Is Nato’s 2 per cent target fit for purpose?

In September 2014, Nato heads of state agreed at the Wales Summit to make an obligation out of what hitherto had only been a recommendation: to spend 2 per cent of their GDP on defence. Those who were spending less should undertake efforts to lift themselves to this level within ten years—by 2024. According to the IISS’ Military Balance 2018 report only two European countries met this spending target in 2017: Estonia and Greece cleared the bar at 2.1 per cent and 2.3 per cent respectively, but the United Kingdom dipped below the threshold at 1.98 per cent. Poland reached only 1.9 per cent. These figures of course pale in comparison to the United States’s 3.3 per cent.

The 2 per cent target has become increasingly prominent in debates on European defence and security, and turned into a political constraint for government leaders. But is the figure actually relevant to understanding states’ defence capabilities? There are in fact several problems with the target, which include how the 2 per cent is counted and whether the money is actually well spent.

How does one count to 2 per cent?

Given that a lot is riding on this benchmark, it is important to point out that there is no shared understanding of what makes up a defence budget. In its definition of “military expenditure" Nato includes, besides defence ministry budgets, pensions, expenditure for peacekeeping and humanitarian operations, and research and development costs. Yet the United Nations’ definition differs. And even across European countries, governments do not all have the same criteria. To decide what numbers to count is the first hurdle when considering the 2 per cent issue.

A second problem relates to the additional information needed to calculate the share of GDP. GDP data can come from a variety of sources, such as national statistics agencies, but also the International Monetary Fund (IMF) or the World Bank, the Organisation for Economic Co-operation and Development (OECD) or the European Commission. Different GDP figures may therefore lead to different results when calculating the share of GDP spent on defence.

To compare defence spending worldwide, US dollar conversions are necessary, hence exchange rates have to be applied. But here again the numbers may come from a diverse range of sources. The US State Department’s “World Military Expenditure and Arms Transfers” report shows that there can be at least five different methods to convert military expenditure from local currencies to US dollars, which generate sometimes very different results. Consequently, in some cases whether or not nations hit the 2 per cent target is dependent on the data sources and definitions.

Going beyond the 2 per cent figure

Leaving methodological issues to one side, arguably the 2 per cent assessment only provides a limited representation of countries’ defence capabilities and commitments. Beyond the 2 per cent defence spending target, it is worth noting that in absolute numbers, real-terms defence spending did increase across European Nato member states in 2017 (going up from US $255bn in 2016 to US $264bn in 2017, or a real-terms growth of 3.7 per cent).

However, these rising numbers do not necessarily guarantee that spending will be efficiently applied in order to generate increased military capability. For instance, military pensions accounted for over 33 per cent of the defence budget in Belgium (US $4.3bn) and Portugal (US $2.4bn) and 24 per cent of the total French defence budget (US $48.6bn) in 2017. Conversely, defence-related research and development (R&D), which should help prepare armed forces for current and future challenges, did not receive such high priority. While France and the UK each spend several billions on such investment, other European states do not dedicate significant portions of their budget to R&D, even those countries with a large defence-industrial base such as Germany or Sweden. For instance, in 2016 Germany spent US $910m on defence R&D, less than three major international defence firms, namely BAE Systems (US$1.6bn), Boeing (US $1.4bn) and Lockheed Martin (US $988m).

In light of this, recent European Union initiatives relating to defence R&D appear all the more important in helping states to spend smarter. The 25 out of 27 EU member states who joined the Permanent Structured Cooperation (PESCO) framework last year have agreed to “ambitious and more binding common commitments.” This includes a “successive medium-term increase in defence investment expenditure to 20 per cent of total defence spending” and “increasing the share of expenditure allocated to defence research and technology with a view to nearing the 2 per cent of total defence spending.”

These commitments strengthen the already existing collective benchmarks defined by the member states of the European Defence Agency. The sharpened focus on defence R&D is even more visible in one of the other key defence initiatives set out by the EU in 2017, the European Defence Fund (EDF). Once the EDF is in full force, after 2020, the common EU budget fund for defence R&D should rise to about to €500m (US $564m) per annum. While this amount is relatively modest, it should allow for the pooling of resources, reduce duplication costs and increase cooperation among member states in an area that remains crucial to the generation of future European defence capabilities.