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Speaker 2: We spent over trillion dollars over the last short period
Speaker 2: trillion in order to protect these countries from Russia, and
Speaker 2: has nothing to do with us. We have a notion,
Speaker 2: but it's been a long term thing and they haven't
Speaker 2: treated us right.
Speaker 3: Europeans have that first task of government is to keep
Speaker 3: our country safe. The second task is to have a
Speaker 3: strong economy, and you need both to deter the Russians.
Speaker 3: We need to strong economies, healthy finances connected to strong economies.
Speaker 3: But first of all, we have to defend ourselves.
Speaker 4: We're all committed to an increase in European defense investments.
Speaker 4: That is burden shifting in an orderly way, but very
Speaker 4: decided way.
Speaker 1: Around the world, governments are pouring more than two trillion
Speaker 1: dollars into defense, from drones to missiles to AI systems.
Speaker 1: A more unstable world has sparked a rush to beef
Speaker 1: up military resources. After haranguing from President Trump, NATO members
Speaker 1: have pledged to spend five percent of GDP on defense.
Speaker 1: The money is flowing, but the results are mixed. Here's
Speaker 1: why defense spending isn't delivering. Becha Wasser leads defense research
Speaker 1: at Bloomberg Economics and she joins US now for more.
Speaker 1: Becka put this in context for US, who is spending
Speaker 1: more on defense and how significant are the sums of
Speaker 1: money involved.
Speaker 5: Most governments have pledged that they're going to meet NATO's
Speaker 5: new goal of spending three point five percent of GDP
Speaker 5: on core defense spending, with the additional one point five
Speaker 5: percent of GDP on associated military spending things like infrastructure.
Speaker 5: If you look at Europe's five largest economies, they are
Speaker 5: likely to well undershoot that target. Some of the modeling
Speaker 5: that my team has done at Bloomberg Economics, we've looked
Speaker 5: at it, and they're probably going to come closer to
Speaker 5: meeting about three percent of GDP by twenty thirty. You're
Speaker 5: going to see Germany as one of the largest economies,
Speaker 5: really spearhead Europe's defense build up, while others like the UK,
Speaker 5: France and Italy they have modest hikes and modest hikes
Speaker 5: and spend. But others like Spain are likely to well
Speaker 5: undershoot that target, even though they are raising defense spending slightly.
Speaker 5: And to put it in sort of bigger context, almost
Speaker 5: all of this is going to be debt financed, and
Speaker 5: we are talking about debt into the hundreds of billions.
Speaker 1: Okay, so there are huge amounts of money involved. Then
Speaker 1: where is it going and what results is that money
Speaker 1: delivering so far?
Speaker 5: So the biggest challenge is not on defense spending. The
Speaker 5: biggest challenge is translating that increased defense spend into genuine
Speaker 5: military capabilities. And Europe faces some very sizable capability gaps.
Speaker 5: They have essentially organized to have peacetime militaries, but a
Speaker 5: revisionist Russia and resurgent aggression in the European continent with
Speaker 5: Russia's invasion of Ukraine really changed that. Additionally, more recently,
Speaker 5: we've seen the US reduce its contributions to the NATO
Speaker 5: Force model, taking some forces and capabilities away from Europe's
Speaker 5: ability to deter Russia from any potential aggression. So that
Speaker 5: means that you've got these huge gaps in what European
Speaker 5: militaries already have in their arsenals, and these are things
Speaker 5: that are offensive, like long range strike. Some of those
Speaker 5: longer range missiles that you would need in a potential conflict.
Speaker 5: They also range things like air defense interceptors that we've
Speaker 5: seen this enormous need for from Ukraine but also in
Speaker 5: the Iran War. And then some of the capability gaps
Speaker 5: are really on these unsexy areas, but things that are
Speaker 5: critically important, things like space based intelligence and surveillance assets,
Speaker 5: things like command and control systems. These are so important
Speaker 5: for Europe to be able to operate together. But these
Speaker 5: are the types of things that Europe needs to be
Speaker 5: spending money on and they're starting to do that, but
Speaker 5: there's no way for them to kind of quickly fill
Speaker 5: these gaps. Part of that is because there are all
Speaker 5: of these weapons development projects that are in process, but
Speaker 5: they're not yet mature, and so that means that Europe
Speaker 5: is probably going to have to rely on buying more
Speaker 5: weapons from the United States and from external providers if
Speaker 5: they want to fill the gaps in the near term.
Speaker 5: That stands in the face of European defense autonomy, Europe's
Speaker 5: desire to go it alone in the face of reduced
Speaker 5: American reliability, and it also means that there could be
Speaker 5: a temporal gap that Russia could exploit before Europe is
Speaker 5: able to actually make that defense spend turn into tangible
Speaker 5: military assets.
Speaker 1: So what's needed then to address those gaps? Can anything
Speaker 1: be done about us?
Speaker 5: I think there's a lot that can be done, and
Speaker 5: we're already seeing Europe already starting to do the right things.
Speaker 5: But I think there is this higher risk right now
Speaker 5: of European defense industrial fragmentation, where, for good measure, all
Speaker 5: of these countries want to see the increase in defense
Speaker 5: spend flow back to their own countries, to their own
Speaker 5: local economies to be able to have domestic benefit. That
Speaker 5: all makes sense, but that does risk creating a number
Speaker 5: of different weapons programs with weapons that might not be interoperabile,
Speaker 5: that might not be able to you work together very well.
Speaker 5: It also means that you're going to have essentially companies
Speaker 5: that are producing weapons in smaller amounts because the contracts
Speaker 5: are going to be smaller. In order to overcome this,
Speaker 5: Europe would need to pick some winners and some losers
Speaker 5: and have a little bit of industrial consolidation, and that's
Speaker 5: a really tricky thing to be done domestically. But I
Speaker 5: think as time goes on, as some of these programs mature,
Speaker 5: as there is the need for really filling these gaps quickly,
Speaker 5: and within Europe's defense industry, we are going to see
Speaker 5: that play out over time.
Speaker 1: Is this a uniquely European challenge? Obviously, Europe has been
Speaker 1: upping its defense spending, most notably as it tries to
Speaker 1: increase these new NATO targets. But do the United States
Speaker 1: and China face any similar challenges in trying to beef
Speaker 1: up their own defenses.
Speaker 5: Listen, defense spending is hard. Weapons capability development is hard.
Speaker 5: Fielding some of these military capabilities is even harder. So
Speaker 5: all countries essentially have same challenges, but they look a
Speaker 5: little bit different. China is notoriously opaque about its defense spending,
Speaker 5: and the true number that it spends on defense is
Speaker 5: likely a fraction of what we know publicly. But China
Speaker 5: has been able to essentially take some of its national
Speaker 5: industries and use them to produce defense equipment, which is
Speaker 5: why you see it producing capabilities at a rate that
Speaker 5: is much higher than the United States and much much
Speaker 5: higher than Europe. For the United States, it has a
Speaker 5: very high defense spend. If you look at this year's
Speaker 5: budget request, it's one point five trillion dollars, but Still,
Speaker 5: the US only spends about three point four percent of
Speaker 5: its GDP on defense, which is much lower than what
Speaker 5: it's spent during the Cold War. And right now the
Speaker 5: US defense industry is overstretched. It can't produce weapons as
Speaker 5: fast as it needs to. It doesn't have enough capacity,
Speaker 5: It doesn't have the surge capability that it needs, particularly
Speaker 5: as it now needs to replenish its own stockpiles after
Speaker 5: the Iran War, let alone fulfill the needs of so
Speaker 5: many global customers and countries that have bought US weapons.
Speaker 5: So each country has its own unique challenges, but I
Speaker 5: think the math behind defense spending and capability development is
Speaker 5: very much the same.
Speaker 1: How do new technologies, newer forms of weapons factor into
Speaker 1: this conversation. How much of investment in research is a
Speaker 1: part of this.
Speaker 5: I think traditionally countries have really focused on spending on
Speaker 5: military personnel. In recent years we've seen that shift towards
Speaker 5: spending more toward equipment. But even smaller than that is
Speaker 5: the percentage of defense spending that goes to research and development.
Speaker 5: So you know, there is going to need to be
Speaker 5: an increase in research and development spending for that next
Speaker 5: generation of weapons. But at the same time, we see
Speaker 5: countries really wanting to do things not only faster, but cheaper,
Speaker 5: and this is why we have such an emphasis on
Speaker 5: things like low cost drones in part to reduce some
Speaker 5: of the manpower challenges that some country space and some
Speaker 5: of the fiscal challenges that they face when it comes
Speaker 5: to being able to buy some of this really expensive equipment.
Speaker 5: So I think we're going to continue to see some
Speaker 5: bending on AI drones, lower cost missiles in order to
Speaker 5: essentially get the dynamic of the cost per shot down
Speaker 5: and try and make it so that different countries and
Speaker 5: different militaries can do more potentially with less.
Speaker 1: Beca wesser leading our defense research at Bloomberg Economics. Thank
Speaker 1: you for more explanations like this from our team of
Speaker 1: three thousand journalists and analysts around the world. Go to
Speaker 1: Bloomberg dot com slash explainers. I'm Stephen Carol. This is
Speaker 1: here's why I'll be back next week with more. Thanks
Speaker 1: for listening.