WEBVTT - Here's Why Defense Spending Isn't Delivering 0:00:02.520 --> 0:00:10.280 Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carroll and 0:00:10.360 --> 0:00:12.800 this is Here's Why, where we take one news story 0:00:12.840 --> 0:00:14.960 and explain it in just a few minutes with our 0:00:15.000 --> 0:00:16.480 experts here at Bloomberg. 0:00:20.000 --> 0:00:23.439 We spent over trillion dollars over the last short period 0:00:23.560 --> 0:00:28.120 trillion in order to protect these countries from Russia, and 0:00:28.800 --> 0:00:31.200 has nothing to do with us. We have a notion, 0:00:31.920 --> 0:00:33.640 but it's been a long term thing and they haven't 0:00:33.680 --> 0:00:34.480 treated us right. 0:00:34.600 --> 0:00:37.880 Europeans have that first task of government is to keep 0:00:37.920 --> 0:00:40.400 our country safe. The second task is to have a 0:00:40.440 --> 0:00:43.960 strong economy, and you need both to deter the Russians. 0:00:43.960 --> 0:00:48.839 We need to strong economies, healthy finances connected to strong economies. 0:00:48.880 --> 0:00:50.599 But first of all, we have to defend ourselves. 0:00:50.680 --> 0:00:55.920 We're all committed to an increase in European defense investments. 0:00:56.040 --> 0:00:59.680 That is burden shifting in an orderly way, but very 0:00:59.720 --> 0:01:00.680 decided way. 0:01:01.680 --> 0:01:04.960 Around the world, governments are pouring more than two trillion 0:01:05.040 --> 0:01:09.520 dollars into defense, from drones to missiles to AI systems. 0:01:09.840 --> 0:01:12.959 A more unstable world has sparked a rush to beef 0:01:13.080 --> 0:01:17.720 up military resources. After haranguing from President Trump, NATO members 0:01:17.720 --> 0:01:21.000 have pledged to spend five percent of GDP on defense. 0:01:21.600 --> 0:01:25.679 The money is flowing, but the results are mixed. Here's 0:01:25.680 --> 0:01:32.600 why defense spending isn't delivering. Becha Wasser leads defense research 0:01:32.600 --> 0:01:35.560 at Bloomberg Economics and she joins US now for more. 0:01:35.959 --> 0:01:38.920 Becka put this in context for US, who is spending 0:01:39.040 --> 0:01:42.160 more on defense and how significant are the sums of 0:01:42.160 --> 0:01:43.040 money involved. 0:01:43.440 --> 0:01:46.560 Most governments have pledged that they're going to meet NATO's 0:01:46.760 --> 0:01:50.000 new goal of spending three point five percent of GDP 0:01:50.520 --> 0:01:53.840 on core defense spending, with the additional one point five 0:01:53.880 --> 0:01:59.240 percent of GDP on associated military spending things like infrastructure. 0:01:59.760 --> 0:02:03.960 If you look at Europe's five largest economies, they are 0:02:04.200 --> 0:02:08.080 likely to well undershoot that target. Some of the modeling 0:02:08.240 --> 0:02:12.160 that my team has done at Bloomberg Economics, we've looked 0:02:12.160 --> 0:02:15.200 at it, and they're probably going to come closer to 0:02:15.280 --> 0:02:19.680 meeting about three percent of GDP by twenty thirty. You're 0:02:19.720 --> 0:02:22.520 going to see Germany as one of the largest economies, 0:02:22.680 --> 0:02:27.240 really spearhead Europe's defense build up, while others like the UK, 0:02:27.720 --> 0:02:31.519 France and Italy they have modest hikes and modest hikes 0:02:31.520 --> 0:02:35.160 and spend. But others like Spain are likely to well 0:02:35.280 --> 0:02:39.800 undershoot that target, even though they are raising defense spending slightly. 0:02:40.400 --> 0:02:43.280 And to put it in sort of bigger context, almost 0:02:43.320 --> 0:02:45.600 all of this is going to be debt financed, and 0:02:45.680 --> 0:02:49.160 we are talking about debt into the hundreds of billions. 0:02:49.720 --> 0:02:52.919 Okay, so there are huge amounts of money involved. Then 0:02:53.200 --> 0:02:56.720 where is it going and what results is that money 0:02:56.760 --> 0:02:57.760 delivering so far? 0:02:59.080 --> 0:03:03.600 So the biggest challenge is not on defense spending. The 0:03:03.639 --> 0:03:08.680 biggest challenge is translating that increased defense spend into genuine 0:03:08.960 --> 0:03:15.520 military capabilities. And Europe faces some very sizable capability gaps. 0:03:15.880 --> 0:03:21.160 They have essentially organized to have peacetime militaries, but a 0:03:21.560 --> 0:03:26.840 revisionist Russia and resurgent aggression in the European continent with 0:03:26.960 --> 0:03:32.480 Russia's invasion of Ukraine really changed that. Additionally, more recently, 0:03:32.520 --> 0:03:36.680 we've seen the US reduce its contributions to the NATO 0:03:36.760 --> 0:03:41.920 Force model, taking some forces and capabilities away from Europe's 0:03:41.960 --> 0:03:46.840 ability to deter Russia from any potential aggression. So that 0:03:46.960 --> 0:03:50.000 means that you've got these huge gaps in what European 0:03:50.000 --> 0:03:53.440 militaries already have in their arsenals, and these are things 0:03:53.480 --> 0:03:56.880 that are offensive, like long range strike. Some of those 0:03:57.040 --> 0:04:01.320 longer range missiles that you would need in a potential conflict. 0:04:01.760 --> 0:04:06.000 They also range things like air defense interceptors that we've 0:04:06.040 --> 0:04:10.320 seen this enormous need for from Ukraine but also in 0:04:10.360 --> 0:04:13.800 the Iran War. And then some of the capability gaps 0:04:13.840 --> 0:04:17.440 are really on these unsexy areas, but things that are 0:04:17.480 --> 0:04:22.720 critically important, things like space based intelligence and surveillance assets, 0:04:23.120 --> 0:04:27.480 things like command and control systems. These are so important 0:04:27.520 --> 0:04:30.599 for Europe to be able to operate together. But these 0:04:30.600 --> 0:04:33.120 are the types of things that Europe needs to be 0:04:33.160 --> 0:04:36.240 spending money on and they're starting to do that, but 0:04:36.400 --> 0:04:38.680 there's no way for them to kind of quickly fill 0:04:38.720 --> 0:04:40.960 these gaps. Part of that is because there are all 0:04:41.000 --> 0:04:44.880 of these weapons development projects that are in process, but 0:04:44.920 --> 0:04:47.760 they're not yet mature, and so that means that Europe 0:04:47.800 --> 0:04:51.080 is probably going to have to rely on buying more 0:04:51.080 --> 0:04:54.720 weapons from the United States and from external providers if 0:04:54.720 --> 0:04:57.200 they want to fill the gaps in the near term. 0:04:57.640 --> 0:05:01.320 That stands in the face of European defense autonomy, Europe's 0:05:01.600 --> 0:05:05.840 desire to go it alone in the face of reduced 0:05:06.000 --> 0:05:10.120 American reliability, and it also means that there could be 0:05:10.360 --> 0:05:14.000 a temporal gap that Russia could exploit before Europe is 0:05:14.040 --> 0:05:18.600 able to actually make that defense spend turn into tangible 0:05:18.640 --> 0:05:19.719 military assets. 0:05:20.400 --> 0:05:23.520 So what's needed then to address those gaps? Can anything 0:05:23.600 --> 0:05:24.479 be done about us? 0:05:25.279 --> 0:05:27.040 I think there's a lot that can be done, and 0:05:27.400 --> 0:05:31.919 we're already seeing Europe already starting to do the right things. 0:05:32.160 --> 0:05:34.679 But I think there is this higher risk right now 0:05:34.839 --> 0:05:40.040 of European defense industrial fragmentation, where, for good measure, all 0:05:40.080 --> 0:05:43.000 of these countries want to see the increase in defense 0:05:43.040 --> 0:05:46.480 spend flow back to their own countries, to their own 0:05:46.520 --> 0:05:50.560 local economies to be able to have domestic benefit. That 0:05:50.680 --> 0:05:54.560 all makes sense, but that does risk creating a number 0:05:54.600 --> 0:05:58.520 of different weapons programs with weapons that might not be interoperabile, 0:05:58.839 --> 0:06:02.000 that might not be able to you work together very well. 0:06:02.279 --> 0:06:06.040 It also means that you're going to have essentially companies 0:06:06.040 --> 0:06:10.159 that are producing weapons in smaller amounts because the contracts 0:06:10.200 --> 0:06:13.000 are going to be smaller. In order to overcome this, 0:06:13.279 --> 0:06:16.520 Europe would need to pick some winners and some losers 0:06:17.240 --> 0:06:20.479 and have a little bit of industrial consolidation, and that's 0:06:20.520 --> 0:06:24.200 a really tricky thing to be done domestically. But I 0:06:24.240 --> 0:06:27.760 think as time goes on, as some of these programs mature, 0:06:28.200 --> 0:06:31.679 as there is the need for really filling these gaps quickly, 0:06:31.839 --> 0:06:36.640 and within Europe's defense industry, we are going to see 0:06:36.640 --> 0:06:37.880 that play out over time. 0:06:38.800 --> 0:06:42.280 Is this a uniquely European challenge? Obviously, Europe has been 0:06:42.360 --> 0:06:45.080 upping its defense spending, most notably as it tries to 0:06:45.160 --> 0:06:48.479 increase these new NATO targets. But do the United States 0:06:48.560 --> 0:06:51.880 and China face any similar challenges in trying to beef 0:06:51.960 --> 0:06:53.000 up their own defenses. 0:06:53.839 --> 0:06:58.239 Listen, defense spending is hard. Weapons capability development is hard. 0:06:58.640 --> 0:07:02.800 Fielding some of these military capabilities is even harder. So 0:07:03.000 --> 0:07:07.120 all countries essentially have same challenges, but they look a 0:07:07.120 --> 0:07:11.720 little bit different. China is notoriously opaque about its defense spending, 0:07:12.040 --> 0:07:15.600 and the true number that it spends on defense is 0:07:16.080 --> 0:07:19.520 likely a fraction of what we know publicly. But China 0:07:19.760 --> 0:07:22.760 has been able to essentially take some of its national 0:07:22.800 --> 0:07:26.840 industries and use them to produce defense equipment, which is 0:07:26.880 --> 0:07:29.960 why you see it producing capabilities at a rate that 0:07:30.040 --> 0:07:32.640 is much higher than the United States and much much 0:07:32.680 --> 0:07:36.440 higher than Europe. For the United States, it has a 0:07:36.680 --> 0:07:40.400 very high defense spend. If you look at this year's 0:07:40.440 --> 0:07:44.800 budget request, it's one point five trillion dollars, but Still, 0:07:44.880 --> 0:07:48.360 the US only spends about three point four percent of 0:07:48.360 --> 0:07:51.400 its GDP on defense, which is much lower than what 0:07:51.480 --> 0:07:55.360 it's spent during the Cold War. And right now the 0:07:55.480 --> 0:08:00.240 US defense industry is overstretched. It can't produce weapons as 0:08:00.280 --> 0:08:03.560 fast as it needs to. It doesn't have enough capacity, 0:08:03.720 --> 0:08:08.200 It doesn't have the surge capability that it needs, particularly 0:08:08.320 --> 0:08:11.400 as it now needs to replenish its own stockpiles after 0:08:11.440 --> 0:08:15.040 the Iran War, let alone fulfill the needs of so 0:08:15.160 --> 0:08:19.280 many global customers and countries that have bought US weapons. 0:08:19.720 --> 0:08:23.080 So each country has its own unique challenges, but I 0:08:23.080 --> 0:08:27.800 think the math behind defense spending and capability development is 0:08:27.960 --> 0:08:28.920 very much the same. 0:08:29.640 --> 0:08:34.320 How do new technologies, newer forms of weapons factor into 0:08:34.360 --> 0:08:37.800 this conversation. How much of investment in research is a 0:08:37.840 --> 0:08:38.439 part of this. 0:08:39.080 --> 0:08:42.880 I think traditionally countries have really focused on spending on 0:08:43.280 --> 0:08:47.040 military personnel. In recent years we've seen that shift towards 0:08:47.080 --> 0:08:50.760 spending more toward equipment. But even smaller than that is 0:08:50.800 --> 0:08:54.920 the percentage of defense spending that goes to research and development. 0:08:55.640 --> 0:08:57.520 So you know, there is going to need to be 0:08:57.800 --> 0:09:01.600 an increase in research and development spending for that next 0:09:01.600 --> 0:09:05.040 generation of weapons. But at the same time, we see 0:09:05.080 --> 0:09:09.440 countries really wanting to do things not only faster, but cheaper, 0:09:09.760 --> 0:09:12.440 and this is why we have such an emphasis on 0:09:12.520 --> 0:09:16.080 things like low cost drones in part to reduce some 0:09:16.200 --> 0:09:20.240 of the manpower challenges that some country space and some 0:09:20.320 --> 0:09:22.920 of the fiscal challenges that they face when it comes 0:09:22.960 --> 0:09:26.439 to being able to buy some of this really expensive equipment. 0:09:26.920 --> 0:09:29.600 So I think we're going to continue to see some 0:09:29.880 --> 0:09:34.880 bending on AI drones, lower cost missiles in order to 0:09:35.040 --> 0:09:38.160 essentially get the dynamic of the cost per shot down 0:09:38.480 --> 0:09:41.319 and try and make it so that different countries and 0:09:41.360 --> 0:09:45.079 different militaries can do more potentially with less. 0:09:45.440 --> 0:09:48.800 Beca wesser leading our defense research at Bloomberg Economics. Thank 0:09:48.840 --> 0:09:52.280 you for more explanations like this from our team of 0:09:52.320 --> 0:09:55.240 three thousand journalists and analysts around the world. Go to 0:09:55.280 --> 0:10:00.960 Bloomberg dot com slash explainers. I'm Stephen Carol. This is 0:10:01.000 --> 0:10:03.920 here's why I'll be back next week with more. Thanks 0:10:03.960 --> 0:10:04.440 for listening.