Austria, Ireland, and Switzerland; Southern Europe does not include data for Cyprus and Malta; Northern Europe does not include data for Sweden. For the Non-Aligned Eastern European region, analysis was possible only for total and per-soldier defense spending due to lack of data.

Sources: NATO Defense Expenditures; Finnish Ministry of Defense; analysis by CSIS Defense-Industrial Initiatives Group.

France

Germany

UK

Western EuropeNorthern Europe

Southern Europe

Czech Republic, Hungary, Poland


0

2

4

6

8

10

12

-8 -6 -4 -2 0 2 4 6 8

Def

ense

equ

ipm

ent

spen

ding

(200

9,in

€bi

llion

s)

2001-2009 CAGR (in percent adjusted for inflation)


Comparing Equipment spending on a per-soldier basis reveals a sharp trend contrast between the Czech Republic, Hungary, and Poland, and Southern Europe. Although both display similar absolute values for Equipment spending per soldier of around 8,200 euros to 10,100 euros, they diverge significantly in the rates of change they have been experiencing. Once again, Eastern European growth in the form of the Czech Republic, Hungary, and Poland surpasses other regions, with a nine-year CAGR of 14.9 percent (see Chart 11). Meanwhile, Southern Europe is the only region with a negative CAGR of 0.9 percent.

The United Kingdom has by far the highest per-soldier Equipment spending value of all the regions at almost 52,000 euros. However, its growth rate of 0.04 percent is small in comparison to Germany (5.1 percent), France (3.4 percent), or Northern Europe (3.4 percent), as well as Western Europe (2.7 percent). Yet these regions display considerably lower per-soldier Equipment spend-ing values, varying between 21,000 euros and 31,000 euros.

Chart 11. Per-Soldier European Defense Equipment Spending by Region

Note: Western Europe does not include data for Austria, Ireland, and Switzerland; Southern Europe does not include data for Cyprus and Malta; Northern Europe does not include data for Sweden. For the Non-Aligned Eastern European region, analysis was possible only for total and per-soldier defense spending due to lack of data.

Sources: NATO Defense Expenditures; IISS Military Balance; EDA Defense Data; analysis by CSIS Defense-Industrial Initiatives Group.

FranceGermany

UK

Western Europe

Northern Europe

Czech Republic, Hungary, Poland

Aggregate Europe

0

10

20

30

40

50

60

-2 0 2 4 6 8 10 12 14 16

Def

ense

equ

ipm

ent s

pend

ing

per

sold

ier

(200

9, in

€th

ousa

nds)


Southern Europe


Overall, many regions have placed a relative priority on Equipment spending, reflected by past growth rates in total and by per-soldier Equipment spending. Figure 3 provides country-by-coun-try information for total and per-soldier Equipment spending.

Regional analysis: R&D The majority of R&D spending is conducted by a few European countries (see Chart 12). France and the United Kingdom account for 64.8 percent of all European R&D spending. Adding Ger-many, Italy, and Spain raises the share to 93.7 percent.

For R&D the fewest data are available, although complete R&D spending time series are available for 15 countries, which represent 82.3 percent of aggregate European defense spending. Southern Europe and Eastern Europe were relabeled for this analysis to prevent invalid conclu-sions due to lack of available data.

Total R&D spending has, with minor exceptions, been stagnant or declining, with 2001–2008 CAGRs either mostly negative or marginally positive (see Chart 13). The few positive CAGR de-velopments were largely limited to countries with a rather small R&D spending baseline in 2001.

Figure 3. Total and Per-Soldier European Defense Equipment Spending (in 2009 euros)

Sources: NATO Defense Expenditures; Finnish Ministry of Defense; IISS Military Balance; maps from the Center for Disease Control and Maptitude; analysis by CSIS Defense-Industrial Initiatives Group.


Chart 12. European Defense R&D Spending by Country (2001–2009)

* R&D spending values are not available for Italy for 2003 and 2004.

** Rest of Europe includes the aggregate of the 10 countries with complete time series data, which are not listed individually.

Note: R&D spending data for Italy in 2002 was obtained from a different data source than the rest of the time series. With the exception of Italy, only countries with complete time series data are included. Overall, 15 countries have complete time series data for R&D spending.

Sources: OECD Main Science and Technology Indicators; analysis by CSIS Defense-Industrial Initiatives Group.

0

2

4

6

8

10

12

14

2001 2002 2003* 2004* 2005 2006 2007 2008Def

ense

R&

D s

pend

ing

(con

stan

t 200

9,

in €

billi

ons)

France Germany Italy* Spain Sweden UK Rest of Europe**

Chart 13. Total European Defense R&D Spending by Region

Note: Western Europe does not include data for Ireland and Luxembourg. For the Non-Aligned Eastern European region analysis was only possible for total and per-soldier defense spending due to lack of data.

Sources: OECD Main Science and Technology Indicators; analysis by CSIS Defense-Industrial Initiatives Group.

France

Germany

UK

Northern Europe

Italy, Portugal, Spain

Romania, Slovenia


Western Europe0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-10 0 10 20 30 40 50 60

Def

ense

R&

D s

pend

ing

(200

8,

in

cons

tant

200

9 €

billi

ons)



On a per-soldier basis, the CAGRs for R&D are positive in all regions but the United Kingdom (see Chart 14). One important factor explaining the considerable negative UK value is exchange fluctuations between the British pound and the euro. When measured in pounds, the United Kingdom returns a comparatively significant smaller negative CAGR of 0.8 percent for per-soldier R&D spending.

Chart 14. Per-Soldier European Defense R&D Spending by Region

Note: Western Europe does not include data for Ireland and Luxembourg. For the Non-Aligned Eastern European region analysis was only possible for total and per-soldier defense spending due to lack of data.


France

Germany

UK

Western Europe

Northern EuropeItaly, Portugal, Spain

Romania, Slovenia

Aggregate Europe

0

2

4

6

8

10

12

14

16

-10 0 10 20 30 40 50 60

Def

ense

R&

D s

pend

ing

per

sold

ier

(200

8, in

con

stan

t 200

9 €

thou

sand

s)



Another noteworthy case is Northern Europe, which spends more on R&D per soldier than either Italy, Portugal, and Spain combined or Germany. The region also exhibits solid growth in this area, with a CAGR of 5.9 percent CAGR; this, however, is driven mostly by troop reductions rather than by funding increases. Figure 4 provides a country-by-country overview for total and per-soldier R&D spending in Europe.

The contrasting trend between total and per-soldier defense spending in Europe is primarily driven by shrinking European armed forces. The decrease in total defense spending highlights the importance of investing most efficiently in the right set of capabilities to ensure that armed forces can address the most relevant mission scenarios. A well-functioning, competitive defense market, governed by an equitable and effective regulartory framework for defense acquisition, is essential to translate requirements into capabilities with minimal impact on cost, schedule, and performance.

Figure 4. Total and Per-Soldier European Defense R&D Spending (in 2009 euros)

Sources: NATO Defense Expenditures; OECD Main Science and Technology Indicators; IISS Military Balance; maps from the Center for Disease Control and Maptitude; analysis by CSIS Defense-Industrial Initiatives Group.


Tabl

e 2.

Reg

iona

l Tot

al D

efen

se S

pend

ing

and

Equi

pmen

t Sp

endi

ng D

ata

(200

1–20

09)

Tota

l D

efen

se

Spen

ding

in

con

stan

t 20

09 b

illio

n Eu

ros

2001

-200

9 To

tal D

efen

se

Spen

ding

C

AG

R

(in

perc

ent)

Def

ense

Sp

endi

ng p

er

Sold

ier

in

cons

tant

200

9 Eu

ros

2001

-200

9

Def

ense

Sp

endi

ng

per

Sold

ier

CA

GR

(i

n pe

rcen

t)

Tota

l Equ

ip-

men

t Sp

endi

ng

in c

onst

ant

2009

bill

ion

Euro

s

2001

-200

9 To

tal E

quip

-m

ent

Spen

ding

C

AG

R

(in

perc

ent)

Equi

pmen

t Sp

endi

ng

per

Sold

ier

in c

onst

ant

2009

Eur

os

2001

-200

9

Equi

pmen

t Sp

endi

ng p

er

Sold

ier

CA

GR

(i

n pr

ecen

t)

Fran

ce39

.2-1

.211

1,09

2-0

.810

.62.

929

,995

3.4

East

ern

Euro

pe14

.90.

745

,399

8.2

2.2

5.8

6,57

15.

8

Ger

man

y34

.2-0

.313

4,51

22.

16.

02.

623

,674

5.1

Non

-Alig

ned

East

-er

n Eu

rope

1.1

-8.8

18,6

790.

5/

//

/

Nor

ther

n Eu

rope

14.0

-0.3

189,

642

5.8

1.2

-2.0

15,8

342.

2

Sout

hern

Eur

ope

52.6

-4.7

52,1

991.

08.

2-6

.68,

191

-0.9

UK

42.6

-1.0

216,

288

0.1

10.2

-1.1

51,9

090.

0

Wes

tern

Eur

ope

19.4

0.4

131,

275

1.9

1.9

1.9

15,2

752.

7

Not

e: T

he t

otal

and

per

-sol

dier

def

ense

spe

ndin

g fo

r N

on-A

ligne

d Ea

ster

n Eu

rope

doe

s no

t in

clud

e da

ta f

or B

osni

a-H

erze

govi

na a

nd M

onte

negr

o. T

he t

otal

spe

ndin

g an

d pe

r-so

ldie

r Eq

uip-

men

t sp

endi

ng f

or W

este

rn E

urop

e do

es n

ot in

clud

e da

ta f

or A

ustr

ia, I

rela

nd, a

nd S

witz

erla

nd; N

orth

ern

Euro

pe d

oes

not

incl

ude

data

for

Sw

eden

; Sou

ther

n Eu

rope

doe

s no

t in

clud

e da

ta f

or C

ypru

s an

d M

alta

. Eas

tern

Eur

ope

incl

udes

dat

a on

ly f

or t

he C

zech

Rep

ublic

, Hun

gary

, and

Pol

and.

Sw

itzer

land

is n

ot in

clud

ed in

the

agg

rega

tes

for

any

of t

he p

er-s

oldi

er

spen

ding

cat

egor

ies.

For

the

Non

-Alig

ned

East

ern

Euro

pean

reg

ion,

ana

lysi

s w

as p

ossi

ble

only

for

tot

al a

nd p

er-s

oldi

er d

efen

se s

pend

ing

due

to la

ck o

f da

ta.

Sour

ces:

NAT

O D

efen

se E

xpen

ditu

res;

SIP

RI M

ilita

ry E

xpen

ditu

re D

atab

ase;

IISS

Mili

tary

Bal

ance

; ana

lysi

s by

CSI

S D

efen

se-I

ndus

tria

l Ini

tiativ

es G

roup

.


Table 3. Regional R&D Spending (2001–2008)

Total 2008 R&D Spending in constant 2009 billion Euros

2001-2008 Total R&D Spending CAGR (in percent)

2008 R&D Spending per Soldier in constant 2009 Euros

2001-2008 R&D Spending per Soldier CAGR (in percent)

France 4.1 0.7 11,708 1.5

Eastern Europe 0.1 28.8 388 34.5

Germany 1.2 -2.0 4,711 0.8

Non-Aligned Eastern Europe

/ / / /

Northern Europe 0.5 0.6 5,959 5.6

Southern Europe 1.8 -4.8 5,475 2.0

UK 2.6 -4.1 16,137 -1.0

Western Europe 0.08 1.4 924 2.6

Note: Western Europe does not include data for Ireland and Luxembourg. Southern Europe includes data only for Italy, Portugal, and Spain. Eastern Europe includes data only for Romania and Slovenia. For the Non-Aligned Eastern European region, analysis was possible only for total and per-soldier defense spending due to lack of data. The R&D spending cat-egory is not mutually exclusive with the NATO spending categories due to different data sources. Due to these caveats, the combined budget category aggregates do not match the aggregate values for total defense spending.

Sources: NATO Defense Expenditures; SIPRI Military Expenditure Database; OECD Main Science and Technology Indicators; IISS Military Balance; analysis by CSIS Defense-Industrial Initiatives Group.

22 |

A Fragmented Defense and Security Market One of the biggest success stories of the European Union has been the creation of a single inte-grated economic market. This single market largely excludes the defense sector, however, due to member states protecting this “sensitive” area because of national sovereignty concerns (e.g., security-of-supply) and the desire to sustain domestic employment.1 In many cases, such pro-tectionism allows national governments to channel defense procurement toward their domestic industrial bases.

Protection of domestic industrial bases has led prior regulations to foster continued fragmen-tation of the European defense and security market. This in turn led to a duplication of effort and inefficiencies in spending due to insufficient economies of scale and the noncompetitive nature of many defense solicitations shaped by national preferences.2 In 1999, then-U.S. Secretary of De-fense William Cohen addressed this issue, saying that European “NATO countries spend roughly 60 percent of what the United States does and they get about 10 percent of the capability.”3 A 2003 University of York study indirectly confirmed this claim, noting that opening the EU defense mar-ket to EU-wide competition would yield annual savings of 9 percent in defense equipment pro-curement and that those savings were projected to increase to 11 percent if competition was not restricted to EU companies.4 However, any shift in Europe toward opening defense markets would require regulatory reform.

The Key Regulatory Challenge The central shortcoming of the current regulatory framework for defense acquisition is the quasi-universal application by EU member states of Article 296 of the Maastricht Treaty on the European

1. Commission of the European Communities, Defence Procurement: Green Paper from the Commis-sion, COM (2004) 608 final, September 2004 [hereinafter Green Paper], 3–7.

2. Erkki Aalto, Daniel Keohane, Christian Mölling, and Sophie de Vaucorbeil, Towards a European Defence Market, Chaillot Paper no. 113, European Union Institute for Security Studies, November 2008, 6, http://www.iss.europa.eu/uploads/media/cp113.pdf; ASD-Europe: Aircraft Sectoral Group, “Vision for the European Military Aircraft Industry,” February 2006, 7, http://www.asd-europe.org/site/fileadmin/user_upload/news/ASD_Aircraft_Sectoral_Group_Vision_Feb_2006-2009-01598-01.pdf.

3. Elizabeth Becker, “European Allies to Spend More on Weapons,” New York Times, September 22, 1999, http://www.nytimes.com/1999/09/22/world/european-allies-to-spend-more-on-weapons.html?n=Top%2FReference%2FTimes%20Topics%2FSubjects%2FI%2FInternational%20Relations.

4. Keith Hartley, “The Future of European Defence Policy: An Economic Perspective,” Defence and Peace Economics 14, no. 2 (2003): 112.

the european regulatory framework for the defense and security market2

chapter 2 ◊ european regulatory framework | 23

Community, which has since been renumbered as Article 346 in the Lisbon Treaty (hereinafter referred to as Article 346).5

Article 346 allows EU countries to circumvent the common market by providing that “any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material.”6 Intended as an exception to EU public procurement law, Article 346 has in-stead developed into a virtual standard for EU members’ defense acquisitions.7 This has preserved the fragmentation of the European defense market along national lines and has therefore been one of the root causes for inefficiencies in European defense spending.

Fixing the Key Regulatory Challenge Several initiatives, proposals, and agreements have been created to overcome or mitigate regula-tory challenges toward a more open European defense market. Noteworthy efforts include a 1998 Letter of Intent (LoI) signed by six key arms-producing European countries, the 2004 creation of the European Defense Agency (EDA), and key EDA initiatives, such as the voluntary Code of Conduct on defense procurement under Article 346. Yet none of these efforts directly address the protectionism enabled through Article 346.

5. Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union, Article 296, O.J. C115/1, at 194.

6. Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union.

7. Burkard Schmitt, Defense Procurement in the European Union: The Current Debate (Paris: Institute for Security Studies, 2005), 7.


That said, the European Commission has recently taken steps to establish a new standard for applying Article 346. The Commission has aimed to relegate Article 346 to its initial “exception” role through both a stricter Interpretative Communication on the application of the article and a new guiding defense procurement directive (Note: Figure 5 highlights reform activities aimed at opening the EU market for defense-related and security-related procurement. Figure 6 showcases the new regulatory hierarchy of the reformed framework for EU defense acquisition):

■ Interpretative Communication. The European Commission in 2006 issued an Interpretative Communication on Article 346. The Communication clarifies that the article applies only to procurement of equipment specifically designed for military purposes and only if the exemp-tion is required for the protection of essential security interests of the respective member state with burden of proof on the member state.8 While the determination of what constitutes “an essential security interest” still resides with the individual member state, the European Com-

8. Commission of the European Communities, “Interpretative Communication on the application of Article 296 of the Treaty in the field of defence procurement presented by the Commission,” COM (2006) 779 final (December 7, 2006) [hereinafter Commission Communication of 7 December 2006], 6–7; Burkard Schmitt, Towards a European Defence Equipment Market: The Green Paper on Defence Procurement, Analysis No. 110, European Union Institute for Security Studies, July 2005, http://www.iss.europa.eu/uploads/media/analy110.pdf, 2.

Open the EU market for defense and security related

procurement

Interpretative Communication on

Article 296 COM(2006) 779 final

Clarifies Article 346's (formerly 296) role as an exception rather than a

standard

EU Defence Procurement Directive 2009/81/EC

Provides regulations specifically designed for

defense and security related procurement

Intra-EU Transfer Directive 2009/43/EC

Facilitating intra-EU transfer of defense-

related products

EU Procurement Intra-EU Exports

Figure 5. Key EU Regulatory Reforms for Defense Procurement



mission made it clear with this communication that member states should invoke Article 346 more sparingly.9

■ New defense procurement directive. Directive 2009/81/EC on defense and security procure-ment went into force in August 2009, providing regulations specifically geared toward procure-ment in the defense sector.10 Member states must integrate the directive into their respective national legislation by August 2011, with EU provisions in place to resolve late or inadequate implementation by member states.11 Key components include three-tiered procurement proce-dures and provisions for security-of-supply and information, as well as guidelines for subcon-tracting practices.12 The directive’s overarching objective is to open the EU defense market to EU-wide competition with core features including the non-discriminatory procurement prin-ciple, the obligation to award contracts on price or on a combination of price and performance criteria, and the requirement to consider a minimum of three bidders in each solicitation.13

9. Commission Communication of December 7, 2006, 7–9. 10. Burkard Schmitt, “Adoption of New Directive Brings Defence and Security Procurement into

the Single Market,” European Commission Single Market News, no. 53 (2009), 6, http://ec.europa.eu/inter-nal_market/smn/smn53/docs/defence_en.pdf; European Commission, “Defence Procurement--Frequently Asked Questions”, August 28, 2009, 1, http://ec.europa.eu/internal_market/publicprocurement/docs/defence/faqs_28-08-09_en.pdf.

11. Council Directive No. 81/2009, O.J. L 216/76, at 121 (2009).12. Council Directive No. 81/2009, O.J. L 216/76 (2009).13. Id. art 4, O.J. L 216/76, at 92 (2009); art 38, O.J. L 216/76, at 107 (2009); art 47, O.J. L 216/76, at 112

(2009).

Public procurement

EU Public Procurement

Directive 2004/18/EC

Procurement of defense and security related goods and services

EU Defence Procurement

Directive 2009/81/EC

- Procurement under international rules as stated in article 12 of Directive 2009/81/EC;

- Specific exclusions as stated in article 13 of Directive 2009/81/EC;

- Procurement under article 296 (now article 346) of the EC treaty pursuant to COM(2006) 779 final

Alternative procurement regulations

Figure 6. Reformed EU Regulatory Framework for Defense Procurement



Directive 2009/81/EC does not come without caveats, however. For one, the directive does not apply to any collaborative procurement programs that include non-EU member states. It does not cover contracts awarded by international organizations such as NATO or the Organisation Conjointe de Coopération en matière d’Armement (OCCAR). In addition to these internation-ally driven exceptions, the directive excludes other specific items such as intelligence activities, contracts awarded in third countries as part of troop deployments, or contracts within the framework of cooperative research and development programs between EU member states. The most significant exclusion remains the protection of essential security interests of member states.14 Thus, the directive clearly does not annul Article 346.

Additional Regulatory Problems and Corresponding Reform EffortsThe practice of offsets, by which states obtain compensations–for instance, in the form of coun-tertrade agreements, technology sharing, or building of domestic production lines—for buying nondomestic products, also distorts the EU defense market. However, the European Commission defense procurement directive falls short of directly addressing offset practices, alledgedly due to definitional challenges for offset practices.15 Instead, the EC directive attempts to curtail offsets in-directly by providing for subcontracting, conditions on contract performance, and contract award criteria to inhibit the application of offsets.16

The EDA Code of Conduct on Offsets from 2008 was also an effort to limit offsets, with the subscribing member states’ objective to eliminate eventually the practice of offsets altogether. Some key provisions are increased transparency through information sharing on offset practices and current offset commitments, the requirement to explicitly mention offset requirements in con-tract notices and bidder selection processes, an offset cap equivalent to the contract value, and the ability of the winning bidder to select offset opportunities based on cost effectiveness and competi-tion.17 The stipulations of the Code of Conduct could considerably mitigate the effects offsets have on the efficiency of the European defense market. Yet the voluntary, nonbinding character of the Code limits its leverage.

The EU also has sought regulatory changes in areas other than procurement. One concern has been the transfer of defense-related goods between member states. Cross-border EU transfers have traditionally involved individual national export licenses, creating bureaucratic burdens and costs estimated at between 400 million euros and 3 billion euros a year, constraining cross-border competition and ultimately preventing the creation of an open European defense market.18

14. Id. art 12, O.J. L 216/76, at 94 (2009); art 13, O.J. L 216/76, at 94 (2009).15. European Commission, “Defence Procurement—Frequently Asked Questions,” August 28, 2009, 2,

http://ec.europa.eu/internal_market/publicprocurement/docs/defence/faqs_28-08-09_en.pdf.16. Id. art 20, O.J. L 216/76, at 97 (2009); id. art 21, O.J. L 216/76, at 97 (2009); id. art 47, O.J. L 216/76,

at 112 (2009). 17. European Defence Agency, “The Code of Conduct on Offsets,” October 24, 2008.18. European Commission, “Reference Documents: Defence Package—Towards an EU Defence Equip-

ment Policy,” 2010, http://ec.europa.eu/enterprise/sectors/defence/documents/index_en.htm; Guenter Ver-heugen, as quoted in European Defence Agency Bulletin Special Issue, “European Defence Technological and Industrial Base Conference,” February 2007.


However, with a zero percent denial rate for such transfers, these measurements did not yield any tangible gains in safety.19 Furthermore, this practice potentially inhibits the central objective of the procurement directive—that of creating an open EU defense equipment market. Based on the directive’s security-of-supply criterion, which allows for a negative rating of potential denials and delays of export licenses in the selection process, contracting authorities could downgrade nondomestic bidders, thereby creating an advantage for domestic sources.20 This in turn would be detrimental to the creation of an even playing field in EU-wide defense acquisition.

19. Isabelle Maelcamp, “Recent EU Developments in Defense Procurement and Reform of Arms Trans-fer Licenses,” presentation at the Institute for Defense Analysis, September 3, 2009, slide 21.

20. Council Directive No. 81/2009, art 23, O.J. L 216/76, at 98 (2009); art 47, O.J. L 216/76, at 112 (2009).


Directive 2009/43/EC addresses this issue by introducing general and global licenses as the new standard for intra-EU transfers. The directive went into force in June 2009, and member states have to integrate this new standard into national legislation by June 2011 and apply the associated measures by June 2012.21 These new types of licenses aim to provide a preapproved authorization framework by bundling certain categories of transfers into a single license. They should apply to the majority of intra-EU transfers, therefore largely removing the requirement for individual licenses (see Figure 7 for a more specific breakdown).22 Consequently, this licensing system will introduce a greater level of predictability for transfers—an attribute critical to satisfying security-of-supply concerns—and will reduce bureaucratic procedures, consequently eliminating time and cost frictions for most transfers.23 Individual licenses would still be an option for transfers, yet they would be reduced to an exception for special circumstances—such as one-time transfers, protec-tion of essential security interests of member states, compliance with international obligations, or in cases when a member state expresses serious concerns about suppliers’ compliance with the terms and conditions associated with a global license.24

21. Council Directive No 43/2009; art 18, O.J. L 146/1, at 9 (2009).22. Isabelle Maelcamp, “European Union: EU Defense Procurement Directive,” U.S. Mission to the

European Union, August 2009, 2.23. Maelcamp, “Recent EU Developments in Defense Procurement and Reform of Arms Transfer

Licenses,” slide 22.24. Council Directive No. 43/2009, art 7, O.J. L 146/1, at 6 (2009).

General Licences are granted for:

Armed forces of other member

states

Certified companies

Demonstrations, evaluations and

exhibitions

Maintenance and repair

Intergovernmental cooperation with

other member states

No time limitations on

validity

Global Licenses are granted for:

Bundling of defense related

products

Bundling of authorized recipients

Three year validity

Individual Licences are granted for:

One time transfers

Protection of essential security interests

Compliance with

international obligations

Cases of serious

suspicion of non

compliance

Figure 7. New Intra-EU Transfer Regulations for Defense-related Goods (Directive 2009/43/EC)



It is noteworthy that neither of the EC directives includes any explicit European preference with regard to the industrial base. This correlates with earlier EDA statements that despite the intention to foster a European industrial base supporting defense, Europe does not aim to create a “fortress Europe” in the defense sector.25 However, this does not mean that the emerging integrated EU defense market will be a level playing field for EU and non-EU defense companies.

Ramifications for Non-EU Countries While EU regulatory changes to create a more integrated European defense market have no direct legal impact on non-EU member states, those changes may still affect those countries. Though the European industrial base supporting defense is geographically heavily concentrated, it is also tightly connected to the global economy. Regulatory modifications therefore may not only have an impact on the size and structure of the European defense industrial base but also have secondary effects on the global defense industrial base. Impacts on individual countries and companies will vary: for instance, countries that have traditionally relied more heavily on non-European sources for their defense needs will be less affected than countries with a stronger European focus in de-fense procurement.

A number of provisions in the new directives, such as the role of security-of-supply in defense procurement or the freedom of national governments to choose not to consider non-EU bidders, might indirectly provide EU companies with advantages over non-EU competitors. Some of these advantages would arise due to the incompatibility of EU regulation with the legal frameworks of third countries rather than legally mandated EU preference.

The U.S. International Traffic in Arms Regulations (ITAR) constitutes such a case. A Euro-pean Commission impact assessment on the intra-EU transfer directive concluded that for U.S. suppliers offering ITAR-regulated goods, the security-of-supply criterion creates a comparative disadvantage through an indirect European preference.26 This preference would derive from the streamlined intra-community transfer regime and the inability of U.S. suppliers to participate in this regime based on ITAR restrictions.

25. Steering Board of the European Defence Agency, “A Strategy for the European Defence Technologi-cal and Industrial Base,” May 14, 2007, http://www.eda.europa.eu/genericitem.aspx?area=30&id=211.

26. European Commission, “Proposal for a Directive of the European Parliament and of the Council on simplifying terms and conditions of the transfers of defence-related products within the Community—Im-pact Assessment from the Commission staff,” SEC (2007) 1593, December 15, 2007, 33–34.


Summary The regulatory reform efforts initiated by the European Commission could considerably alter the European defense market. European governments might continue to provide preferential treat-ment to their respective domestic defense and security industrial bases. However, such protection-ist actions might be exposed to a heightened amount of scrutiny once all the regulatory changes are fully implemented. Much will depend on the willingness and ability of the European Commis-sion to enforce the new directives and to limit the exemptions applied by member states. Some ex-amples in the more recent past hint at a more determined stance of the European Commission in this regard.27 The result could be progress toward a less fragmented European defense market and thus more access to business opportunities for the European defense industry, as well as increased EU-wide competition. The impact on the United States and other nations remains to be seen.

The fragmented demand side combined with the complex regulatory framework creates a challenging environment for the European defense industry. The industry in turn constitutes a key component of the European defense market. It is therefore crucial to analyze the European defense and security industrial base so as to assess the effects the demand structure and regulatory frame-work have on the defense market. This analysis is the focus of the next chapter.

27. For instance, European Commission, “Public procurement: Commission calls on Czech Republic to respect public procurement rules for military aircraft,” May 5, 2010, http://europa.eu/rapid/pressReleasesAc-tion.do?reference=IP/10/501&format=HTML&aged=0&language=EN&guiLanguage=en.

| 31

Chapter 3 presents key financial metrics for a selection of European defense and security firms. The discussion begins with a brief overview of market dynamics between 2001 and 2009 and pro-ceeds to evaluate the profitability and viability of the sector in a historical and comparative context. The metrics employed here are not meant to be exhaustive or portray a complete picture of the financial health of the entire industrial and technological base supporting European defense. Still, they provide a useful framework for understanding the state of the defense and security industry and its ability to absorb and respond to the changes described in the previous chapters of this report.

European defense and security companies are in a difficult position. Despite their important role in supporting Europe’s militaries, police forces, and first responders, they must compete with other private entities for capital. To do so, they must generate competitive returns for their own-ers and lenders. They must earn these returns while simultaneously investing in next-generation capabilities and meeting regulatory and political requirements, including those for profitability.

In the past decade, European defense and security companies have managed well in this environment. Compared to their commercial peers, they have delivered matching or superior re-sults for profitability and return on investment. Despite flat or declining defense spending within Europe in the past nine years, the industry grew due in part to higher expenditures on European homeland security and greater exposure to foreign markets. However, changes in demand and the regulatory framework could reverse this trend. The defense and security industry’s financial results are an important element in analyzing whether the industry can remain attractive to inves-tors and whether it is investing enough to remain viable.

The CSIS ESDS IndexTo assess the financial health of the European defense and security sector, CSIS created the Eu-ropean Security, Defense, and Space, or ESDS, Index. The Index is made up of 22 publicly traded companies across Europe for whom defense and security are core activities.1 In 2009, revenue for these companies ranged from 5 million euros to 23 billion euros. Companies in the Index repre-sent both the hardware and services sectors and include both established and emerging defense capabilities. Many operate nondefense businesses. Note that given the large number of privately held or government-owned European defense and security companies, the CSIS ESDS Index does not reflect the entire European defense and security industry. The Index does include, however, nearly all the publicly traded companies in the European defense and security sector. The CSIS

1. The full list of companies in the CSIS ESDS Index can be found at the end of Appendix 1, Methodol-ogy, on page 56.

the financial health of the european industrial base supporting defense 3


ESDS Index is evaluated against the industrial components of the MSCI Europe Index.2 Data are aggregated for each of the companies in the respective indices to get weighted totals or averages. The financial data are obtained from commercial services and company filings.

Market Dynamics: Defense Spending and Industry Revenue From 2001 through 2009, revenue for companies in the CSIS ESDS Index grew from 79 billion euros to 117 billion euros3 (in constant 2009 euros), a 49 percent gain, for a CAGR of 5.1 percent. In contrast, total European NATO defense spending during the same period fell from 240 billion euros to 207 billion euros, a decline of 2 percent annually (in constant 2009 euros). Likewise, ag-gregate European NATO spending on Equipment (and the associated R&D) fell from 43 billion

euros to 40 billion euros, a decline of 1 percent annually (Chart 15; also see Chart 7, Changes in Total European Defense Spending by Defense Spending Categories, page 8).

2. The MSCI Europe Industrials Index is made up of 11 companies varying in activity and scope, pri-marily capital-goods manufacturers but also representing the service sector. The analyses presented here use historical data for the period 1995 through 2009 for the Index members as of November 2009. MSCI Industrials members Abertis, Societe Des Autoroutes, and Atlantia SPA, all of which operate toll roads, are excluded.

3. European Aeronautics Defense and Space excluding Airbus.

Chart 15. CSIS ESDS Index: Revenue and European NATO Defense Spending (2001–2009, in constant 2009 billion euros)

Sources: Bloomberg; NATO Defense Expenditures; analysis by CSIS Defense-Industrial Initiatives Group.

0

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European NATO Equipment Budget Subcategory CSIS ESDS Index

chapter 3 ◊ european industrial base supporting defense | 33

Two factors help explain the growth in ESDS Index revenue that began in 2005 despite falling defense spending. Internally, after the terrorist attacks in the United States, Madrid, and London, European governments and firms spent more on domestic security measures.4 While national and European-level data on homeland security spending are not available, several reports indicate that higher security spending is a major growth driver for Europe’s defense and security firms.5

Externally, non European foreign sales provided major revenue growth for European compa-nies. As defense budgets fell or were flat at home, European firms increasingly looked to foreign markets for growth and found record defense expenditures in the United States.6 Chart 16 shows the CSIS ESDS Index revenue mix by geographic origin for 2003 and 2009. Revenue originating outside Europe more than doubled and increased from 35 percent of total ESDS Index revenue in 2003 to 55 percent by 2009.7 Revenue from European markets remained virtually unchanged between 2003 and 2009, though its contribution to total ESDS Index revenue fell by 20 percentage points. This shift in revenue by geographic origin means that European markets are no longer the main revenue source for ESDS Index companies—among the largest in Europe.

4. Kristin Archick et al., “European Approaches to Homeland Security and Counter Terrorism,” Con-gressional Research Service, July 24, 2006.

5. See, for example, Frost & Sullivan, “European Homeland Security—A Market Opportunity Analysis,” July 13, 2005, http://www.frost.com/prod/servlet/report-brochure.pag?id=B447-01-00-00-00.

6. Tom Chruszcz and Elisabetta Zorzi, “First Half Results of European Aerospace & Defence Compa-nies Reflect Benign Industry Dynamics,” Fitch Ratings, August 13, 2007.

7. Excluding European Aeronautics Defense and Space.

Chart 16. CSIS ESDS Index: Revenue Mix by Geographic Origin (2003, 2009, in constant 2009 billion euros)

Note: Excluding Dassault Aviation and Lubawa due to limited data availability.

Sources: Bloomberg; company filings; analysis by CSIS Defense-Industrial Initiatives Group.

Europe Europe

N. America

N. AmericaRest of World

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ProfitabilityIn the medium and long terms, profitability is critical to a sector’s attractiveness to outside inves-tors. Low profitability relative to other sectors will hinder an industry’s ability to finance its opera-tions. In the context of the industrial and technological base supporting European defense, to the extent profitability shrinks, the industry may contract as well, as companies and capital gravitate toward more lucrative sectors. Three profitability measures provide a quick read on comparative industry health: gross margin, operating margin (EBIT margin8), and cash flow return on invest-ment (CFROI). On average and in aggregate, by these measures, companies in the ESDS Index have performed well compared to their peers in the MSCI Europe Industrials Index.

Gross Margin Gross margin is the ratio of gross profit to sales. It is the portion of revenue left after paying the direct cost of goods and services sold. As shown in Chart 17, revenue-weighted gross margin for the ESDS Index has been lower than that for the broader industrial sector. However, the average

company in the ESDS Index has a higher gross margin than the average company in the MSCI Industrials Index. That is, smaller defense and security companies tend to have higher gross mar-gins than their larger defense competitors. The opposite is true of the MSCI Industrials, in which larger companies are likely to have slightly higher gross margins. For both indices, gross margin has been reasonably steady. The sharp decline in gross margin for the commercial MSCI Europe Industrials Index in 2008 and 2009 likely reflects the recession.

8. Earnings before interest and taxes.

Chart 17. CSIS ESDS and MSCI Europe Industrials: Gross Margin Comparison (1998–2009)

Sources: Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.

5%

10%

15%

20%

25%

-5%

0%

5%

10%

15%

20%

25%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

ESDS (revenue weighted) ESDS Avg. MSCI (revenue weighted)

MSCI Avg. ∆ MCSI-ESDS


EBIT Margin

Earnings before interest and taxes—EBIT—margin is a widely used measure of operating profit-ability. On a revenue-weighted basis, EBIT margins for the CSIS ESDS and the MSCI Europe Industrials indices were similar from 1995 through 2009 (Chart 18). On a per-company basis, the average company in the CSIS ESDS Index had a higher EBIT margin than the average MSCI Industrial company (Chart 19). As is the case with gross margin, smaller European defense and se-curity companies appear to have higher returns than their larger competitors. Operating margins improved for both indices in the early part of the decade, likely reflecting the benefits of higher revenue and an improving overall economic environment.

Chart 18. CSIS ESDS and MSCI Europe Industrials: EBIT Margin Comparison, Revenue Weighted (1995–2009)


0%

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CSIS ESDS Index MSCI Europe Industrials

Chart 19. CSIS ESDS and MSCI Europe Industrials: EBIT Margin Comparison, Index Average (1995–2009)


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Cash Flow Return on Investment (CFROI)Based on cash flow return on investment—CFROI—another widely used profitability metric, ESDS Index companies are substantially more profitable compared to other European industrial companies. CFROI compares the cash flow available after expenses have been paid—and sufficient investment has been made to continue current operations—to the total investment in the compa-ny.9 CFROI is an important profitability metric to understand. Return on investment often drives decisions to enter or exit an industry, meaning it can ultimately shape the breadth and depth of the defense industry and the capabilities it offers. As shown in Chart 20, CFROI for the CSIS ESDS Index has been higher than that for the MSCI Europe Industrials Index between 2001 and 2009.

Based on the metrics above, ESDS Index companies were generally at least as profitable as their commercial peers. Within the defense and security sector, on average, smaller companies re-ported better results than larger companies. On a cash flow basis, which investors consider among the most important measurements,10 ESDS Index companies performed substantially better than their commercial industry peers during the period evaluated.

9. Cash flow is the sum of EBIT plus depreciation and amortization minus capital expenditures minus the increase in net working capital, which in turn is the sum of accounts receivable and inventory, minus ac-counts payable. Investment is the sum of long-term and short-term debt and shareholders’ equity (including preferred stock).

10. Morgan Stanley, “Aerospace & Defense: 2010 Defense Survey Results and Analysis,” January 11, 2010, confidential source.

Chart 20. CSIS ESDS and MSCI Europe Industrials: Cash Flow Return on Investment, Revenue Weighted (2001–2009)


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Investment While profitability gauges how attractive an industry is to investors, the investment accounts—capital expenditures and R&D—provide perspective on how the industry itself views its market opportunity. Growing investment suggests that industry executives see greater opportunity, with the opposite suggesting pessimism about longer-term prospects. R&D spending indicates the industry’s investment in innovation and development of next-generation products and technolo-gies. Capital expenditures, in turn, measure the industry’s continuing investment in the assets it needs to remain in business, such as buildings and machinery. Companies in the ESDS Index show investment levels comparable to those reported by companies in the MSCI Europe Industrials Index. While R&D as a percentage of sales has been reasonably steady, capital expenditures have fluctuated.

Research and Development On average, ESDS Index companies have spent 4 percent to 5 percent of revenue on R&D, a level roughly comparable to that of their counterparts in the MSCI Europe Industrials (Chart 21). This suggests a consistent effort to develop new technologies and capabilities. Note, however, that the reported R&D data include government grants, subsidies, and tax credits as well as self-financed activity. This consistent level therefore represents to some extent the efforts of the relevant govern-ments. In contrast, on the commercial side, R&D as a percentage of sales declined, likely as a result of management deciding that a point had been reached at which more R&D expenditures would not lead to higher sales.

Chart 21. CSIS ESDS and MSCI Europe Industrials: R&D as Percentage of Revenue, Index Average (1995–2009)

Note: Excluding QinetiQ.


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Capital Expenditures On average, companies in the ESDS Index and the MSCI Europe Industrials had similar CapEx levels as a percentage of revenue (Chart 22). The comparable performance, regardless of changes in revenue or overall economic conditions, suggests ESDS Index and MSCI Europe Industrials companies took similar views on the longer-term prospects of their respective industries.

Chart 22. CSIS ESDS and MSCI Europe Industrials: CapEx as Percentage of Revenue, Index Average (2001–2009)


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| 39

4This chapter amalgamates the data from the preceding chapters to generate a novel way of look-ing at the European defense market. Combining the analysis of (1) defense spending trends, (2) changes in the defense acquisition regulatory framework, and (3) the financial health of the European defense and security industrial base yields new insights into how the European defense market is developing. This trend analysis presents the findings based on these three elements and discusses their implications for Europe’s ability to generate military capabilities in the future.

Offsetting Budget Declines with Troop ReductionsThe differences in European defense spending trends depending on the unit of analysis—total spending or spending per-soldier—as described in Chapter 1 suggest that substantial troop reduc-tions within the European armed forces have outpaced defense budget reductions. The resulting ability to spread constant or slightly reduced defense budgets across a smaller number of soldiers could enable European states to create smaller yet better-trained and better-equipped forces.

The probability of Europe achieving any sizeable increases in defense spending in the coming years is unlikely, given European political and socioeconomic realities. Former NATO General Secretary Jaap De Hoop Scheffer stated, “I do not expect defense budgets to go up. I’d be happy in fact if they don’t slide further. So let’s do more with the buck[s] we have.”1 One response to this demand could be a further concentration of available resources on smaller force structures, which could be more adequately equipped for the most likely mission scenarios. As of 2009, the com-bined armed forces of the 37 countries examined in this report still fielded almost 1 million more troops than the United States, leaving significant opportunity for further troop reductions and more savings in Personnel accounts. Secondary effects such as reduced Infrastructure spending due to base closures or a smaller bureaucracy supporting the military could further increase these savings numbers. Some of these measures will accrue initial upfront costs but would yield long-term savings that governments could shift to investment accounts.

However, the smaller decrease in European defense spending between 2001 and 2009 com-pared to the manpower reductions during the same period could also simply be a function of different rates of change, rather than relative scale of change. If that is the case, both defense spending and troop numbers might—in the long run—experience comparable relative reductions. This would suggest that the current gains in per-soldier spending—as outlined in Chapter 1—are temporary and that eventually, defense spending reductions would catch up with the chronologi-cally more compressed decline in military personnel, consuming most of the gains in per-soldier-level spending observed during the 2001–2009 timeframe.

1. Martin Banks, “NATO Chief Looks for EU Support on Defence Spending,” TheParliament.com, January 27, 2009, http://www.theparliament.com/policy-focus/regions/regions-article/newsarticle/nato-chief-looks-for-eu-support-on-defence-spending.

trend analysis


For the timeframe examined in this report, aggregate European per-soldier defense spend-ing reached its peak in 2007 and declined slightly in 2008 and 2009 (see Chart 1, Total European Defense Spending and Defense Spending per Soldier, page 2). These two data points align with the prediction of a long-term decline in per-soldier spending, but they could also be the result of year-to-year fluctuations. In addition, political or socio-economic crises may alter per-soldier spending trends quite rapidly in either direction. For instance, the longer-term effects of the global econom-ic recession—not fully reflected in the 2001–2009 data—will likely generate considerable pressure on total and per-soldier defense spending. The objective of maintaining stable European defense spending might therefore prove elusive for the future. For example, projections in the United Kingdom, which anticipate defense spending cuts of 10 to 20 percent over the upcoming years, appear to validate such concerns.2 Under these circumstances further troop reductions would be required to preserve the benefits obtained through past spending increases on a per-soldier level.

Changes in Demand Alter the Defense Market and Its ParticipantsThe tendency identified in 2001–2009 to reduce troop numbers might affect how European states allocate their defense resources. Relative spending priorities might continue to shift toward the O&M/Other and Equipment spending categories. The trends over the 2001–2009 timeframe pro-vide evidence for this assertion (see Chart 4, Per-Soldier European Defense Spending by NATO Defense Spending Categories, page 6, and Chart 6, Distribution of Total European Defense Spend-ing by NATO Defense Spending Categories, page 7).

This situation will likely have two interconnected impacts on demand:

■ European armed forces may obtain technologically more sophisticated equipment in smaller quantities and possibly for a higher per-unit price. Robustly growing Equipment spending per

soldier presages this trend, which should improve the capabilities of Europe’s armed forces; and

■ the possible trend to acquire fewer units of more advanced and expensive equipment may have an adverse effect on economies of scale and thus accelerate the drive toward more multi-national collaboration. The relative gains of collaborative defense equipment spending within overall defense equipment spending between 2005 and 2008 (see Chart 23) supports this assertion. Yet opting for more European collaboration within defense acquisition comes with its own set of problems: political interference in program management and disparate military requirements can lead to significant cost overruns and schedule delays, which might consume some or all of the projected savings resulting from better economies of scale. The delay ridden pan-European A400M airlift program must serve as a warning for these kinds of undesirable developments.

2. AFP, “U.K. Reassures Gates, Pentagon Over Defense Cuts,” Defense News, September 24, 2010, http://www.defensenews.com/story.php?i=4788495&c=POL&s=TOP.

chapter 4 ◊ trend analysis | 41

This dynamic on the government side could have considerable consequences for the European industrial base—the supply side—by driving consolidation. First, the need for more sophisticated equipment would expand R&D requirements as a key driver of innovation in the defense and security domains. This increasing demand might then further necessitate a concentration of avail-able defense resources through collaborative R&D strategies and spending and, on the industry side, through a preference to consolidate toward company structures that can support and inte-grate more complex R&D efforts and turn them more efficiently into useable products.3 With total R&D spending declining (see Chart 7, Changes in Total European Defense Spending by Defense Spending Categories, page 8), the pressure to implement such consolidation is strong. Efforts initi-ated in recent years by the EDA and the European Commission to coordinate defense and security R&D efforts are indicative of the desire to utilize resources more efficiently and to obtain more effective outcomes.4

As a second consequence, the European defense market framework might, through collabora-tive acquisition strategies and a more open and integrated defense market, become more compa-rable to its American counterpart. The European defense industrial landscape is therefore likely slated for a consolidation comparable to the one the U.S. industrial base underwent in the 1990s, although specific aspects—such as the existence of state-owned defense companies—will continue

3. Guy Ben-Ari and Matthew Zlatnik, “Aerospace & Defense: Inventing and Selling the Next Genera-tion,” DIIG Current Issues No. 11, May 12, 2009, http://csis.org/files/publication/090513_DIIG_Current_Is-sue_Number_11.pdf.

4. European Defence Agency, “A European Defence Research & Technology Strategy,” February 13, 2009, http://www.eda.europa.eu/WebUtils/downloadfile.aspx?fileid=494; European Commission, Towards a More Secure Society and Increased Industrial Competitiveness, Security Research Projects under the 7th Framework Programme for Research, May 2009, ftp://ftp.cordis.europa.eu/pub/fp7/security/docs/towards-a-more-secure_en.pdf.

Chart 23. Defense Equipment Spending for EDA Member States (2005–2008)

Sources: EDA Defense Data; analysis by CSIS Defense-Industrial Initiatives Group.

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to vary. The history of European collaboration has shown that mergers and acquisition activity occurred predominantly in areas where technological innovation, or development and production costs, made national stand-alone solutions less viable.5 This trend is likely to continue. Industry consolidation will therefore chronologically proceed down a complexity axis, with companies that offer less complex equipment being the last to consolidate.

Third, in addition to industry consolidation, the increase in European collaborative acquisi-tion programs could catalyze the emergence of a smaller number of potential prime contractors in the form of European champions. Medium-size or smaller companies might increasingly be relegated to subcontractor status or become prime contractors only in niche areas, as they will no longer offer the breadth of business and technological expertise needed to successfully take on these larger, more complex programs.

Effect on the Financial Health of the Defense and Security Industrial BaseCompanies in the European defense and security sector have performed well in recent years, both in absolute terms and compared to a sample of companies from other sectors. Boosted by higher domestic security spending and increased defense exports, their revenues grew steadily, despite largely falling or stagnant European defense spending and investment. Operating margins expand-ed, in line with those of companies from other sectors, and the defense and security companies continued to generate high levels of cash flow.

However, the changing demand structure in the European defense market will significantly af-fect its defense and security industrial base, despite the growing share of export revenue. The trend toward smaller, better-equipped forces will result in smaller orders for some items (such as boots and vehicles) or in bigger orders for others (such as armor and C4ISR6 systems). Smaller orders will put pressure on margins and cash flow as economies of scale are lost. Should the European Commission directives successfully open national markets to EU-wide competition, margins will face further pressure. To the extent buyers collaborate, orders may be larger but might also be less frequent. As a result, companies may be willing to reduce margins in order to win them.

It is unlikely that domestic security spending will increase at the rate necessary to replace defense sales. Further, U.S. defense investment is more likely to fall than rise, meaning exports to what in recent years has been a major customer may not be a sufficient source of further growth. A key question is whether European firms can enter new export markets. In other words, will the implementation of the EC directives create a supplier base that is more competitive globally?

Companies may have to seek growth and profits not by growing with the market, but by tak-ing share from one another. This will pose a challenge for national governments. Market share losses will eventually translate to job losses, businesses being sold to others, or both. Political leaders will have to decide how much of this they will accept, and what to do to allow the industry to continue to earn returns sufficient to attract capital. Companies will abandon the sector if cash

5. Jean-Pierre Darnis, Giovanni Gasparini, Christoph Grams, Daniel Keohane, Fabio Liberti, Jean-Pierre Maulny, and May-Britt Stumbaum, Lessons Learned from European Defence Equipment Programmes, Occasional Paper No. 69, European Union Institute for Security Studies, October 2007, http://www.iss.eu-ropa.eu/uploads/media/occ69.pdf.

6. Command, control, communications, computers, intelligence, surveillance, and reconnaissance.


flows fall to levels uncompetitive with other opportunities. Fewer industry participants ultimately may mean less innovation and fewer military capabilities.

Internal R&D and capital expenditures could serve as a barometer for the vitality of the defense and security sector. If falling margins and cash flows are complemented by decreasing internal R&D and capital expenditures, it may be that companies are becoming pessimistic about their long-term prospects and potentially are preparing to exit the market. In recent years, defense and security companies have invested at levels comparable to those of industrial companies, and government R&D spending has decreased but not dramatically so. This suggests that firms in the European industrial base supporting defense and security are confident about their medium- to longer-term opportunities, or at any rate as confident as their industrial counterparts are in their own respective markets.

Government and Industry Responses Will Determine Regulatory Reform ImpactThe responses of industry and national governments will shape the impact of regulatory reforms more than additional action by Commission officials. Regulatory reforms in tandem with the emerging changes on the demand side in the European defense market have put the European defense industry on a path toward increased consolidation. This consolidation may happen at dif-ferent speeds, depending on factors such as variance in government policies, the characteristics of specific market segments (e.g., shipbuilding, land vehicles), and individual company outlooks and strategies; yet it will occur. The exact composition of the consolidated industrial base will be deter-mined by the ability of different actors to manage and navigate through the unfolding changes.

For national governments, the preference for using defense spending as an instrument of in-dustrial policy is likely to prevail. Initially, governments might test the determination of the Com-mission to oversee and enforce the spirit of the procurement directive by ensuring that member states will not misuse the Article 346 exemption to favor their domestic industrial bases. National governments might also try to exploit loopholes within the directive to shield their domestic in-dustrial bases from foreign competition. Drafting solicitations that favor domestic solutions is an option for competitions with a smaller number of bidders that offer specific products or services.

Governments may also exploit exclusions explicitly mentioned in the EU procurement direc-tive. For instance, Article 12 exempts collaborative procurement programs that include non-EU member states, as well as contracts awarded by international organizations. Some countries might therefore conduct these specific types of collaborative programs with the secondary objective of circumventing the EU procurement directive. However, the projected fiscal gains from open com-petition are expected to exceed the cost savings from such collaboration, therefore making this loophole less desirable from the standpoint of overall efficiency.7 Nevertheless, for some states the prospect of a guaranteed work share for the domestic industrial base might outweigh the associat-ed cost inefficiencies. Furthermore, Article 13 of the EU procurement directive provides exclusion for contracts that fall within the framework of cooperative R&D programs among EU member

7. Keith Hartley, “The Future of European Defence Policy: An Economic Perspective,” Defence and Peace Economics 14, no. 2 (2003): 112.


states and have the potential to expand into the “later phases of all or part of the life-cycle of this [resulting] product.”8 Member states could again misuse these collaboration exclusions, distorting the defense market in favor of national preferences.

That said, such tactical maneuvers are not likely to alter the trajectory of the European defense and security industrial base toward consolidation driven by market forces. What remains to be determined is when, and under which specific circumstances, this consolidation will unfold. How individual European governments manage this transition will significantly affect the eventual size and composition of the industrial base.

Perceptions by national governments of the relative strengths and weaknesses of their vari-ous domestic defense industrial base sectors will influence their support for consolidation. The existence of a strong domestic industry segment would encourage governments to foster consoli-dation as a tool to elevate a national champion into a European or even a global player. The merger of Daimler Chrysler Aerospace of Germany, Aérospatiale-Matra of France, and Construcciones Aeronáuticas of Spain to create EADS—the European Aeronautic Defence and Space Company—is a case in point for this assertion.

In contrast, a scenario in which a defense industry segment is domestically fragmented or weak—and therefore more vulnerable to foreign takeovers—might fuel concerns over the poten-tial loss of this industry segment and its associated jobs and know-how to neighboring states. In this situation, national governments might be prone to adopt stalling techniques in which they shield their industry, in some instances enabling initial consolidation on the national level.

Interpretations and perceptions also play an important role on the industry side. The core question for European defense companies today is: How real is the EU procurement directive?

Companies that assume that the impact of the procurement directive will be only marginal—perhaps because they believe that the Commission will not prevent national governments from invoking Article 346, or that new loopholes will emerge that allow the preservation of the status quo—will see little need to adjust their business strategy.

In contrast, companies that perceive the directive as a game-changing mechanism in Euro-pean defense acquisition will reevaluate their strategies. Depending on their individual situa-tions—from an already multinational, integrated European champion such as EADS to second- and third-tier domestic players in a shielded national market—companies will reach significantly varying conclusions.

To seek mergers and acquisitions is one approach for companies anticipating that they will face a larger, more transparent market, with increased competition and new client structures. Such an approach, however, will also affect defense companies that do not foresee significant changes deriving from the directives, as the actions of their competitors will pressure them to respond. Ac-tions by companies that assess the directives as having a real impact may therefore initiate a trend that could further accelerate the push toward even greater consolidation of the European defense industry.

Lastly, an important yet often neglected factor is sustaining sufficient competition in Europe’s industrial base. The essential question in this regard is: How much consolidation is enough? Less competition may mean less innovation and higher prices for customers. On the industry side, the

8. Council Directive No 81/2009, art. 12, 13, O.J L 216/76, at 94 (2009).


focus will be to create structures that not only are viable within a European context but can also successfully compete on the global stage.

A Defense Market Supporting Greater International InvolvementOverall, the changes unfolding in the European defense market—on the demand and supply side as well as in the regulatory domain—are creating opportunities to free up and reallocate existing defense resources. European states could appropriate these resources in a manner consistent with national policies, i.e., toward improvements to force structures that enable more participation in international operations. International military operations in response to failing states or regional conflicts now complement territorial defense in European defense planning.9 This is well docu-mented in the official policies of many European states, which clearly cite participation in interna-tional operations as a key element of their national defense strategies.10

However, the possibility of generating savings in defense spending is a necessary but not suffi-cient condition for achieving this objective. Another component, which the defense market cannot supply, is the political will and leadership to channel freed-up resources to where they are needed most. Nevertheless, the European defense market is currently evolving in a manner that provides an enabling framework for European states to respond better to the pressing challenge of greater international involvement.

Today, European states deploy only a small fraction of their military forces in international operations. Note that the increases in the share of deployed troops since 2001 is driven primarily by the reduction in overall personnel count, rather than by substantial gains in absolute deploy-ment numbers.

A key question is whether the limiting factor for the number of European forces contributed to international operations has been a shortage of deployable troop contingents or a lack of politi-cal desire for military involvement. In this context, it is important to understand that European states display various levels of national ambition for defense and security policy, and in particular for participation in international operations. Deployment patterns that might appear as inad-equate contributions from a U.S. perspective might therefore be completely in line with what some European states perceive as appropriate.

9. Council Act, “A Secure Europe in a Better World: European Security Strategy (ESS),” adopted by the European Council on December 12, 2003, http://www.consilium.europa.eu/uedocs/cmsUpload/78367.pdf. Other key threats mentioned in the ESS are not primarily a domain for military operations and would there-fore instead be more closely associated with national security planning and non-military instruments.

10. Sebastian Giegerich, European Military Capabilities: Building Armed Forces for Modern Operations (London: International Institute for Strategic Studies, 2008), chapter 3.


Chart 24 and Figure 8 show that the majority of European troops today are not deployed. At the same time, statistics from the EDA indicate that in 2008 the number of total (land) forces of its member countries that were deemed deployable accounted for almost 27 percent of total military personnel.11 This in turn implies that political desire rather than troop availability has been the real limiting factor for European troop deployment ceilings.

However, this comparison between deployable troop numbers and actual deployed troop numbers does not capture the complete issue. EDA’s deployability numbers, for instance, do not take into account qualitative aspects for specific missions; certain high-demand capabilities, such as strategic and tactical lift, or special operations forces might be unavailable in sufficient numbers to increase relevant contributions, despite a rather abundant availability of deployable troops.

Locking in or even expanding the gains realized to date in European per-soldier defense spending would provide European states with the resources to modify the qualitative and func-tional composition of their armed forces and consequently to increase troop availability for key contributions to international operations. However, it is possible that higher per-soldier spending levels would be sustainable only temporarily; European governments may reduce defense budgets to the point where relative cuts in total spending eventually match faster declines in troop num-bers, consuming gains in per-soldier-level spending. Such a scenario could materialize if the glob-al economic recession, which is not fully reflected in the 2001–2009 data, continues to generate pressure on European defense spending levels and no further troop reductions are implemented.

The observed relative shifts toward investment accounts are essential for improving European defense capabilities. This prioritization of investment accounts is a possible indicator of more

11. European Defence Agency, “Defense Data of EDA Participating Member States in 2008,” December 23, 2009, http://www.eda.europa.eu/defencefacts/, 19 and 38.

Chart 24. European Troop Deployments vs. Total Troop Numbers

Note: Troop deployment numbers do not include OSCE operations or permanent oversea deployments that are not part of military contingency operations.


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mission-oriented defense spending and a commitment of states to modernize the capabilities of their armed forces. Yet macro trends, such as further cuts in overall defense budgets, could force European states to reverse this trend.

On the industry side, a single, more competitive European defense market and a more inno-vative, efficient industrial base could provide military capabilities at better value for money. This could again result in savings that could be reallocated to create force contingents more fitting to the requirements of current and future international operations.

Demand developments toward greater harmonization in acquiring defense products and services—initiated by a need to leverage better economies of scale as described in the “Changes in Demand Alter the Defense Market and its Participants” section, page 40—could equally result in considerable savings. The ideal scenario of a centralized EU defense procurement mechanism, which would yield the greatest savings, appears to be unattainable.12 It would de facto transfer the task of assessing security threats and defining and evaluating adequate responses, in the form

12. Hartley, “The Future of European Defence Policy,” 112.

Figure 8. European Troops Deployed and Deployments as a Share of Total Troops (2009)

Note: Troop deployment numbers do not include contributions to OSCE operations or permanent overseas deployments that are not part of military contingency operations.



of force structures and defense acquisition, to the EU level. If implemented, it would eventually culminate with the creation of an EU military force to replace national armed forces. Although appealing for its efficiency, from a political standpoint it remains wishful thinking (or a nightmare scenario, depending on the individual outlook). The question is therefore: What improvements are realistically achievable on the demand side?

An alternative instrument for achieving higher efficiency on the demand side, in particular for smaller- to medium-sized European countries, could be military specialization and the devel-opment of complementary niche capabilities.13 Such a strategy would enable nations that cannot cover the full spectrum of modern military operations nevertheless to provide meaningful and valuable capabilities without duplicating acquisition efforts across Europe. Instead, national re-sources would be bundled toward the acquisition of niche capabilities in large enough numbers to cover the quantitative requirements of multinational operations. Yet only a few European coun-tries explicitly state this approach as an objective in their defense policy documents.14 The 2000 Dutch Defense White Paper provides the following explanation for why European states forego the economic benefits of specialization:

In principle, increasing international cooperation on defense should lead to the formation of task specialization. So far, however, the path towards Allied task specialization has not been an easy one. The Netherlands has regularly argued in favor of task specialization in bilateral contacts and international organizations. Other countries have shown little enthusiasm how-ever. The most important reasons for this are: reluctance to make themselves dependent on, sometimes limited, contributions from other countries and the complexity of the coordination of specialized units of varying nationalities when they have to be deployed.15

This general aversion toward specialization and complementary capabilities is reflected in several national defense policy documents. The 2006 German Defense White Paper, for example, argues that “sub-capabilities can be dispensed with only if this is justifiable and if it can be ensured that the forces of allied or partner nations keep such sub-capabilities available.”16 So although military specialization could ameliorate and mitigate inefficiencies on the demand side of the European defense market, it does not appear to be a viable political option.

This leaves ad hoc collaboration as the primary and currently only realistic option to benefit from a more integrated and coordinated procurement process. For EDA member countries, the share of collaborative defense equipment procurement to total Equipment spending rose from 18.0 percent in 2005 to 24.2 percent in 2008 (Chart 23, page 41). Collaboration among European

13. Michèle A. Flournoy, Julianne Smith, Guy Ben-Ari, Kathleen McInnis, and David Scruggs, Euro-pean Defense Integration: Bridging the Gap between Strategy and Capabilities (Washington, D.C.: CSIS, 2005), p. 40 and pp. 75–76, http://csis.org/files/media/csis/pubs/0510_eurodefensereport.pdf.

14. Chief Head of Defence (CHOD) Norway, “Norway’s Armed Forces: A Summary of CHOD Norway’s Defence Study 2003,” 2003, 6, http://www.mil.no/multimedia/archive/00032/The_new_defence_pdf_32767a.pdf; Dutch Ministry of Defence, “Chapter 2: An Outline of the Future Armed Forces,” in Neth-erlands: Framework Memorandum for the 2000 Defence White Paper, 1999, http://www.pdgs.org/Archivo/dutch-chapter2.htm.

15. Ibid.16. German Federal Ministry of Defence, White Paper 2006 on German Security Policy and the Future

of the Bundeswehr, 2006, 81, http://merln.ndu.edu/whitepapers/Germany_White_Paper_2006.pdf.


member states is the most common form, with 90.0 percent of total collaboration in 2005 and 87.6 percent in 2008 being intra-European.17 Collaboration is appealing because it offers many op-portunities for efficiency gains and other benefits—such as increased interoperability, technology sharing, and a strengthening of the European defense industrial base—without the political long-term commitments that truly integrated procurement would require.18

However, collaboration in defense acquisition comes with its own set of limitations and chal-lenges—such as those arising from dissimilar requirements, resources, and acquisition cycles, or friction points in organizational culture—that can often undo a considerable share of the expected gains.19 NATO’s Allied Ground Surveillance (AGS) program, which was repeatedly delayed and experienced significant cost growth because of dissenting views on technology sharing, funding shortfalls from individual countries, and disagreements of the fleet composition, illustrates the potential pitfalls of collaborative acquisition. The NH-90 transport helicopter constitutes another negative example in which expected economies-of-scale gains in a collaborative effort have been largely denied by a lack of requirements harmonization of the partner countries. The feasibility of collaboration as a tool to improve efficiency on the demand side depends therefore on the ability to improve and standardize collaboration processes that lead to predictable and repeatable out-comes. Organizations such as OCCAR can act as a repository for process-driven lessons learned in collaborative defense acquisition. Other recent projects such as the European Air Transport Command take this principle a step further by pooling the operation of in-service assets to realize savings throughout the equipment life cycle.20

SummaryThe analysis in this report presents key budgetary, regulatory, and industry trends for the Europe-an defense market. Facilitated by regulatory reform, the demand and supply sides of the European defense market might continue to shift toward increased collaboration and consolidation. Eco-nomic forces have been, and will remain, the primary driver for these developments.

Many of the ongoing changes in the European defense market have the potential to free up defense resources. European governments could in turn use these resources to align their forces more closely with current defense policies and ongoing military missions. Yet the lingering reces-sion and its associated effects, war weariness among some European voters, and non-defense spending priorities in key European countries will create challenges for defense spending trends. Can these demands be de-conflicted with aspirations for a more robust European defense and security policy? At the heart of this problem lies the issue of whether the political leadership can

17. European Defence Agency, “Defence Data 2008,” November 17, 2009, 15, http://www.eda.europa.eu/WebUtils/downloadfile.aspx?fileid=785.

18. Darnis et al., Lessons Learned from European Defence Equipment Programmes, 12–13.19. Richard C. Catington, Ole A. Knudson, and Joseph B. Yodzis, Transatlantic Armaments Coopera-

tion: Report of the Military Research Fellows DSMC 1999–2000 (Ft. Belvoir, Va.: Defense Systems Manage-ment College, August 2000), chapter 6; Darnis et al., Lessons Learned from European Defence Equipment Programmes, chapter 3.

20. “Europe’s Air Transport Command Agreement,” Defense Industry Daily, May 25, 2007, http://www.defenseindustrydaily.com/european-air-transport-command-agreement-signed-03326/.


withstand pressures to transfer significant resources out of the defense sector and instead reallocate them more efficiently within the defense budget. The key determinant for future Euro-pean military capabilities is therefore primarily political will rather than available resources, but analysis of the benefits of reallocation can help strengthen political will.

Possible further reductions in European force structures constitute an additional core issue with direct implications for defense spending and the defense market. As elaborated earlier, a decreased emphasis on territorial defense and demographic developments will most likely call for more cuts in troop numbers in the long run.

This demographic factor needs to be balanced with military requirements and organizational economies of scale, especially for small and medium-sized European countries. Europe’s aggregate active troop level is still significantly higher than that of the United States. Further troop draw-downs might enable European states to offset potential declines in total budget sizes, perhaps as necessitated by the ongoing economic recession, by preserving upward trends in defense spend-ing per soldier. Yet as an analytical underpinning, detailed manpower studies might determine adequate and feasible force sizes. This process might also facilitate a reconsideration of military specialization.

On the regulatory side, it remains to be seen how successful the European Commission will be in enforcing its new directives and facilitating a more unified European defense market. It will be equally interesting to observe what segments of the European defense and security industry will benefit the most from the gradually changing operating environment and how the defense and security industry as a whole will fare in the larger economic and financial marketplace.

The long-term effects of the global economic recession will likely create pressures on all the components of the European defense market. Yet this development does not necessarily have to be detrimental, as it could also provide powerful incentives to foster political will to remove ineffi-ciencies on the demand and supply side as well as in the regulatory domain.

The ways in which the various actors will manage change in the European defense market present overall a wide array of intriguing research issues. The Defense-Industrial Initiatives Group at CSIS will continue to monitor and analyze these and other questions regarding the European defense market.

| 51

The analysis and the associated projections presented in this report are based on the current tra-jectories of key factors or on predictions about how their paths may alter in the near-term future. The validity of the insights provided is therefore linked to the future developments of these factors. Unforeseen changes such as a worsening of the economic crisis or a radical change in the security outlook of European states might move European defense trends as well as the European defense market into alternative directions. But even less drastic changes have the ability to change the future European defense landscape considerably.

Some indicators are less suitable for predicting such shifts due to their predominantly lag-ging characters. This category includes, for instance, defense budgets or annual revenue and profit numbers for defense companies. All three would exhibit delayed responses to occurring changes. For example, due to low responsiveness, the 2008 defense budget numbers of European states did not reflect the fiscal pressures of the economic crisis despite it already affecting Europe consider-ably during that year. Equally, the revenue and profit numbers of most defense companies are determined by rather long-term contract structures, which means that a worsening of the demand situation would not be visible for a significant amount of time. A further example of a lagging indicator is reductions in troop numbers, as they are predominantly implemented in response to macroeconomic or geopolitical changes, such as declining defense budgets or alterations in the security environment. In addition, they normally require considerable amounts of transition time for implementation.

Other factors are more suitable as leading indicators and can validate whether the develop-ment path this report has outlined for the European defense market will indeed materialize. For the assertion that European states will continue toward smaller yet better-equipped forces, the rel-ative spending shares of the R&D and the Equipment budget categories constitute key indicators. The former reflects the commitment of European states to invest in tomorrow’s capabilities of their armed forces. The latter provides an indicator for the level of the modernization and improvement efforts for the near-term future, due to the multiyear character of many acquisition programs. For the same reasons, spending levels for collaborative acquisition and R&D programs are a suitable precursor for future tendencies toward rationalizing the European demand side.

On the supply side, internal R&D and capital expenditures give a reliable testimony on the market outlook of European defense companies. Declining resource allocations in these areas hint toward a pessimistic standpoint, which does not warrant investments in future capabilities; meanwhile, stable or even increasing investments point into the opposite direction. However, the validity of these indicators for the future of the European defense market is somewhat limited, as many European defense companies serve a global customer base. Any decisions on R&D and capital expenditures are therefore influenced by a global market outlook rather than an exclusively European one.

key indicators for future developments5


Mergers and acquisitions or divesture activities form a key indicator for the report’s projec-tions on the consolidation and opening up of the European defense market. The European defense industry will initiate major structural changes only if it concludes that national defense markets will indeed be increasingly replaced by a single European market. The 2009 and 2010 divesture activities of the U.S. defense industry in anticipation of the impact of reformed rules on organiza-tional conflict of interest in the United States showcase the leading character of industry behavior toward forthcoming regulatory change. The actual implementation strategies of individual mem-ber states for new EU regulations as well as the EC’s level of determination to enforce the spirit of its new directives provide a more delayed yet at the same time more tangible indicator for the extent to which the European defense market will really open up.

| 53

appendixes

Appendix 1: Methodology

Appendix 2: Key European Defense Data by Country

Appendix 3: Total and Per-Soldier European Defense Spending by Country in Euros (2001–2009)

Appendix 4: Total and Per-Soldier European Defense Spending by Country in Dollars (2001–2009)

Appendix 5: Total and Per-Soldier European Defense Equipment Spending by Country (2001–2009)

Appendix 6: Total and Per-Soldier European Defense R&D Spending by Country (2001–2009)


Data SourcesAny effort to analyze European defense spending will inevitably encounter data availability and fidelity challenges. Data granularity and quality varies considerably across individual countries, with NATO member countries generally offering the most comprehensive datasets, followed by non-NATO European Union member states. This report relies heavily on NATO’s datasets on defense expenditure, supplemented by data from Bloomberg, the European Defense Agency, the International Institute for Strategic Studies (IISS), the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the Stockholm International Peace Research Institute (SIPRI), and several ministries of defense. Although individual defense budgets would have offered the most direct data sources, this report mostly refrained from using them, as individual budget documents apply a wide range of accounting methods and data depth. This would have in turn further complicated cross-country comparisons, which were mitigated through the primary utilization of NATO accounting standards. The integration of different data sources and varying data availability also raised the challenge of unintended sample biases and accounting methods with regard to trends and comparisons. The authors tried to account for these limitations in the analysis and provided corresponding notes in their findings and figures.

Data AnalysisThe diversity of Europe as a unit of analysis creates a number of challenges. For instance, while the euro has established itself as Europe’s lead currency, there are still a significant number of other currencies in use throughout the continent. The assessment of total values, such as defense spend-ing in 2009 as well as aggregate trends for regions and for Europe as a whole, necessitated a single unit of measurement, for which the euro was chosen. To capture only real-term effects, all trends are assessed on a constant 2009 basis applying deflators from the IMF, unless otherwise noted. This created an additional challenge for non-euro countries, as inflation differentials are already partly included in exchange rates. For those countries, the combination of currency exchange and deflat-ing creates certain inaccuracies. However, the authors believe that these deviations are marginal enough to not significantly distort the results of the analysis.

Another issue in conducting the analysis has been the imbalance in the availability of data for individual countries, which makes the aggregation of data at regional and European levels challenging. The analysis follows a conservative approach and includes only countries with data availability for the full time series (unless otherwise indicated) to avoid inadvertent distortions of results based on incomplete datasets. Ten countries have complete time series for all the categories. An additional six countries have complete time series for the NATO categories, and an additional five countries have a complete time series for the R&D category. The table on page 56 lists the indi-vidual countries with complete time series data.

Most of the data presented in this report’s charts, figures, and tables has been currency-con-verted and adjusted for inflation. The numbers will therefore in many cases not match the raw data provided in the sources listed underneath each chart, figure, or table. The CSIS Defense-Industrial

Appendix 1. Methodology

appendix 1 | 55

Initiatives Group primarily used Bloomberg and the World Economic Outlook report of the IMF for these adjustments.

Methodology for Defining Regions The integration of Europe has considerably accelerated since the fall of the Berlin Wall and the subsequent expansion of NATO and the EU. Today, there exist a multitude of cross-border coop-eration and collaboration efforts—such as the EU Battlegroups, NATO Response Force, and mul-tinational defense acquisition efforts—in the defense and security sector within Europe. Many of these activities overlap geographically and extend beyond the forcing function of countries sharing a common border. Acknowledging these efforts was therefore a necessary yet not sufficient crite-rion for determining the regional breakdown applied in this report. Additional aspects that were taken into consideration were geography, homogeneity with regard to socioeconomic and cultural factors, and roughly comparable defense budget policies. The objective was to create subunits of analysis that allow meaningful comparisons. With this goal in mind, the three major European powers—France, Germany, and the United Kingdom—were treated as their own region due to their weight in European defense spending rather than in combination with other countries. (See Figure 2, Regional Breakdown, page 11, for an overview of the breakdown used in this report.)

Scope of Europe for the Report Analysis Unfortunately, there exists no universally accepted definition of Europe. This report chose to focus its analysis on 37 European countries. The selection of countries was driven by geographical loca-tion as well as membership in the EU and NATO.

It should also be noted that not all analytical steps conducted throughout this report apply to all 37 countries. In some cases data availability or data sources used (e.g., NATO, EDA, OECD) limited the analysis and any deriving insights to certain countries. In other cases the membership in organizations limited the applicability with regard to the sample group. The discussion about regulatory reforms of the EU, for instance, is primarily relevant for EU member states. This chang-ing frame of analysis reflects the nonuniform character of Europe today and needs to be taken into consideration when assessing the report’s findings.

Defense Spending Categories The defense spending category breakdowns used for the functional analysis derive from two different sources. The four categories of Equipment, Personnel, Infrastructure, and O&M/Other originate from NATO sources, and complete time series are available only for countries that joined NATO before 2004. Trends in these categories reflect only data from those countries and therefore have limited validity for other countries. However, data are available for countries representing 95 percent of total European defense spending. The defense R&D category is provided by the OECD and is, with few exceptions, available only for OECD countries. Trends in defense R&D there-fore capture only data from that country group and therefore have only limited validity for other countries. In the case of defense R&D, complete time series are available for 15 countries repre-senting 80.5 percent of total European spending. The sample groups used in both instances are not congruent due to data availability, raising the possibility that varying individual country dynamics


skew results. This also complicates cross-category comparisons between R&D and the four NATO categories. In addition, the R&D category numbers are not complementary to NATO’s defense spending categories. In fact, R&D spending and the four NATO defense spending categories are not mutually exclusive, but partially overlapping, as NATO subsumes R&D spending in the equip-ment and other categories. This prohibits an aggregation of data for the five defense spending categories. In this context it should also be noted that the relative size of defense R&D spending to total defense spending is inflated for some countries, as the budget for defense R&D spending is not entirely included in the defense budget but sometimes supplemented by contributions—in some cases considerable—from other government budgets.

Companies in the CSIS ESDS Index

Company Name Country Company Name Country

Babcock Intl Group UK Qinetiq Group UK

BAE Systems UK Rheinmetall Germany

Chemring Group UK Rolls-Royce Group UK

Cobham UK SAAB Sweden

Comrod Communication Norway Safran France

Dassault Aviation France Serco Group UK

Finmeccanica Italy Simrad Optronics Norway

Indra Sistemas Spain Thales France

Lubawa Poland Ultra Electronics Hldgs UK

Meggitt UK VT Group UK

OHB Technology Germany Zodiac Aerospace France

Countries with Complete Time Series Data

Country Complete Time Series Country Complete Time Series

Austria R&D Category Netherlands All Categories

Belgium All Categories Norway All Categories

Czech Republic NATO Categories Poland NATO Categories

Denmark All Categories Portugal All Categories

Finland R&D Category Romania R&D Category

France All Categories Slovenia R&D Category

Germany All Categories Spain All Categories

Greece NATO Categories Sweden R&D Category

Hungary NATO Categories Turkey NATO Categories

Italy All Categories UK All Categories

Luxembourg NATO Categories

appendix 2 | 57

Appendix 2. Key European Defense Data by Country

Note: The troop numbers for Switzerland include only professional soldiers. The R&D spending category is not mutually exclusive with the NATO categories due to different data sources. R&D spending is accounted for twice in this table, once directly in the R&D category and once combined in the equipment and other categories. Due to these caveats, the combined budget category aggregates do not match the aggregate values for total defense spending.

Sources: NATO Defense Expenditures; SIPRI Military Expenditure Database; OECD Main Science and Technology Indicators; IISS Military Balance; Bloomberg; analysis by CSIS Defense-Industrial Initiatives Group.

2009 Spending in millions of eurosLCU to Euro Exchange RatesCountry

Total Defense

Equip-ment Personnel

Infra- structure

O&M/Other

R&D (2008 values)

Troop Numbers

Troop Deploy-ments

* Albania 179 40 91 13 34 n/a 14,295 326 0.01

^ Austria 2,504 n/a n/a n/a n/a 0 27,300 1,057 1.00

^ * Belgium 4,048 332 3,016 89 611 6 36,000 1,006 1.00

Bosnia and Herzegovina

190 n/a n/a n/a n/a n/a 11,099 10 0.51

^ * Bulgaria 791 112 468 51 159 n/a 34,975 628 0.51

* Croatia 820 84 594 12 130 n/a 18,600 436 0.14

^ Cyprus 646 n/a n/a n/a n/a n/a 10,050 2 1.71

^ * Czech Republic 2,258 506 1,041 88 623 20 24,000 873 0.04

^ * Denmark 3,123 309 1,758 12 1,043 12 19,000 973 0.13

^ * Estonia 314 56 110 31 117 n/a 4,750 186 0.06

^ Finland 2,580 n/a n/a n/a n/a 51 22,600 651 1.00

^ * France 39,190 10,581 19,321 862 8,426 4,077 352,771 8,832 1.00

^ * Germany 34,166 6,013 18,176 1,640 8,371 1,189 254,000 7,559 1.00

^ * Greece 7,263 2,026 4,125 58 1,053 n/a 133,000 823 1.00

^ * Hungary 1,068 136 538 42 352 3 19,000 855 0.00

^ Ireland 1,032 n/a n/a n/a n/a 0 10,460 718 1.00

^ * Italy 21,946 2,480 16,218 307 2,919 125 197,000 7,667 1.00

^ * Latvia 487 26 289 31 141 n/a 5,745 175 1.42

^ * Lithuania 462 75 281 11 95 n/a 8,850 291 0.29

^ * Luxembourg 179 50 84 8 36 0 900 35 1.00

Macedonia 139 n/a n/a n/a n/a n/a 8,000 178 0.02

^ Malta 36 n/a n/a n/a n/a n/a 1,954 0 1.00

Moldova 1,839 n/a n/a n/a n/a n/a 5,998 0 0.06

Montenegro 41 n/a n/a n/a n/a n/a 3,127 0 1.00

^ * Netherlands 8,733 1,537 4,375 297 2,533 77 51,000 2,254 1.00

* Norway 4,464 857 2,098 246 1,268 111 19,000 673 0.11

^ * Poland 5,277 797 3,361 243 876 36 100,000 3,432 0.23

^ * Portugal 2,671 254 2,062 3 350 8 38,000 646 1.00

^ * Romania 1,643 141 1,296 15 191 16 73,350 1,195 0.24

Serbia† 684 n/a n/a n/a n/a n/a 29,125 6 0.01

^ * Slovakia 948 125 529 43 251 8 16,531 618 0.03

^ * Slovenia 612 53 408 24 128 24 7,200 559 1.00

^ * Spain 12,196 2,122 7,159 281 2,647 1,653 134,000 2,361 1.00

^ Sweden 3,800 n/a n/a n/a n/a 338 13,050 678 0.09

Switzerland 2,958 n/a n/a n/a n/a n/a 4,059 232 0.66

* Turkey 7,807 1,366 4,504 250 1,686 n/a 493,000 1,874 0.46

^ * United Kingdom 42,609 10,226 15,552 256 16,575 2,564 197,000 9,508 1.12


Appendix 3. Total and Per-Soldier European Defense Spending by Country in Euros (2001–2009)

Total Defense Spending (constant 2009, in € millions)CAGR

‘01-’092001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania 75 74 79 92 98 121 150 178 179 11.6%

^ Austria 2,311 2,272 2,368 2,375 2,328 2,231 2,661 2,572 2,504 1.0%

^ * Belgium 3,983 3,866 3,911 3,838 3,707 3,659 3,948 4,300 4,048 0.2%


n/a 314 218 195 163 156 156 169 190 n/a

^ * Bulgaria 737 743 755 739 747 740 867 857 791 0.9%

* Croatia 887 968 767 678 676 759 784 912 820 -1.0%

^ Cyprus 438 299 290 303 331 326 309 311 646 5.0%

^ * Czech Republic 1,609 1,868 1,954 1,846 2,016 2,123 1,986 2,137 2,258 4.3%

^ * Denmark 3,309 3,279 3,183 3,198 3,041 3,322 3,208 3,329 3,123 -0.7%

^ * Estonia 145 173 200 211 263 295 358 346 314 10.2%

^ Finland 1,861 1,890 2,186 2,319 2,382 2,432 2,312 2,493 2,580 4.2%

^ * France 43,277 44,174 45,475 46,625 45,600 46,681 46,733 45,519 39,190 -1.2%

^ * Germany 34,875 34,992 34,515 33,416 32,776 31,954 31,989 32,868 34,166 -0.3%

^ * Greece 8,442 5,993 5,099 5,572 6,090 6,329 6,322 6,974 7,263 -1.9%

^ * Hungary 1,609 1,655 1,705 1,591 1,597 1,346 1,439 1,338 1,068 -5.0%

^ Ireland 1,047 1,005 958 972 987 991 1,018 1,064 1,032 -0.2%

^ * Italy 29,696 30,258 30,463 30,542 29,321 28,336 21,827 22,801 21,946 -3.7%

^ * Latvia 163 255 267 278 308 387 426 447 487 14.7%

^ * Lithuania 313 340 409 428 421 455 505 513 462 5.0%

^ * Luxembourg 213 190 201 211 213 209 216 146 179 -2.1%

Macedonia 300 131 119 123 116 111 128 117 139 -9.2%

^ Malta 35 34 35 37 38 38 38 39 36 0.5%

Moldova 14 16 14 11 14 18 18 21 18 3.2%

Montenegro n/a n/a n/a n/a n/a 49 45 50 41 n/a

^ * Netherlands 8,058 8,008 8,112 8,162 8,191 8,531 8,649 8,563 8,733 1.0%

* Norway 3,841 4,946 4,466 4,375 5,120 4,273 4,564 4,476 4,464 1.9%

^ * Poland 4,779 4,505 4,141 4,266 4,971 5,393 6,179 6,076 5,277 1.2%

^ * Portugal 3,137 2,424 2,361 2,522 2,722 2,628 2,468 2,521 2,671 -2.0%

^ * Romania 2,420 2,003 1,610 1,709 2,023 2,142 2,172 2,167 1,643 -4.7%

Serbia† 1,442 1,541 1,226 1,022 743 733 871 855 684 -8.9%

^ * Slovakia 892 905 959 892 967 980 992 1,015 948 0.8%

^ * Slovenia 374 415 431 458 466 534 538 569 612 6.4%

^ * Spain 10,030 11,612 11,283 11,657 11,608 12,286 12,686 12,719 12,196 2.5%

^ Sweden 5,340 5,259 5,221 4,882 4,842 4,777 4,929 4,224 3,800 -4.2%

Switzerland 3,180 3,242 3,092 2,982 2,913 2,595 2,558 2,757 2,958 -0.9%

* Turkey 25,580 17,630 13,117 11,400 11,561 11,733 10,117 10,550 7,807 -13.8%

^ * United Kingdom 46,178 46,404 43,655 44,556 49,701 50,890 53,130 47,568 42,609 -1.0%

* NATO member state

^ EU member state

† Until 2006 Serbia & Montenegro

appendix 3 | 59

Appendix 3 (continued)

Per-Soldier Defense Spending (constant 2009, in €)CAGR

‘01-’092001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania 2,761 3,364 3,678 4,293 4,563 11,014 13,587 12,426 12,509 20.8%

^ Austria 66,778 65,662 67,671 59,522 58,347 56,342 67,201 73,697 91,722 4.0%

^ * Belgium 97,147 92,037 95,384 95,954 92,683 93,817 101,238 116,203 112,444 1.8%


n/a 15,852 8,877 7,885 13,726 13,172 17,194 19,785 17,087 n/a

^ * Bulgaria 10,762 14,563 14,809 14,486 14,654 14,507 21,267 21,027 22,619 9.7%

* Croatia 17,388 46,527 36,889 32,615 32,512 36,506 44,397 49,046 44,107 12.3%

^ Cyprus 43,796 29,943 29,029 30,276 33,065 32,553 30,920 31,129 37,612 -1.9%

^ * Czech Republic 32,840 46,706 75,138 76,934 80,625 84,904 79,450 85,500 94,069 14.1%

^ * Denmark 150,408 149,052 159,150 159,875 144,830 166,095 152,742 208,065 164,348 1.1%

^ * Estonia 26,297 31,385 40,191 42,745 53,238 72,007 87,340 65,197 66,145 12.2%

^ Finland 58,428 69,982 80,950 81,929 84,159 82,989 78,901 85,074 114,159 8.7%

^ * France 118,242 124,432 127,738 130,602 127,731 131,126 132,015 131,178 111,092 -0.8%

^ * Germany 113,971 118,616 127,360 132,605 133,237 128,849 130,569 130,430 134,512 2.1%

^ * Greece 41,791 28,812 36,684 42,209 45,108 45,529 47,178 52,046 54,609 3.4%

^ * Hungary 32,834 37,622 47,356 61,211 66,533 58,507 71,973 74,355 56,190 6.9%

^ Ireland 100,116 96,045 91,605 92,897 94,400 94,622 97,306 101,712 98,662 -0.2%

^ * Italy 79,402 83,585 93,731 96,959 93,378 91,701 111,934 116,927 111,401 4.3%

^ * Latvia 29,593 52,351 54,661 53,021 58,854 72,456 74,780 86,264 84,850 14.1%

^ * Lithuania 23,147 26,785 30,293 31,665 31,138 37,916 36,479 57,976 52,226 10.7%

^ * Luxembourg 151,882 135,394 125,350 140,453 152,272 149,073 154,578 182,787 198,889 3.4%

Macedonia 24,430 10,158 10,883 11,311 10,673 10,156 11,720 10,753 17,316 -4.2%

^ Malta 16,158 15,892 16,294 16,465 16,926 23,603 23,760 19,856 18,424 1.7%

Moldova 1,985 2,309 2,053 1,598 2,007 2,658 2,631 3,458 3,065 5.6%

Montenegro n/a n/a n/a n/a n/a 6,760 7,752 11,167 13,112 n/a

^ * Netherlands 158,006 151,090 153,057 166,562 163,818 174,108 180,186 194,609 171,235 1.0%

* Norway 123,898 224,823 212,666 198,870 284,463 237,397 240,195 223,812 234,952 8.3%

^ * Poland 26,846 28,335 27,608 28,437 33,137 35,956 41,195 46,738 52,766 8.8%

^ * Portugal 46,130 35,132 56,217 64,673 68,043 65,694 64,938 66,348 70,289 5.4%

^ * Romania 24,400 20,602 16,568 17,578 20,809 30,777 29,244 29,604 22,397 -1.1%

Serbia† 19,350 20,772 18,773 15,654 11,379 18,481 35,916 35,237 23,473 2.4%

^ * Slovakia 34,063 41,128 47,498 44,174 47,863 64,346 57,893 58,183 57,347 6.7%

^ * Slovenia 41,506 63,302 65,808 69,873 71,105 81,498 89,991 79,004 85,000 9.4%

^ * Spain 66,425 86,016 86,791 94,011 96,731 98,287 99,893 99,364 91,015 4.0%

^ Sweden 157,525 190,526 189,150 176,870 175,445 173,070 205,357 249,921 291,220 8.0%

Switzerland n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

* Turkey 31,855 21,605 24,564 22,710 23,076 23,420 20,355 21,270 15,835 -8.4%

^ * United Kingdom 214,781 216,839 211,918 214,209 247,266 259,645 276,720 247,749 216,288 0.1%

* NATO member state

^ EU member state


Note: Available troop numbers for Switzerland include only professional soldiers. Hence, the table does not provide per-soldier values for Switzerland.

Sources: NATO Defense Expenditures; SIPRI Military Expenditure Database; IISS Military Balance; analysis by CSIS Defense-Industrial Initiatives Group.


Total Defense Spending (constant 2009, in US$ millions)CAGR

‘01-’092001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania 67 70 90 115 122 153 205 261 249 17.9%

^ Austria 2,070 2,150 2,683 2,955 2,897 2,804 3,648 3,784 3,493 6.8%

^ * Belgium 3,569 3,657 4,429 4,776 4,614 4,598 5,413 6,325 5,646 5.9%


n/a 297 247 242 203 196 213 249 265 n/a

^ * Bulgaria 660 703 864 918 929 930 1,187 1,262 1,104 6.6%

* Croatia 795 915 868 844 841 954 1,075 1,342 1,144 4.7%

^ Cyprus 392 283 329 377 411 409 424 458 159 -10.7%

^ * Czech Republic 1,442 1,769 2,211 2,297 2,508 2,668 2,725 3,147 3,153 10.3%

^ * Denmark 2,965 3,103 3,605 3,978 3,785 4,175 4,397 4,897 4,356 4.9%

^ * Estonia 130 164 227 262 327 371 491 508 438 16.4%

^ Finland 1,668 1,788 2,475 2,885 2,964 3,056 3,169 3,667 3,599 10.1%

^ * France 38,779 41,794 51,504 58,017 56,747 58,659 64,066 66,966 54,664 4.4%

^ * Germany 31,251 33,107 39,091 41,581 40,789 40,154 43,854 48,355 47,656 5.4%

^ * Greece 7,564 5,670 5,775 6,933 7,578 7,952 8,667 10,260 10,131 3.7%

^ * Hungary 1,440 1,567 1,929 1,981 1,988 1,690 1,973 1,973 1,492 0.4%

^ Ireland 938 951 1,085 1,209 1,229 1,245 1,395 1,565 1,439 5.5%

^ * Italy 26,610 28,628 34,501 38,005 36,488 35,607 29,923 33,544 30,611 1.8%

^ * Latvia 146 240 298 343 390 480 576 666 680 21.2%

^ * Lithuania 280 322 463 532 524 572 693 755 645 11.0%

^ * Luxembourg 191 179 227 262 265 262 297 215 250 3.4%

Macedonia 269 124 134 153 145 139 175 172 193 -4.1%

^ Malta 31 32 39 46 47 48 52 57 50 6.2%

Moldova 13 15 16 13 17 23 24 31 26 n/a

Montenegro n/a n/a n/a n/a n/a 62 62 74 57 n/a

^ * Netherlands 7,221 7,576 9,188 10,156 10,193 10,720 11,857 12,597 12,181 6.8%

* Norway 3,440 4,686 5,051 5,444 6,367 5,369 6,260 6,604 6,233 7.7%

^ * Poland 4,276 4,251 4,683 5,313 6,182 6,777 8,478 8,964 7,370 7.0%

^ * Portugal 2,811 2,293 2,674 3,138 3,387 3,302 3,383 3,709 3,726 3.6%

^ * Romania 2,167 1,889 1,942 2,125 2,516 2,692 2,977 3,192 2,291 0.7%

Serbia† 1,292 1,459 1,388 1,274 925 922 1,195 1,259 954 -3.7%

^ * Slovakia 800 856 1,086 1,110 1,203 1,231 1,359 1,493 1,322 6.5%

^ * Slovenia 335 392 488 569 580 671 737 837 854 12.4%

^ * Spain 8,988 10,987 12,779 14,506 14,445 15,438 17,392 18,711 17,012 8.3%

^ Sweden 4,786 4,976 5,914 6,076 6,030 6,004 6,756 6,227 5,308 1.3%

Switzerland 2,849 3,068 3,499 3,711 3,625 3,260 3,506 4,050 4,125 4.7%

* Turkey 23,116 16,576 14,880 14,203 14,365 14,709 13,883 15,532 10,883 -9.0%

^ * United Kingdom 41,362 43,865 49,406 55,414 61,832 63,961 72,774 70,073 59,438 4.6%

* NATO member state

^ EU member state


Appendix 4. Total and Per-Soldier European Defense Spending by Country in Dollars (2001–2009)

appendix 4 | 61


Per-Soldier Defense Spending (constant 2009, in US$)CAGR

‘01-’092001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania 2,474 3,183 4,165 5,342 5,678 13,840 18,626 18,281 17,449 27.7%

^ Austria 59,838 62,125 76,644 74,065 72,610 70,799 92,125 108,422 127,938 10.0%

^ * Belgium 87,051 87,079 108,031 119,398 115,341 117,890 138,786 170,956 156,843 7.6%

Bosnia and Herze-govina

n/a 14,998 10,053 9,812 17,081 16,551 23,572 29,107 23,834 n/a

^ * Bulgaria 9,643 13,780 16,949 17,991 18,225 18,232 29,127 30,963 31,576 16.0%

* Croatia 15,581 44,000 41,753 40,557 40,446 45,875 60,870 72,140 61,528 18.7%

^ Cyprus 43,796 29,943 29,029 30,276 33,065 32,553 30,920 31,129 37,612 -1.9%

^ * Czech Republic 29,427 44,215 85,044 95,706 100,303 106,709 109,007 125,884 131,390 20.6%

^ * Denmark 134,779 141,030 180,238 198,924 180,238 208,732 209,401 306,082 229,254 6.9%

^ * Estonia 23,561 29,693 45,515 53,197 66,263 90,497 119,758 95,937 92,285 18.6%

^ Finland 52,356 66,212 91,683 101,947 104,732 104,284 108,165 125,160 159,235 14.9%

^ * France 105,953 117,730 144,674 162,512 158,956 164,772 180,978 192,987 154,956 4.9%

^ * Germany 102,127 112,227 144,247 165,005 165,808 161,911 178,995 191,886 187,623 7.9%

^ * Greece 37,447 27,260 41,548 52,523 56,135 57,212 64,676 76,569 76,171 9.3%

^ * Hungary 29,395 35,604 53,577 76,175 82,819 73,496 98,651 109,585 78,524 13.1%

^ Ireland 89,711 90,871 103,750 115,595 117,477 118,902 133,396 149,637 137,618 5.5%

^ * Italy 71,150 79,083 106,158 120,650 116,205 115,232 153,449 172,020 155,387 10.3%

^ * Latvia 26,488 49,107 61,121 65,554 74,406 89,945 101,196 128,487 118,354 20.6%

^ * Lithuania 20,723 25,344 34,306 39,402 38,749 47,647 50,012 85,300 72,851 17.0%

^ * Luxembourg 136,097 128,100 141,969 174,770 189,496 187,325 211,910 268,912 277,419 9.3%

Macedonia 21,891 9,611 12,326 14,074 13,282 12,762 16,067 15,820 24,153 1.2%

^ Malta 14,479 15,036 18,455 20,487 21,064 29,659 32,572 29,212 25,698 7.4%

Moldova 1,779 2,184 2,326 1,989 2,497 3,340 3,606 5,087 4,276 n/a

Montenegro n/a n/a n/a n/a n/a 8,494 10,628 16,429 18,289 n/a

^ * Netherlands 141,585 142,951 173,350 207,259 203,865 218,783 247,014 286,304 238,847 6.8%

* Norway 110,976 212,998 240,518 247,450 353,740 298,271 329,466 330,205 328,037 14.5%

^ * Poland 24,024 26,736 31,219 35,417 41,216 45,178 56,523 68,957 73,700 15.0%

^ * Portugal 41,336 33,239 63,671 80,474 84,677 82,551 89,022 97,609 98,043 11.4%

^ * Romania 21,846 19,429 19,974 21,863 25,886 38,685 40,081 43,602 31,240 4.6%

Serbia† 17,342 19,669 21,260 19,511 14,173 23,220 49,276 51,919 32,738 8.3%

^ * Slovakia 30,523 38,913 53,796 54,967 59,563 80,857 79,365 85,597 79,990 12.8%

^ * Slovenia 37,192 59,892 74,533 86,945 88,488 102,410 123,368 116,229 118,562 15.6%

^ * Spain 59,522 81,382 98,298 116,980 120,378 123,507 136,942 146,183 126,952 9.9%

^ Sweden 141,169 180,276 214,280 220,132 218,470 217,536 281,509 368,479 406,725 14.1%


* Turkey 28,787 20,314 27,865 28,292 28,673 29,360 27,933 31,314 22,075 -3.3%

^ * United Kingdom 192,382 204,976 239,834 266,416 307,622 326,330 379,031 364,964 301,715 5.8%

* NATO member state

^ EU member state


Note: Available troop numbers for Switzerland include only professional soldiers. Hence, the table does not provide per-soldier values for Switzerland.

Sources: NATO Defense Expenditures; SIPRI Military Expenditure Database; IISS Military Balance; analysis by CSIS Defense- Industrial Initiatives Group.


Total Defense Equipment Spending (constant 2009, in € millions)CAGR

‘01-’092001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania n/a n/a n/a n/a n/a n/a n/a n/a 40 n/a

^ Austria n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Belgium 283 274 207 211 237 216 190 353 332 2.0%


n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Bulgaria n/a n/a n/a 130 124 104 208 183 112 n/a

* Croatia n/a n/a n/a n/a n/a n/a n/a n/a 84 n/a

^ Cyprus n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Czech Republic 327 327 383 284 187 310 201 276 506 5.6%

^ * Denmark 556 443 512 614 341 512 504 626 309 -7.1%

^ * Estonia n/a n/a n/a 27 31 43 85 35 56 n/a

^ Finland n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * France 8,396 8,437 9,322 9,745 9,713 10,643 10,001 9,559 10,581 2.9%

^ * Germany 4,883 4,934 4,763 4,946 4,654 4,793 4,670 5,620 6,013 2.6%

^ * Greece 1,283 785 546 407 932 943 664 1,144 2,026 5.9%

^ * Hungary 169 184 176 189 134 121 174 198 136 -2.7%

^ Ireland n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Italy 3,059 3,752 3,930 3,573 2,668 2,040 3,056 2,896 2,480 -2.6%

^ * Latvia n/a n/a n/a 21 27 48 41 67 26 n/a

^ * Lithuania n/a n/a n/a 53 64 77 94 84 75 n/a

^ * Luxembourg 26 13 15 17 24 18 15 37 50 8.8%

Macedonia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ Malta n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Moldova n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Montenegro n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Netherlands 1,346 1,273 1,209 1,363 1,311 1,433 1,652 1,576 1,537 1.7%

* Norway 814 1,172 974 1,002 1,080 829 977 1,012 857 0.6%

^ * Poland 421 500 514 623 726 982 1,149 826 797 8.3%

^ * Portugal 166 99 175 192 242 234 207 340 254 5.4%

^ * Romania n/a n/a n/a 437 405 514 289 362 141 n/a

Serbia† n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Slovakia n/a n/a n/a 93 143 124 161 148 125 n/a

^ * Slovenia n/a n/a n/a 85 44 65 58 42 53 n/a

^ * Spain 1,274 2,706 2,505 2,658 2,565 2,666 2,639 2,862 2,122 6.6%

^ Sweden n/a n/a n/a n/a n/a n/a n/a n/a 0 n/a


* Turkey 8,441 5,553 5,024 3,751 3,445 4,036 2,479 2,891 1,366 -20.3%

^ * United Kingdom 11,129 10,487 9,953 10,159 11,481 10,789 12,007 10,703 10,226 -1.1%

* NATO member state

^ EU member state


Appendix 5. Total and Per-Soldier European Defense Equipment Spending by Country (2001–2009)

appendix 5 | 63


Per-Soldier Defense Equipment Spending (constant 2009, in €)CAGR

‘01-’092001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania n/a n/a n/a n/a n/a n/a n/a n/a 2,815 n/a

^ Austria n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Belgium 6,897 6,535 5,055 5,277 5,932 5,535 4,859 9,529 9,220 3.7%



^ * Bulgaria n/a n/a n/a 2,550 2,433 2,045 5,104 4,500 3,212 n/a

* Croatia n/a n/a n/a n/a n/a n/a n/a n/a 4,499 n/a


^ * Czech Republic 6,667 8,174 14,727 11,848 7,498 12,396 8,024 11,029 21,072 15.5%

^ * Denmark 25,269 20,122 25,623 30,696 16,221 25,579 23,981 39,116 16,270 -5.4%

^ * Estonia n/a n/a n/a 5,386 6,335 10,441 20,700 6,585 11,774 n/a

^ Finland n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * France 22,939 23,767 26,186 27,296 27,207 29,897 28,251 27,547 29,995 3.4%

^ * Germany 15,956 16,725 17,576 19,626 18,920 19,327 19,063 22,303 23,674 5.1%

^ * Greece 6,352 3,774 3,925 3,081 6,902 6,784 4,954 8,536 15,236 11.6%

^ * Hungary 3,448 4,176 4,878 7,284 5,589 5,266 8,709 11,005 7,136 9.5%

^ Ireland n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Italy 8,178 10,365 12,091 11,344 8,497 6,603 15,671 14,850 12,588 5.5%

^ * Latvia n/a n/a n/a 3,924 5,120 8,912 7,179 12,853 4,582 n/a

^ * Lithuania n/a n/a n/a 3,895 4,764 6,446 6,822 9,450 8,461 n/a

^ * Luxembourg 18,378 9,207 9,276 11,517 17,359 12,969 10,511 45,879 56,087 15.0%





^ * Netherlands 26,387 24,023 22,805 27,816 26,211 29,250 34,415 35,808 30,137 1.7%

* Norway 26,266 53,283 46,361 45,541 60,022 46,055 51,402 50,582 45,111 7.0%

^ * Poland 2,362 3,145 3,423 4,152 4,838 6,544 7,662 6,356 7,968 16.4%

^ * Portugal 2,445 1,440 4,160 4,915 6,056 5,847 5,455 8,957 6,678 13.4%

^ * Romania n/a n/a n/a 4,500 4,162 7,387 3,889 4,944 1,926 n/a


^ * Slovakia n/a n/a n/a 4,594 7,084 8,172 9,379 8,495 7,570 n/a

^ * Slovenia n/a n/a n/a 12,926 6,755 9,943 9,719 5,846 7,310 n/a

^ * Spain 8,436 20,042 19,268 21,434 21,378 21,328 20,778 22,357 15,837 8.2%

^ Sweden n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a


* Turkey 10,512 6,806 9,408 7,471 6,877 8,056 4,987 5,828 2,771 -15.4%

^ * United Kingdom 51,762 49,006 48,317 48,840 57,119 55,045 62,539 55,744 51,909 0.0%

* NATO member state

^ EU member state




Total Defense R&D Spending (constant 2009, in € millions)CAGR

‘01-’08 2001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ Austria 0 0 0 0 0 0 0 0 0 -4.7%

^ * Belgium 4 6 7 7 5 6 6 6 n/a 4.6%



^ * Bulgaria n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

* Croatia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a


^ * Czech Republic n/a 15 17 15 16 22 18 20 22 n/a

^ * Denmark 8 8 18 20 12 12 11 12 n/a 6.0%

^ * Estonia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ Finland 24 24 45 38 58 50 43 51 35 11.6%

^ * France 3,940 4,064 4,045 3,857 3,730 4,289 4,207 4,077 n/a 0.5%

^ * Germany 1,381 1,025 1,240 1,081 1,061 1,201 1,164 1,189 1,183 -2.1%

^ * Greece 4 4 4 3 4 4 4 n/a n/a n/a

^ * Hungary n/a n/a n/a n/a 0 0 2 3 n/a n/a

^ Ireland 0 0 0 0 0 0 0 0 0 n/a

^ * Italy 408 152 n/a n/a 378 132 471 125 67 -15.6%

^ * Latvia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Lithuania n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Luxembourg n/a n/a n/a n/a 0 0 0 0 0 n/a





^ * Netherlands 73 70 73 51 84 89 80 77 80 0.8%

* Norway 114 126 119 116 120 119 117 111 105 -0.3%

^ * Poland n/a n/a n/a 14 11 9 22 36 n/a n/a

^ * Portugal 19 20 19 8 8 6 6 8 n/a -12.3%

^ * Romania 2 2 2 1 4 12 12 16 12 32.9%


^ * Slovakia n/a 15 12 9 13 10 8 8 8 n/a

^ * Slovenia 0 0 0 6 9 3 13 24 n/a 84.7%

^ * Spain 2,119 1,736 1,617 1,445 1,385 1,697 1,540 1,653 n/a -3.5%

^ Sweden 351 571 586 462 486 484 463 338 223 -0.5%

Switzerland n/a 11 n/a 10 n/a 13 n/a n/a n/a n/a

* Turkey n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * United Kingdom 3,894 5,050 4,432 4,295 3,251 3,380 3,318 2,564 n/a -5.8%

* NATO member state

^ EU member state


Appendix 6. Total and Per-Soldier European Defense R&D Spending by Country (2001–2009)

appendix 6 | 65


Per-Soldier Defense R&D Spending (constant 2009, in €)CAGR

‘01-’082001 2002 2003 2004 2005 2006 2007 2008 2009

* Albania n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ Austria 6 0 0 5 7 3 1 4 6 1.7%

^ * Belgium 100 140 160 170 128 142 154 152 n/a n/a



^ * Bulgaria n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

* Croatia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a


^ * Czech Republic n/a 385 642 615 636 874 715 794 909 n/a

^ * Denmark 352 371 900 996 572 600 516 729 n/a n/a

^ * Estonia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ Finland 742 892 1,679 1,350 2,036 1,717 1,483 1,743 1,537 9.5%

^ * France 10,765 11,449 11,363 10,803 10,448 12,048 11,884 11,748 n/a n/a

^ * Germany 4,512 3,476 4,575 4,288 4,313 4,842 4,750 4,717 4,658 0.4%

^ * Greece 22 18 25 25 27 27 29 n/a n/a n/a

^ * Hungary n/a n/a n/a n/a 19 17 122 148 n/a n/a

^ Ireland 0 0 0 0 0 0 0 0 0 n/a

^ * Italy 1,091 420 n/a n/a 1,205 427 2,413 640 340 -13.6%

^ * Latvia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Lithuania n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * Luxembourg n/a n/a n/a n/a 0 0 0 0 0 n/a





^ * Netherlands 1,438 1,326 1,386 1,050 1,675 1,807 1,675 1,761 1,563 1.0%

* Norway 3,664 5,712 5,652 5,278 6,681 6,611 6,172 5,575 5,518 5.3%

^ * Poland n/a n/a n/a 96 72 60 148 278 n/a n/a

^ * Portugal 286 290 454 211 196 142 156 204 n/a n/a

^ * Romania 22 20 17 12 39 169 164 219 168 28.9%


^ * Slovakia n/a 666 575 431 650 669 489 481 509 n/a

^ * Slovenia 37 41 26 952 1,396 463 2,161 3,378 n/a n/a

^ * Spain 14,034 12,862 12,436 11,655 11,542 13,577 12,128 12,916 n/a n/a

^ Sweden 10,344 20,693 21,229 16,742 17,626 17,542 19,298 20,014 17,105 6.5%

Switzerland n/a 3,305 n/a 2,376 n/a 3,112 n/a n/a n/a n/a

* Turkey n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

^ * United Kingdom 18,112 23,600 21,513 20,648 16,176 17,245 17,280 13,356 n/a n/a

* NATO member state

^ EU member state



66 |

AGS Allied Ground Surveillance program (NATO)

CAGR compound annual growth rate

CFROI cash flow return on investment

DIIG Defense-Industrial Initiatives Group (CSIS)

EBIT earnings before interest and taxes (operating margin)

EC European Commission

EDA European Defense Agency

ESDS European Security, Defense, and Space (index)

GDP gross domestic product

IISS International Institute for Strategic Studies

IMF International Monetary Fund

ITAR International Traffic in Arms Regulations (U.S.)

LoI Letter of Intent

OCCAR Organisation Conjointe de Coopération en matière d’Armement

OECD Organization for Economic Cooperation and Development

R&D research and development

SIPRI Stockholm International Peace Research Institute

abbreviations and acronyms

| 67

Guy Ben-Ari is a fellow and deputy director of the CSIS Defense-Industrial Initiatives Group. His current research involves defense R&D policies, defense economics, and the governance of complex defense capabilities. Before joining CSIS, Mr. Ben-Ari was a research associate at the George Washington University's Center for International Science and Technology Policy, where he conducted research on defense R&D policies and network-centric capabilities. From 2000 to 2002 he worked on collaborative research and development programs for Gilat Satellite Networks Ltd., an Israeli high-tech company in the field of satellite communications, and from 1995 to 2000 he was a technology analyst for the Israeli government. He has also consulted for the World Bank on innovation policies in developing countries, and he is an evaluator for the European Commission’s research and technology Framework Program. Mr. Ben-Ari holds a bachelor’s degree in political science from Tel Aviv University and a master’s degree in international science and technology policy from the George Washington University.

David Berteau is a senior adviser and director of the CSIS Defense-Industrial Initiatives Group, covering defense management, programs, contracting, and acquisition. His group also assesses national security economics and the industrial base supporting defense. Mr. Berteau is an adjunct professor at Georgetown University, a member of the Defense Acquisition University Board of Vis-itors, a director of the Procurement Round Table, and a fellow of the National Academy of Public Administration. He also serves on the Secretary of the Army’s Commission on Army Acquisition and Program Management in Expeditionary Operations. Before joining CSIS, Mr. Berteau was director of national defense and homeland security for Clark & Weinstock, director of Syracuse University’s National Security Studies Program, and a senior vice president at Science Applications International Corporation (SAIC). He also served in the Defense Department under four defense secretaries, including four years as principal deputy assistant secretary of defense for production and logistics. Mr. Berteau graduated with a B.A. from Tulane University and received his master’s degree from the LBJ School of Public Affairs at the University of Texas.

Joachim Hofbauer is a research associate with the Defense-Industrial Initiatives Group at CSIS, where he specializes in acquisition policy and defense industrial base issues in a U.S. and Euro-pean context. At CSIS, he has extensively analyzed the implications of cuts in defense acquisition spending as well as European defense budget and acquisition trends. He has also assessed budget-ary issues surrounding individual major defense acquisition programs. His current work focuses on U.S. defense acquisition reform, the European defense market, and root cause analysis for cost and schedule overruns in major defense acquisition programs. Before joining CSIS, Mr. Hofbauer worked as a defense analyst in Germany and the United Kingdom, producing analyses for several U.S. and German defense publications. Mr. Hofbauer holds an M.A. with honors in security stud-ies, with a concentration in defense analysis, from Georgetown University and a B.A. in European studies from the University of Passau.

about the authors


Roy Levy is a consultant with the Defense-Industrial Initiatives Group at CSIS, where he focuses on financial aspects of the U.S. defense industrial base. Before joining CSIS, Mr. Levy was a policy analyst with a New York City-based economic research firm and a fellow at the Colin Powell Cen-ter for Policy Studies between 2007 and 2009. Prior to that, he worked at a New York-based hedge fund and served in the Israeli Defense Forces’ Armor Corps. He is the author of several articles on international security issues, and his work has been published in China Security and the CSIS Smart Power Initiative report, among others. Mr. Levy holds a B.A. in political economy from the City University of New York and studied Mandarin at Beijing Language and Cultural University.

Gregory Sanders is a research associate with the Defense-Industrial Initiatives Group at CSIS, where he gathers and analyzes data on U.S. defense acquisition and contract spending. He has also studied data visualization and ways to use complex data collections to create succinct and inno-vative tables, charts, and maps. His recent research focuses on U.S. defense export controls, the defense software industrial base, and European defense budgets, requiring management of data from a variety of databases, most notably the Federal Procurement Database System, and exten-sive cross-referencing of multiple budget data sources. Mr. Sanders holds an M.A. in international relations from the University of Denver and a B.A. in government and politics as well as a B.S. in computer science from the University of Maryland.



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Ë|xHSKITCy065998zv*:+:!:+:!ISBN 978-0-89206-599-8

October 2010

project directors


lead author

Joachim Hofbauer



Eu

ropean

Defen

se Trend

s

Ben

-Ari / B

erteau

CSIS

