Defense Retrenchment in Europe: The Advantages of a Collaborative Response to Relative Decline and Economic Crisis Presented to the Department of Government in partial fulfillment of the requirements for the degree with honors of Bachelor of Arts Harvard College March 2013 2 3 Table of Contents List of Acronyms and Abbreviations……………………………………………….4 Introduction………………………………………………………………………..6 Research Question A Brief History of the European Economic and Financial Crisis The Importance of Studying State Response to Crisis in the Defense Sector Outline of the Content and Argument Chapter 1. Literature Review……………………………………………………...18 Overview Retrenchment Theory Power Transition Theory Collective Action Theory Chapter 2. Theory and Methodology……………………………………………...41 Theory Methodology Chapter 3. Case Studies of Britain and France…………………………………….64 Overview Britain, France, and the Eurozone Crisis Reconsidering Global Ambition: French and British Defense and the Eurozone Crisis Discussion Chapter 4. Case Studies of Germany and Italy…………………………………...107 Overview Germany, Italy, and the Eurozone Crisis Germany and Italy: Two Sides of the Same Coin? Discussion Chapter 5. Discussion……………………………………………………………154 Overview The Trappings of Defense: ―Sticky‖ Planning, Policy Options, and Domestic Retrenchment Multiple Levels of Cooperation: The Industry Driving Factor Governments, the Defense Industry, and Collaborative Retrenchment Conclusion………………………………………………………………………170 Evaluating the Model of Collective Action and State Retrenchment Future Directions of Study Final Considerations Appendix A: List of Interviewees………………………………………………...181 Bibliography……………………………………………………………………..183 4 List of Acronyms and Abbreviations AIAD: Federazione Aziende Italiane per l’Aerospazio, la Difesa e la Sicurezza (Federation of Italian Companies for Aerospace, Defence and Security) BDSV: Bundesverband der Deutschen Sicherheits- und Verteidigungsindustrie (Federal Association of the German Security and Defence Industry) Bn: Billion(s) DPG: Defence Policy Guidelines EADS: European Aeronautic Defence and Space Company EATC: European Air Transport Command EATF: European Air Transport Fleet EU: European Union EU-15: European Union before May 1, 2004. Includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom. EU-27: Full European Union. As of 2012, includes: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, and the United Kingdom. EU-4: The states considered in this thesis: Britain, France, Germany, and Italy EUR: euro (currency) FACO: Final Assembly and Check-Out 5 FREMM: Franco-Italian multipurpose frigate (French: Frégate multi-mission; Italian: Fregata multi-missione) GBP: pound sterling (currency) GDP: Gross Domestic Product JSF: Joint Strike Fighter Mn: Million(s) MoD: Ministry of Defense NATO: North Atlantic Treaty Organization. As of 2012, includes: Albania, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Turkey, the United Kingdom, and the United States of America. O&M: Operations and maintenance OECD: Organization for Economic Cooperation and Development R&D: Research and development RUSI: Royal United Services Institute SDSR: Strategic Defence and Security Review SIPRI: Stockholm International Peace Research Institute STOVL: Short Take-Off Vertical Landing U.A.E.: United Arab Emirates UAV: Unmanned Aerial Vehicle USD: United States dollar (currency) 6 Introduction Research Question How are the leading European states responding to the pressures of the economic and financial crisis on their defense budgets? The pressures of the current European economic and financial crisis, which began in early 2008, have caused a majority of European governments to enact cuts in public expenditure in a variety of sectors, including the defense budget. These policies are having consequences on the size and capability of European armed forces, as well as on the size and viability of the European defense industry. The primary challenge European states are facing is how to balance Europe‘s role in the international system with pressures to reduce defense expenditures. The conventional view in international relations holds that retrenchment— systematic cuts in defense spending disengagement from costly foreign commitments—is a risky strategy and is thus undesirable. Yet this view appears to be inconsistent with current European realities, both in terms of data trends and expert opinion. It is the view of a number of experts in security studies that the only possible way to decrease European defense expenditures while maintaining the capabilities needed to preserve Europe‘s role in the international system is that of extensive collaboration between countries at the bilateral and multilateral levels. Isolationism and fragmented policies carried out by individual nations are expected to hasten Europe‘s decline as an international military and diplomatic agent. In my analysis, which focuses on the case studies of Britain, France, Germany, and Italy, I show that these countries are indeed pursuing collaborative 7 retrenchment. This course of action can be observed in budgetary allocations, procurement programs, international agreements, and state-industry cooperation. I find that the data indicates consistency between what European states are nominally seeking to achieve—maintaining Europe‘s international status and role in the world while reducing defense expenditures—and what the evidence appears to indicate— that European states consider collaborative retrenchment a viable strategy in the face of economic and financial crisis and relative decline. A Brief History of the European Economic and Financial Crisis The origins of the present economic and financial crisis in Europe can be traced to the subprime mortgage crisis that started in 2007 in the United States and successively escalated into a recession of global proportions as early as 2008. These economic woes began to affect Europe almost immediately due to the interconnectedness of the international economic and financial systems. The first repercussions involved a banking crisis deriving from the exposure of European banks to toxic U.S. financial assets and the expansion of housing market issues to several European countries. This had economic consequences in the form of national Gross Domestic Product (GDP) decline, as well as in the related strains on government finances and budgets that entailed. As the economy slumped, tax revenue decreased and demand for social spending grew, causing governments to accumulate increasingly larger budget deficits. Worsening the situation, some European governments intervened to bail out failing banks, further adding to government deficits in various states. 8 However, the core of the so-called European sovereign debt crisis began to engulf European Union member states only in 2010. As the economic and financial situations worsened—in some states more than in others—investors began to be less certain that the governments they were lending their funds to were reliable borrowers. The yields on government-issued bonds grew to high percentages, threatening both short- and long-term government solvency. European states, in particular those which shared the euro as a common currency, began to worry that the financial collapse of one country could lead to a domino effect detrimental to the stability of other states‘ economies, finances and, ultimately, to the integrity of the euro and potentially even of the European Union (EU).1 This contagion effect was not limited to states within the euro-area, however. It also influenced neighbors whose economies were deeply integrated in this system, such as that of the United Kingdom. In the euro-area, Italy joined Greece, Ireland, and Portugal in the group of ailing states, whereas France and Germany suffered but to a somewhat lesser degree. The situation became visibly critical to all in 2011, when bond yields reached their maximum levels and the aforementioned fears of European economic and financial disintegration also achieved their apex. Throughout European countries, with few if any exceptions, governments began to implement severe austerity measures in an attempt to balance the national budget and ensure financial stability. Collective solutions were sought in Brussels by the EU with the assistance of the European Central Bank and the International Monetary Fund. By early 2012 the crisis was slowly receding, and although the 1 For a more technical and in-depth overview of the origins of the European economic and financial crisis, see Henk Overbeek, ―Sovereign Debt Crisis in Euroland: Root Causes and Implications for European Integration,‖ The International Spectator: Italian Journal of International Affairs 47, no. 1. 9 situation remained stable throughout the same year there was awareness in Europe that even if the starkest period may have had elapsed, it was still too early to say that the crisis had been resolved and overcome. Between 2010 and 2012, harsh measures were imposed—sometimes from within, at times from outside as well—on government budgets to stem the