 Good morning and welcome to CSIS. It's a sign of the times that we talk about Europe and the room is only half full. And it is a sign of the times actually and you'll see that both in our report and in our commentary on the report and perhaps even you'll see hints of it in the commentary that Jim Townsend provides here. I'm David Burto. I'm the director of our Defense Industrial Initiatives Group here at CSIS. I want to thank you all for coming. I particularly want to give special thanks to our commenters Jim Townsend who's already here. Steve Flanagan is addressing I think something to do with military health care which is you know bigger bigger than any European country's budget for defense to what we spend on health care alone. But he'll be joining us shortly here and and I appreciate that. I have one administrative note I would ask you all to silence your cell phones so that they won't interrupt us. We try to actually make it impossible for a signal to penetrate the basement but sometimes it gets through anyway. I'm gonna spend a short period of time going through the report this morning and then to accommodate the schedules of our commenters we're gonna allow them the time to provide some comments on the report as they've had an opportunity to look at it. And then after that we'll throw the floor open to questions and comments from you all as we go forward here and we'll use our standard procedures. We've got microphones and we'll ask you to identify yourselves and your affiliation before you ask the questions but we're pretty open otherwise. Defense analysis is never very easy and in the US we've actually gotten spoiled because we've got good access to data both on spending and on trends and on breaking that down. We have a lot of constancy over time. We have a lot of public visibility. Some of that is thanks to our executive legislative branch interface because it requires everybody to put good data on the table and to track it over time. But that's not true in other parts of the world and in fact it's very difficult to get good data and to get constancy over time and to get comparability across countries. And so a number of years ago we undertook here at the Defense Industrial Initiatives Group an effort to do a thorough examination of European defense spending and that really required us to create our own database in order to do that. And I actually want to give thanks to the seminal work that was done by our research consultant in 2007, Won Jung Chow, without whose work this would not have ever happened and we wouldn't be where we are today. I also want to recognize the enormous contributions that were done by our lead author Joachim Hoffbauer. Is he here? Joachim? Yes, he's standing in the back corner still making sure that everything is squared away here as well as the contributing authors, Gregory Sanders and Roy Levy and a host of others who contributed to this process as it went through, particularly my deputy Guy Benari who was with me was the co-project director here. It is an enormous technical challenge to pull the data together. There is no common data definition. There's no common data dictionary. NATO and the EU count differently both within a country and across Europe. But we've been able to pull together what we believe is the most comprehensive view available on European defense spending. And we've gone beyond that. Let's see. I have, I actually have some view graphs, but more importantly you have the report. Does everybody have a copy of the report with you? I will refer you to the charts as I'm talking about them so that you'll be able to find them and come into play here. We open with an analysis of European defense spending because that's what we've done in our previous reports here. But early last year we began tracking the implementation and the effects of some additional activities, not the least of which is the EU directives on procurement and transfers. And we think that that regulatory framework and the changes in the regulatory framework in Europe have enormous potential impact for the future, both of defense in Europe and for the U.S. relations there at both the strategic level and at the defense industry level. And this led us to questions of impacts on industry, and so we've actually created our own framework of analysis for industry as well. Let me ask you to look at the chart on page two. And I'll go through these fairly quickly so that we can get to our comments and our questions. There's a couple of surprising elements in our results, but the overall picture is not surprising at all. You can see the blue dotted line there shows that European defense spending is down over the entire decade. And this is all in constant 2009 euros so that we've got comparability over time and across countries. But essentially you've got almost a 2% per year decline in overall defense spending in European countries. We expect that trend to continue in 2010 based on the announcement so far like the U.K.'s SDRS late last month and others are probably in line to come. The more surprising thing is the red line because over 2001 to 2009 spending per soldier, and we use soldier here for military personnel, even though we're not just restricting it to the Army, is actually up. And it's up on average 2.8% per year. This was probably not by design. It's by default. It happened. It happened because interest reductions were greater than defense spending cuts. But overall it actually does provide both an opportunity and in some cases the reality of an increased focus on the technological capability on a per soldier basis. Let me ask you then to look at the chart on page five because the second surprising trend is one that runs counter to the U.S. experience when defense spending is going down. And that is that the cuts have been less in the investment accounts than they have in the personnel and the infrastructure accounts. Typically, of course, in the U.S., and this is true both in the post Vietnam drawdown in the 1970s and in the post Cold War drawdown of the 1990s, we take a disproportionate share of our cuts in investment accounts in procurement and R&D. And we tend to protect infrastructure and forced structure and civilian jobs greater than we do the expenditures on procurement and R&D. The reverse has been true in Europe over the course of the first half of or the first decade of this century. Equipment reductions have been less than half of overall defense spending cuts and O&M and operations in part because of deployments overseas have been protected to an even greater degree. Look on page seven at the chart. On a per soldier basis, all the categories are up except for facilities. I don't believe that's because the facilities were so modern and up to date that they required no additional investment. I think it's because forced structure cuts are so great that we can abandon a number of places. Similarly, on page seven, you'll see the distribution by the NATO budget categories. Now, NATO doesn't break out R&D separately. And so we have to do our own manipulation to get R&D. But here again, you'll see over time and these are in constant euros. O&M and other is up from 20 billion euros to 23.6 billion by 2009. Equipment up from 15.7. That's at the bottom to 19 billion. Personnel is down a bit. Not surprising because personnel cuts over a million in numbers and facilities down a little bit. Turn back to page three. This is a complex map that gives you defense spending by country. The size of the circle is the spending per soldier. So the ones with bigger circles have higher levels of euros per soldier. The density of the color of the country, that is, the very dark green ones, is total spending. So not surprisingly, the UK, France, Germany, Italy are at the top of that list in terms of overall defense spending. Inside the countries that have multiple colors, some of them you see are just sort of a plain orange, which is the data are not available to be broken down by category. But inside the ones where you have colored wedges, the blue wedge is actually equipment spending. And you can see a very, and the data are all buried in here, but this gives you a good quick visual image. You can see the countries that have a higher percentage of expenditure on equipment. And not surprisingly, it's again, Germany, France, the UK, although at the smaller level, at the smaller country level, there are some interesting things there. There is, we believe, a result of all of this, a huge opportunity for specialization. Now, Europe has talked a lot about specialization. In fact, I think when I first came to town 30 years ago, what were the realities? NATO wasn't spending enough. No European country was living up to its commitments. And we needed greater specialization in order to take full advantage of the capability that would be available to us and mesh it with a global strategy that had the US at the center. That same discussion is still underway today. It's just the framework of it is all fundamentally different. And the numbers are pitiful in comparison to what we used to be talking about. But if you look at page 12, at chart eight, here I'm going to pull up my own book and make sure that I'm looking at the same thing that I'm talking about. You'll see an array, and the array here, the vertical axis is, in fact, total defense spending. And that's in billions of euros. The UK and France and Germany are obviously high. Southern Europe, which is Italy, Spain, combined together, is at the highest. On the horizontal axis, you have combined annual growth rate. And you see that most countries adjusted for inflation haven't grown very much, but all have grown a little bit. It's really been the non-aligned Eastern Europe countries and Southern Europe where the reductions have been the greatest UK, France, and Germany down a little bit. Now, this obviously doesn't incorporate the latest UK data in it. And so if you take out there, they'll move a little bit to the left there. On the next page, page 14, chart 10, you see on the defense equipment spending by region. And again, the zero line in the middle is not the European aggregate. The European aggregate is 0.9 percent. That's the heavy, dark vertical line. And so you see that you have a number of places that are above average, a number that are below average. That's a quick snapshot of the spending picture, if you will. That led us to then step back and think about the market as a whole. And I mentioned that about early last year, we began tracking a number of directives that were being issued. In fact, if you'll turn to page 24, you'll see a quick summary of this. And I want to walk you through three key recent initiatives here. The first one is the lower left-hand side, the Interpretative Communication on Article 296. This is the exception inside NATO regulations that allow, I mean, EU regulations that allow for countries to essentially make noncompetitive awards in order to protect domestic supply. And it's an exception that has not been used as an exception, but has been by and large the rule in most procurement. In fact, if you look back on page 41, you'll see a chart that shows the total revenue or in expenditures, and you'll see the vast majority is in-country. Roughly two-thirds to three-fourths of spending is on in-country companies. This is an in-country job. This is not a surprise. This is what you would expect. This is what Europe has done for a long time. But the emphasis now in recent years has been to reduce that and to make it truly an exception rather than the standard rule. There's a test case right now involving the Czech Republic, which we will find out whether or not there's actually teeth behind this to essentially stand up to an exception that's not warranted and not justified. That in and of itself is remarkable enough, but it might become more remarkable because of the two directives that were issued. One is the EU procurement directive. That's the upper left item there, which basically particularly designed to create greater competition across countries and across companies for procurement decisions and to again reduce the exceptions and provide for more competition. And then on the upper right, the directive on transfers, which fundamentally has at its core an opportunity for a single license for export across all of Europe. And the potential here is that once you've qualified, you no longer have to get new licenses for any particularly different activities. Depending on what the U.S. does in response to this could end up creating an advantage for European companies for inter-European defense contracts and a disadvantage for U.S. companies who won't necessarily be subject to that. We're going to have to watch that as it's played out. Now, how will this play out? I mean, typically, you know, there's lots of great words about less domestic focus and greater increase on competition and on taking advantage of technology or even on looking at opportunities for specialization. But history says that we haven't taken advantage of those opportunities when they've come around. The question is, will today be any different? In order to set ourselves up for that question, we also want to look at what happens with the industry. We created our own index, a European Security Defense and Space Index. And the list of companies that are in that index is in the back on page 56. But if you look at page 35 and 36, you'll see sort of the results of what we've done. What we wanted to do was to have an ability to look at the performance of European defense companies vis-a-vis their non-defense industrial counterparts. And so we used the Morgan Stanley Capital Investment Europe industrials as the benchmark, and we compared our own index against those. And I just want to quickly walk you through the results of that. On page 35, you'll see that on a pure EBIT margin comparison that our European index generally outperforms the core industrials in Europe. So they're doing a little better. On cashflow ROI, which is on page 36, they're consistently better than their industrial counterparts. So that tells us that the European defense industry over the decade of the aughts is pretty healthy. It did OK even as defense spending was going down. What about the future? Well, there's a couple of ways that you can think about the future. One is what kind of R&D expenditures have the companies received from their governments? The second is what are they doing with their own internal R&D investment? Because where you put your investment is likely to be where you think your future is. So if you look at page 37, you'll see that R&D as a percentage of revenue, by and large, the defense index outperforms the basic industrials. So as a percentage of revenue, they're spending more on R&D. And then on page 38, from a capital investment point of view, again, with a couple of exceptions, by and large, the index outperforms the industrials. This says that European defense companies are actually thinking they still have a future, notwithstanding the 1.8 percent annual decline in revenue. Turn back to page 33 and you'll see why they think this. Revenue mix by geographic origin. In 2003, roughly two-thirds of all the revenue from the companies in our index came from Europe itself with a smaller portion from North America and the rest of the world. By 2009, which is the last year for which we have data, you'll see that in fact Europe has been relatively flat. North America has roughly doubled and the rest of the world has gone up even greater. And so what this says is the companies have done very, very well. But they've done well not by selling in Europe, but by selling to us and to the rest. And of course many of you are represented here in this room. So you already knew that at the company level, you probably didn't know it overall. What does this mean over time? We think that there is at least the potential for the budget declines to continue to be offset by true productions. European armies across the board have more than a million men and women in uniform than the US does. There's still an enormous opportunity for that. You see it in the German white paper. The potential for a move away from a conscription force to a smaller professional force. And that trend could easily continue. The key will be whether or not we take advantage of that opportunity, create greater specialization, which could in fact allow us to both retain or even enhance overall capability and or whether or not we just downsize in place and protect domestic jobs with a consequent loss in capability across Europe. That's somewhat independent of national decisions because global financial markets will in part determine whether or not that technology capability is there. If the company is no longer a competitive, they'll have a little more difficulty with access to capital. Overall the government and the industry responses will determine the regulatory reform impact. This is really a question of how governments implement and whether or not the cost is more important than protecting domestic jobs because ultimately the competitive market will in fact allow European countries to have greater capability for the dollar or the euros they're going to have, but if they're not careful they'll end up protecting jobs at an increasing cost. Defense market I think we think supports greater international involvement. This is not only a financial question, this is a technology question and a capability question. So our recommendations are, our strong recommendations are, that there's a huge NATO interest, there's a huge EU interest, most importantly there's a huge US interest in maintaining the spending trends of increases on a per soldier basis, but more importantly in focusing that spending on greater specialization and enhanced capability. That's been by default up to now, it could be by design the US clearly has a strong vested interest in doing so, the question is can we take advantage of that vested interest and actually create an encouragement for that. From the regulatory reform point of view there's an enormous opportunity to integrate the market, this would both provide greater capability for the same amount of spending and provide for greater technology development from European defense industrial base. There's probably an opportunity to create a broader European defense industrial base strategy, there's a lot of talk about this, there has been talk about this for decades, that opportunity is greater now than it's been before. And in some ways the economic recession that we find ourselves in creates an opportunity here, because recovery opens options that in fact wouldn't have been there had we had a stable opportunity. So the US needs to weigh in, needs to encourage specialization, needs to recognize the opportunity of the per soldier spending and needs to have a corresponding effort to continue on our own export control reforms so that as the EU directives on transfers takes effect we've got a corresponding opening of the market here. So with that I'm going to conclude and you can hold your questions, we'll get after the end of our commenters and and we'll provide that opportunity as well. So with that I will ask that Jim Townsend who's our DASD for Europe in the office of the Secretary of Defense and who was a collaborator with us in his time at the Atlantic Council on previous European defense spending reports that we had for which we're grateful. And Jim you've got an opportunity I think to look at this and we look forward to your comment. So I'll turn the microphone over to you. Well David thank you very much for inviting me to take part in this again as he as David pointed out when CSIS first rolled out this report a couple of years ago I was part of that roll out then and I will say David that when we rolled out the first copy of this it was one of your smaller rooms upstairs and we had maybe 10 people in the audience. So this is a pretty good increase but the point's well taken about the importance that we need just to pay to this kind of data. And I would like to say to David and to CSIS and all your collaborators that this is an important work that comes out each year and each year it gets better and better. There's a great need in the community outside of government to drill down and to look at these types of things. It's done somewhat in government but it's not done I think is as thoroughly as CSIS does their report and so I'm always glad to see this come out every year and it's really a value to me in looking at it. I'm going to have my remarks kind of in two buckets if you will. One is the so what of this which I always try to apply to everything that I take a look at is you know particularly for statistics and business trends and that type of thing because I'm a Paul Mill guy. I can never have done advanced math that David I'm sure did in his past educational career. So what I have to do is the Paul Mill guys take a look at this and say well so what does this mean for me? How do I use this? And David got into that as he was talking about what the U.S. government and what NATO needs to do so I'm going to talk about that a little bit. So what? And then I want to talk a little bit about what I'm seeing, what we're all seeing right now in terms of not just trends but this bit of a bit of a free fall if you will as nations begin to grapple with the deficits that we all have and we go through and do reforms in terms of government spending particularly on in the defense side and there's not a capital in the alliance that is that is immune from this. Everyone is making cuts some big some not as big. We know about the U.K. It's been in the news quite a bit recently particularly the U.K. French approach joint approach and and so we need to talk about that as well and and just to just to start off I guess a little bit on that particular bucket the looking at what we're seeing. You know I I collect books and I have a book that I bought a few years ago which is really interesting. It's a year book for 1913 and what it is is one of the British newspapers put it out and it talks about all the news events and the personalities of 1913 and it's really interesting because obviously 1913 is right before Europe was engulfed in war. In fact this this 1913 book came out and about I guess it came out about January February 1914 just months before. So when you go through 1913 knowing what we know now it's it's interesting to see the little hints here and there. I think you know one of the pages was devoted to seeing the praises of Kaiser Wilhelm as a matter of fact that you know as a statesman in this type of thing and so it was interesting to watch this and to get in the minds of those in 1913 and the events of 1913 right before the First World War began. In some ways this is like 1913 because the reason I say that is the in terms of looking at the data. The data here is from 2009 it's showing it's so well the trends and what was happening in 2009. But it's come out right before we went into this I call it a freefall but we went into this incredible restructuring reorganization that we're in the middle of right now and we're not sure how it will end. So David when you put this out next year it's going to be very interesting very interesting to see what what the impact has been. So I'm looking forward to seeing that because in a couple of ways we're wrestling with that we're wrestling with this with the defense spending trends that are now taking hooks that we didn't see last year. We got hints but certainly they're big right now. And how that then ripples into business and into what is what nations not only going to be willing to spend but what are they going to spend it on. It's going to be fascinating because you have that aspect of what government policy is in terms of defense spending but you've got requirements like Afghanistan. Where all the nations of the Alliance are doing something there and many of them have lots of troops there they're using up lots of equipment that's got to be replaced or refurbished. We know we're going we're learning lessons from Afghanistan that's leading to upgrades and different views on how one acquires capability or the kinds of capabilities that you need. And so it's a it's it's going to it's it's it's a it's a time where somehow we're going to have to square this circle of meeting capability requirements just in terms of replacing kit and training and this type of thing because of Afghanistan and other operations do whether it's piracy or whatever it might be for naval vessels with this with the cut in and spending. At NATO as well we ran into in this year in 2010 a problem that NATO hasn't had to have before and that is in terms of common funds. I won't go into all the budgeting and the types of things that NATO does. I'm sure most of you are aware that that much of NATO spending is done through a common pot that the nation's put in funding by percentage and a lot of this money in these days are going to help fund NATO operations in Afghanistan. The requirement this year just in January of this year was so great that we spent the common funds within the first couple of months of the fiscal year. So we outstrip the estimates that were made the year before in terms of budgeting. And so at NATO over the past year we've gone through a big reform effort to try to get the cost and the expense down of running the alliance and try to channel the money into the highest priorities. And I can tell you that that was difficult work. We had political directors from capitals come in during the winter of this year and we sat and we reformed the way NATO does budgeting, the way it does estimates, the way it spins it out, how it prioritizes. We try to do a lot of groundwork to better estimate what our needs are for next year. You would think we'd be doing that anyway. But in the past, NATO had the luxury of missions that were not at that point outstripping what nations were putting into the common funds. It was a different day, if you will. And this year we found the trend lines crossing. And in fact, we had to go and get a supplement from nations to plus back up the budget for this year. And so as a result of that, you will see at the Lisbon Summit in January, not in January, Lisbon Summit in a few weeks, reform packages that include not just that these budget reforms that NATO is doing, but a couple of other things too. One is the so-called Lisbon Critical Capabilities Commitment. And what that is, unlike past summits and approaches where NATO has had the Defense Capabilities Initiative where we had nations try to purchase capability to meet shortfalls from scratch, if you will, these 10 projects that are in the Lisbon Capabilities Commitment have already been agreed. They're in the pipeline. They're being worked at NATO. And what we want head to state and government to do is to pledge that despite these cuts and reforms nationally in terms of spending that we will fully fund and take across the goal line these projects. They involve counter IED. They involve cyber. They involve missile defense. They are important initiatives that NATO has already agreed to undertake is already partially funded, many of them, but that we've got to make sure survive whatever happens in terms of common funds and in terms of national funds that might have to go into these programs. So we've fenced off these to make sure that they remain. You'll also see a blueprint for a generic command structure. And this was something that was revolutionary in a lot of ways. We started with a blank sheet of paper at NATO on what the command structure should look like to come up with a command structure that is fit for purpose in terms of what we want the Alliance to do in the coming 10 years along with the new strategic concept, but to do it more affordably than we've done in the past. We're still in the middle of that work. We hope that head to state and government will approve this blueprint and then we'll have to take on additional work after Lisbon. But these are examples of what NATO was doing as an institution trying to deal with these cuts. And David talked about specialization and I'm gonna get to that in a second as well. But what we're seeing obviously within an Alliance context in terms of the institution and how it goes about its work. And what we're seeing in nations is this grappling with a... We saw the trends earlier and a lot of them are in here but we're grappling with this deficit situation that is really burst on the scene this year in terms of impact on defense spending and trying then to couple that with needed requirements coming out of real-world operations, particularly in Afghanistan. Now, how can we go about in a new way deal with this deficit situation and the spending, ways that are creative? And going back to what David said and going back to the report, this is an opportunity for us to do on a national basis as well as NATO to do things that we know should have been done years ago, whether it's NATO budgeting or command structure or conscription in Germany or the way the UK does things. This is an opportunity for us to go about and make changes and to do things because we have to. We've got a fiscal bayonet to our back, if you will, saying we've got to do a smarter job and how we go about spending this money. David mentioned specialization. I'm gonna talk about that in a second. Just so I'll keep saying that so I'll remember to. But I think in a lot of ways what the UK and France have decided to do a few days ago is an example of us, the situation causing a cooperative approach that is actually something that's not necessarily new. If you look at how allies have cooperated in the past, whether it's the Netherlands and Belgium, the US and Canada, there's examples of the Nordic nations. There are a lot of examples of how due to perhaps specialization in some ways, but due to size, due to an affinity in terms of nations working together, it was the common sense approach to deploying forces. When forces were deployed to Italy to do the air campaign, as I remember Belgium and the Netherlands deployed together, they're F-16s, and so this isn't necessarily something new, this kind of cooperation, but I think what is new, maybe even the French and the UK have cooperated in the past, I think. You could probably find examples, but what's new here is the scale and the depth of it and the new areas that they're exploring in a lot of ways. And so I think what the UK and France have done, they're pointing the way both within an alliance context as well as on a bilateral basis. They're pointing the way towards a smart way for nations to try to keep the capability up even as the money spent on capability is going down. And let me tell you, that type of cooperation is difficult what France and the UK are doing. I'm wishing them all the best and we're gonna be watching and helping where we can, but it's gonna be important that they are successful. I think other nations are watching closely too because I think there's a lot of ways in which we can operate together in an efficient and effective way, an affordable way, keeping that capability up. Specialization, as an old defense planner at NATO, back in the 90s when I was doing defense planning there, we talked quite a bit about role specialization, pooling of forces, that type of thing. In a sense what UK and France are doing now and you could cause some of that pooling or that type of thing. We'll have to see the details and how it works out, but we've talked about this in the past. A lot of this is common sense, combat service support or whatever, you can name other specializations too. Having a nation or a handful of nations specialize in that type of thing or pooling bits of capability that individual nations have together to create a larger pool of that capability, that's common sense. We do it in our own lives in various ways. They're downsides to that too. If you've got a nation that has specialized in something, water purification, whatever it might be, and NATO is going off on a mission and that nation says, you know, look, we're with you on the mission, but we're not gonna participate in it for whatever reason it might be. Then are you gonna scramble around and have to find water purifiers, if you will? That's a very simple example, but it's something that you have to think about in creating a dependency on nations for important capabilities when whether those capabilities will be used is a political decision that nations have to make. And if they, for whatever reason, go in another direction, then you find yourself having to scramble. But I think what's happening here, David, and you point this out, is there's an opportunity and a necessity to approach this kind of thinking and agree that there's downsides to these things, but is there not a necessity here for us to think more thoroughly about it and say, well, are there some work arounds here? Are there some role specializations that in fact we've got to do, despite the risks, that in fact lend themselves? So there's some things that really do lend themselves to be specialized that we've got to pursue and be smart about. Now, I will say, as far as David was saying, that the US has got to jump in and lead the way, in a lot of ways, in terms of the opportunities here, I think you'll see that happening after the Lisbon Summit in the sense that in terms of defense planning, in terms of how the alliance will then implement the new strategic concept, in terms of, okay, here we've got the concept. We know where Hedges-Tayton government wants us to go. How are we going to do that? Obviously, the alliance is gonna have to do a lot of that implementation work after Lisbon and sort that out in this fiscally constrained environment that we're in. So as we do the various documents, ministerial guidance, things like that, that will then task out work, I believe in what we will do, because that's what I work doing, we will inject into the defense planning process the need to really look hard at this. We have allies who are still building capabilities, they are coming from a background where their military forces were shaped in a certain way, perhaps during the Cold War. They're now being shaped in other ways that are more towards, of course, the way NATO does business, the interoperability, et cetera. We've been doing that since the 90s. But it might be some of these nations might wanna focus on a specialization and we've got to figure out if that, in fact, makes a lot of sense in the NATO context. And we're gonna do that, and we're gonna do that because there is an opportunity, like we've seen with these reforms at NATO that I never thought I'd see in my lifetime, there is an opportunity to make the hard decisions when you have to because of the financial resources. And there is a need to be more creative. And I'll tell you a creative approach that the Alliance took over a couple of years that sets the standard and that's the C-17 consortium or the SAC, I guess it's called now. And I think that C-17 consortium where nations bought flight hours was absolutely brilliant. It was hard making it work, although I have to say it happened more quickly than AGS or other kinds of things. But it worked, but of course that kind of approach works only in certain specialties. It doesn't work across the board for everything. But it gives us an example, though, of an approach that's new. It's not like NATO AWACS or AGS or AX or all the other programs that have taken a long time to come to fruition. This happened pretty quickly, it was very creative. And it's this kind of thing, David, I think that we've got to look for as we are in this new era of fiscal constraints and we try to grab on to the opportunities that are there. Well, what does this mean for business? And I think it's really, we are gonna need business to help show the way on how we can be more creative. It's you all face the same kind of problems we have from a different side of it, but as far as the transatlantic industrial concerns, the businesses, if we can't find creative approaches to acquiring capabilities, I think business is going to be, and business will not be doing as much as it could be doing. It's complicated work. And if it's left up to NATO, up to the CNAT, up to NATO committees, or up to individual nations, my office, other people, if it's left up to us to come up with these creative approaches, the frenetic pace that we are involved in and the broad array of issues we're dealing with don't necessarily leave time for us to sit down and think up something like the C-17 consortium. I think really it's something, it's a partnership between the nations and NATO and, well, between the nations and NATO and business, it's a three-legged stool, if you will, that we've got to think this through together. And I know we talk about that. We've talked about that for years. I've come to CSIS many times and talked about that, but this time the financial situation is such that we have to do this. We've got to come up with creative approaches and I really do believe industry can be a great help on this. I think you all probably see more clearly than we do the imperatives and the motivation certainly is there too in terms of making sales and that type of thing. So somehow we've got to come up with an intersection where this three-legged stool of nations, NATO and business can sort this out. I think NATO obviously has the NIAG and other committees that are supposed to do that. NATO-EU should be doing this. The EU defense arm has capability shortfalls too that are gonna be harder to try to fill as nations aren't spending the money there. So David, I think frankly this is an imperative for NATO and the EU as well on an industrial side. European Defense Agency, I mean we've said this how many times. I think we've got to do it now to come up with this industrial approach working with industry, NATO-EU to come up with C-17-like approaches to helping us meet shortfalls. We just have to. I'm gonna wrap up real quick David and head out for yet another meeting, but the so what bucket, that was all about the what's happening now bucket, the so what bucket of your study. I think there's a lot of so what here. In fact, if I was still at the Atlantic Council I would come over and say, can we help you guys write the so what part of this? On what does this mean? And I'll just, I'm gonna draw out just with just one example. When you look at page three and you look at the European defense spending by the map and you combine the statistics and the things that go into the circles that are on the map. And you think about, but then you put your polynomial hat on and you look at this and you, you know, it's interesting that the story isn't all there. Obviously because you're doing a specific thing, but if you put your polynomial hat on, I look at Sweden as an example. If you look at Sweden, it's got a pretty big circle there. This category breakdown is unavailable, so you're not quite sure where it's being spent. But I use Sweden as an example that you can use for all the countries there. It's not necessarily the amount of money and where it's being spent that says it all. It's also how smart is this money being spent? And I know you said that and you're absolutely right. It's how smart it's being spent. When you look at Sweden, I've been watching Sweden over many years having been the former Swedish desk officer many years ago, but watching the evolution of the Swedish defense forces once they got into the European Union got into the defense side of the EU as that developed after Somalo and Sweden became evolved in the battle groups, it had to change its force structure to be able to take on those kinds of missions because Sweden was in a whole nother place in 1990. You fast forward a number of years and the way they have spent the money that circled there has been very important in terms of being expeditionary, acquiring capabilities they didn't have before because that wasn't where they were in the total defense days. Now they are quite a different force and a very effective one and a very important one. So for me, I look at that circle and I think I know a lot of goodness is in that circle and change. It doesn't come out unless you put that Paul Mill hat on and I think for the next iteration of this it would be great to have a Paul Mill view of okay, what's the so what of that circle? For me that circle with Sweden is an important circle and so I could say something similar about a lot of the circles here and how the monies are being spent. And so I maybe we should meet in six months and we can come and take a look at the Paul Mill implications of all of this. Anyway, it's an important work that we have in front of us and I'm so happy that CSIS is continuing to do this. I'm looking forward to seeing it next year as we look at the impact and frankly it's not next year, it's five years from now. What kind of force structure are we gonna have within the transatlantic community after all the reforms have taken place? As David said and it's true as nations reform and cut defense spending it doesn't have to be, if you will, all in the negatives. There could be reforms that are forced by monies being cut that in fact produce that in fact fix problems that have been there all along, like I said at NATO that we've been able to do that. And so I think it could be as we look at this five to 10 years from now you have a lot of doomsayers saying we're gonna have nothing but a hollow force. We don't want that. We've gotta be careful about that as we do these cut backs. We have to make sure we do them in a coordinated fashion at NATO so that we don't inadvertently end up with a cupboard that's nothing but combat service support five years from now. We've got to be able to do this in a smart way in terms of the alliance and NATO's gonna have to pick that up as an imperative after Lisbon is to see where we are. But David I think five years from now, 10 years from now as we look at the long-term implications of what's happening now I think this is gonna be a fascinating document and this map will be very interesting and I hope what we can do whether it's in an alliance context whether it's NATO EU, whether it's in a national context I hope that what we can do is take advantage of the opportunities David that you said are there and I agree we can take advantage of the opportunities that are also there at a period of reform. At a period of reform that is a essential reform one that's pushed by politics that if we can guide it and we can work together and we can make sure that the monies that we spend even though smaller amount are spent in a smarter way are spent in a way that enhances cooperation to keep capabilities higher as high as they were when there was money. France, UK example right there. If we're able to do that, the picture doesn't have to be in five or 10 years one of smaller and less capable hollow forces. It doesn't have to be that way. In fact we could come away with some problems fixed and some enhancements. The only issue that I'm gonna be watching very, well not the only issue but one that particularly concerns me is to make sure that as we get smaller we don't impact the sustainability of an operation as the numbers of ground forces particularly get smaller that while they might be more capable spending per soldier goes up and in fact it's in areas that it's not just a statistical anomaly but in fact it's done with on purpose. It's done in a way to improve capability per soldier. Even with that the smaller numbers means there's less of the more capable soldiers. It's less of the ability to sustain operations and to handle concurrent operations two or three or four different operations happening at the same time. That's what concerns me the most. As you know when you get smaller your ability to do two or three or four things at one time becomes harder to do and that's what I worry about and we'll see how this evolves over time. And we'll watch very carefully how nations who are also concerned about that certainly how they deal with it. France, UK as an example. How the alliance deals with that. Making sure that we keep not just the quality up there but somehow deal with the ability to handle the sustainment and concurrency issues where it's nice to have a larger force to be able to handle things that happen together. Whether it's a battle group over here and a NATO operation over there and a national requirement here. That can be a big challenge for nations whose forces have gotten smaller even though more capable but they've gotten smaller. So lots of things to look at. Thank you so much for allowing me to come in give some views and I think you're gonna have a very interesting morning of discussion. So thank you so much. Thank you Jim. Thank you. I would like to welcome Dr. Steven Flanagan. Dr. Flanagan is the Kissinger chair here at CSIS and he has, I was gonna say a long career but that implies that he's old and so I'm not gonna say a long career. He has had a very dynamic and ubiquitous career across both the interagency DOD and the academic community here and we've asked him to provide some additional commentary this morning. I would like to thank Jim Townsend as he's walking out the door as well for his taking time out from his schedule to be here with us today. Thank you Jim. Steve. Thank you. Thank you David and sorry to join in a little bit late. I did hear Jim's remarks and I've had the opportunity to read this great report several times so I hope to not repeat things you've already heard but we had another event going on upstairs. I like that ubiquitous introduction. My father just says I can't hold down a steady job so I keep changing my location in Washington before they catch up with me. First of all I just wanna say it's been a real privilege to be on the sidelines of this study. I think David and Guy and his team in our Defense Industrial Initiatives group have really produced a very impressive piece of work that I think of you as you've had a chance to take a look at it, post together an enormous array of data in a very readable and graphically interesting and appealing way. So if you haven't got a copy of the report I hope you will pick one up on the way out. It comes of course as Jim alluded to it at an important time with a number of national defense reviews having just been completed most recently the UK Strategic Defense and Security Review but also on the eve of the NATO summit and the finalization of a new strategic concept for the alliance which will be adopted in the 19th and 20th of this month in Lisbon and setting some clear goals and direction for the future kind of force structure that NATO feels that it is most appropriate to the emerging security environment and setting some goals in an era of austerity that it recognized will be very difficult for a number of member countries to achieve. But what this study does I think in that context offers is a solid database on the realm of the possible within that those kinds of goals both the individual national plans and whatever plans NATO hopes to pursue. So I think it'll be very useful and I know already from some discussion that the NATO international staff and the military staffs there that they've really welcomed this more detailed analysis and particularly also looking at the industrial base side of this in tandem which is centrally important because of the notion of both what kind of capabilities can European countries sustain and what about the defense industrial base to support it? And of course as you heard from David I'm sure and the sort of the good news, bad news part of this report or the glass half empty half full part of the notion of the not surprising and continuing dismaying trends about the continuing European disinvestment in defense over the past decade and even going beyond that if you look at some of the previous studies that both CSIS and others have done and NATO data that reflects the same thing that are contributing to from a US perspective of course to the widening gap in capabilities with US forces, the compound negative growth that was cited at 1.8%, that's the bad news. But the two good news parts of this report of course of this notion or at least the potential of the glass half empty of the notion that this per soldier spending has ticked up a bit and with the shrinking size of the overall forces leaving at least the potential for countries devoting and developing more capable kinds of forces smaller but more capable and as Jim noted but the question of capable of what and sustainable for how long but also the general health of the defense industrial base that it suggests in Europe and how the period of contraction and consolidation has actually left with a fairly healthy and stable defense industrial base the question is can it be orchestrated of course in a way in a coherent way to support and will it support defense programs that have the kind of coherence and achievability in the context of the scarce resources. So I mean we could dwell a lot on the bad news part of this and how this report further amplifies many of the trends that have been lamented by various US defense secretaries or in various NATO communiques as governments were being urged to try to live up to the 2% goal as you look at the general trend that of course that on average according to the NATO data over the last 15 years or so the US average being about 3.7% of GDP based on current prices and with about little less than 1.9 for the core group of allies that were in the alliance during that period. So and of course that all but four of our current allies who do achieve that 2% and of course the British in their SDSR a few weeks ago were very quick to underscore that they were still gonna maintain that commitment based on a number of other specific initiatives that they're gonna be taking and that they wouldn't fall below that mark not that it's a magic number not that it is necessarily linked to any specific set of capabilities but it is reflective of an overall level of capacity going back to Jim's point about well what level of kinds of operations can various governments sustain and of course the other big concern that has been out there for so long within NATO within the US defense community of the gap in average spending on investment in R&D that Europe spends that the United States has had been outspending Europe about six to one in R&D and devoting much higher percentages of its defense expenditures to investment from a budget of a much larger obviously much larger base and then Jim too alluded to and again as I said I wanna focus more about how we go forward in the world that we live in not that the world that we wish we had perhaps the equally problematic gap on the sustainability and the fact that with still over two million men under arms only about 3% three to 5% of those European forces are capable of deployment outside their territory so still falling far short of the NATO goals of achieving about 50% that they're capable and prepared for foreign deployment and about 10% of those land forces capable of being sustained in foreign operations. So that is probably in particularly as we look at the fiscal forecasts and the growth forecasts in Europe in the out years at least over the next four to five years very unlikely that those goals are likely to be achieved either at a time though when this new NATO strategic concept will call for the development of more flexible and adaptable forces that are capable of being both projected and sustained at some geographic distance at strategic distance as the Alliance speaks of it that is to say more expectation that there will be more efforts to be engaged in remote stabilization operations not necessarily on the scale of Afghanistan but certainly operations complex contingencies like Afghanistan perhaps on a smaller scale support to counter piracy and freedom of navigation activities other kinds of threats that are out there that the group of experts that advising NATO on the strategic concept said that the broader threats to European security emanating from afar from more distant regions new threats and that relate to protection of the global commons or other areas that don't necessarily pose direct threats to Alliance territory but to Alliance interests and of course new threats and NATO as one of the things that the summit will do it's already been established but endorsed by the summit is this development of the new division in the international staff focused on emerging threats and focusing on how the Alliance does better in dealing with not only terrorism and proliferation but also cyber and other threats what is the role of the allied militaries and the Alliance itself in some of those domains and how can that be made more effective but all of that calling for a much more dynamic and adaptable and flexible force posture than a number of the current legacy forces that we see in the European countries can sustain. So as I say I thought it may be more useful to focus on a discussion of the more positive part of the report the trend that does this opening the door in particular to having more capable smaller forces among our allies and key European partners and how could what ways could we encourage that and what kinds of mechanisms would achieve the best value for money which was certainly what was being emphasized in the recent UK strategic defense and security review what a number of other governments are at least talking about and how enhanced collaboration more common funding within NATO multinational formations multinational procurement programs could those in this context of will the fiscal crisis serve as a stimulus to help overcome some of the traditional political hesitancies and other financial and economic complications of those kinds of operations of those kinds of cooperation to advance and the development of the kind of smaller and more capable forces that we think are probably sustainable if you look at the trends even as this flat line does continue in the out years with regard to European spending but with these smaller forces with the move of a number of countries to away from constriction forces to professional militaries how can that be sustained? So I think the dig analysis does suggest that this changing structure demand and the tendency towards these smaller and more expeditionary capable forces is emerging that there are certainly those are the trend lines there are certain improvements in some key areas a number of governments having made some specific investments in special operations and special operations like forces and some of them having rather considerable capabilities in those areas and that those relative spending priorities could be focused on giving priority and that is of course another one of the trends that this present study has shown that it is across all of those other areas of its equipment and as well as total defense spending that this per soldier or per personnel investment has been going up. But still there's the whole question as I said of the many governments and the British tried to wrestle with this as they looked at their legacy force both the British Army of the Rhine still deployed in Germany some of the heavy tank forces moving some of that equipment into the reserves how could they begin to transition from the legacy forces but at the same time obviously meeting the challenge of restoring and replacing worn out equipment that has been taxed heavily in recent current operations. But I think the UK SDSR does set a course and I think this is why you'll see that a number of our colleagues here we gave a rather positive review to that review arguing that they made some very difficult choices they made some hard calls but overall I think that they did make it not in the direction of focusing on more transformational capabilities sustaining providing a clear support for sustainment of current operations in Afghanistan and elsewhere but also trying to move towards the investments in the longer term that will provide a force that is capable of some long range power projection capable of sustaining at least in the British case at least a combat brigade fairly indefinitely in a long term mission at some distance. So if the UK model is followed or emulated by a number of the countries as they go forward either those that are already in the middle of various program laws or defense plans or as they undertake future reviews I think that the UK review offers some very good guidelines and indeed as a number of my colleagues here pointed out also some lessons that the US could learn from as it looks towards a more austere fiscal environment in the defense sector. So I think that there are still some key questions about what kind of resources though if you look even at the British assessments which have been the most complete and explicit if you look at that clear commitment to sustaining support for current operations in Afghanistan if you look at this issue of what will be required to simply recapitalize some of the forces that the kit is wearing out what impact will this have on then the resources how sustainable will the continued growth that the dig study has illuminated is still out there for our equipment and R&D how sustainable is that gonna be over the coming years I think that's one of the big questions that I have not at all evident that as you say well of course we and any politically impossible for any government not to say that they're not gonna provide adequate support to forces in the field in active combat operations and other than reducing that level of commitment then the notion is what else is gonna be left over as you look at these continued shrinking pies even on the smaller base that many of them are projecting. The whole question though of this renewed focus and I think again one of the good news stories that emerging from this and we saw this even this week in the announcement of some of the cooperation between the France and the UK on both in the conventional sphere and also in their nuclear development but the notion that it does seem to be some evidence at least that some of the traditional impediments to bilateral cooperation among European allies that also too we know very clearly that the French and the UK both are looking towards continued cooperation with the US as a way to sustain some of the most capable forces within the alliance either for ad hoc coalition operations or as part of a leadership role in NATO operations but also we see other regional cooperation Nordic cooperation, Jim mentioned Sweden being increasingly active and wanting to play a role in Nordic Baltic security cooperation a number of other regional consortia of course that are out there that we could talk about all of those kinds of capabilities will in fact the current fiscal environment be a stimulus to that to enable these governments to overcome some of the impediments that we know that have oftentimes been difficult in multinational cooperation or in multilateral procurement programs but so I think those are some of the questions those are some of the unknowns at this point but some of the key questions that we'll I think answer the or prove out the question that the dig study asks is as they have this greater resources available per individual soldier and airmen and seamen what kinds of how will those will they in fact be spent smartly will there in fact be efforts to achieve the kind of cooperation and rationalization of force structures so that not and particularly in a NATO context the hard decisions that maybe some countries will make to say that well they're not gonna maintain a full spectrum of forces that they're gonna begin to specialize within a certain range leaving still open some capacity for national action but independent national action but also moving towards a more specialized force that is then a more sustainable so I probably should stop there and we can open the floor to discussion other comments thank you Steve I appreciate those very thorough commentary along the way I would like to make three points before I open up the floor to questions in response to the comments both from Jim Townsend and from Dr. Flanagan one is that absolutely the first minute we can predict where Europe's gonna be five years from now we're gonna print that report and distribute it to all of you the you know and one of the reasons we look so hard at the information is to see whether or not there's trends that we can lean forward here I think the inflection point that we're at right now makes it very difficult to predict where we're gonna go the second is really I think you have to look at the political dynamic that's happened in Europe over the last decade for the first time in a long time many of these countries have actually deployed their young men and women into combat environments and they've come home dead and this has been a dramatic change for a lot of European countries and the ways in which they both have responded and will continue to respond or to some extent independent of the finances and you know there's a tendency in face of that situation to react in one of two ways one is to say okay we're gonna quit sending them because it's too dangerous because the reality is that an awful lot of European soldiers ended up without the same capability to survive in the hostile combat environment that US soldiers had and their parents asked legitimately why not how come ours aren't as well protected and it's not just a question of body armor and Humvees it's a question of sensors and data it's a question of situational awareness it's a question of organizations and training it's a question of the entire way in which you approach military operations because the other side of that equation is the geopolitics of the future may not permit you the luxury of not engaging and I think most of the European countries have faced that and are continuing to face that dynamic so it's not just a question of money and technology and expenditures is also a question of both political will and the geopolitical reality of the future and then the third comment I think and Steve really raised this point very very interestingly to what extent are we in the US gonna look at Europe and see ourselves in our own future both what lessons do we learn from that and how do we apply those lessons and what's the reality of what we're facing so those are questions that are really above and beyond the nature of our report but I think they all shape and frame the way in which we look at the data and the way in which we project forward from the data I wanna pick up on your point at the David about you can't predict the budget five years in the future. What I'd like to ask the following comment let's pretend that we're having this meeting in 2022 or 2025 and you're talking about how the European Defense Industrial Base evolved over the intervening 10 to 12 years. It's obvious that there are some alternative ways that that base could go and it may move a lot faster than the US base will go and it will be hinged on things like well you can see the indications today there are what I will call macho industrial base issues like no self-respecting force when we talk about the last. Let me take a first crack at that Steve and you can be thinking about it while I ramble a bit here. I think it is a fairly binary set of options that we face and of course let's just pick 2025. I mean that seems like an awful long way into the future but if you go the same distance back it's 1995 and you say okay how much different are we now today than we were in 1995 and the reality is not all that much. Maybe in terms of threat environment we're dramatically different and in terms of parts of the world we can ignore we're dramatically different but in terms of distribution of labor fundamental capabilities and options available to us and the industry that supports it there's not a lot of dramatic change but I think the binary path that we go down is one that's very clearly laid out here. Absent any conscious decisions to the contrary what we're going to end up with is at the national level in Europe very limited capability on a country by country basis and it will still be platform centric. At the industry level it's already evolved to a very export dependent industry in a way that we don't yet see here in the US but that may be the future that we're looking at here as well I actually don't think so because I think the US will continue to be the biggest market. The other option that sits there and this is an option that won't be decided by the companies themselves is an option that focuses more on integration of technology it's less platform specific and it has a greater transatlantic integration in terms of technology capability. Those two futures are very very different and I don't actually see right now the political will to steer towards that second future the market itself won't do it these are national decisions and alliance decisions that have to be made. Thanks Chip it's an excellent question and I think it's as David said if you could predict that five years it'd be quick to get it out before anybody else did but I think if you look at the sense of in our own defense analysis we've done on looking at shocks and trends and what could shape or alter perceptions I mean if you look back at the NATO's discussions in 1999 about its strategic concept that is still in place that will be it was fairly focused on developing making the transition from the legacy force for defense of central Europe towards engagement in not so distant stabilization and reconstruction missions of adopting peacekeeping and engagement with other partners as a long term concept and now no one certainly anticipated the notion of the idea that NATO would deploy in excess of 100,000 troops in Central Asia no one was talking about this kind of longer term sustainment about kind of piracy operations all these other kinds of things that and now you see we still have 40,000 European troops deployed in Afghanistan for a long period at a point that even Secretary Gates when he made his rather pointed speech about demilitarization of European thinking and capabilities in February even he pointed out it's a remarkable achievement that even with all the caveats with all the limitations still and they were taking a fairly high proportion of the casualties as David alluded to there was still that engagement so I think it's hard to know what would there be galvanizing events the whole question of missile defense which is now gonna become a prominent feature of the debate at the NATO strategic concepts in the finalization of the concept at the summit what would be the reaction clearly the coalition of the P5 plus two was stuck together on aspects of pushing on Iran now the alliance has a clear decision to make about and it looks like it will endorse the notion of defensive population for all of the alliance as a core mission how will the alliance and will that begin to soak up a lot of resources I mean that's another if there were a couple of missiles lobbed by the Iranians at Israel or other countries in the region how would looking at five years or further how would the allies react would there be a new resolved about or would there be an impetus to focus more on homeland security and societal security which is indeed one of the things that the UK defense review did highlight and emphasize that there was a need to put more effort in there in that but would that include missile defense would it include other capabilities how much what balance will they see between fighting or preventing threats from reaching our shores versus dealing with threats once they do emerge more full blown on our shores so I think in some ways a lot of international trends and potential shocks could impact that so it's but I think that the baseline that we see is probably an all likelihood of fairly limited I mean in the discussions that the NATO group of experts had this year and a lot of the seminars that were held which I participated in a lot of the discussion was on the notion certainly the expectation that for the next four to five years NATO could expect to be engaged in operations like Afghanistan not nearly on that magnitude but that that's what the allies needed to at least aim for would they be able to sustain those capabilities but complex contingencies developing integrated civil military approaches the so-called comprehensive approaches NATO calls it or networked approaches the Germans call it doing all the lessons of Afghanistan and applying those but hopefully for many allies because of their inability to sustain it hopefully on a much smaller scale than what has become the current mission in Afghanistan so I think that's the baseline that many allies think they're moving towards but now worried about if they make this commitment to missile defense what kind of implications will that have for what's the yeah it's only 200 million for the command and control system but what are the other investments gonna be down the road how much capability are we gonna need to have something effective if the threat is greater than a few dozens of missiles if it what if it becomes a hundred missiles what are we gonna do then so I think there's still a hesitancy it's not certainly a robust engagement most of those governments on a robust embrace of global engagement but I do think there is a recognition at least at the level of the defense establishments in those countries that their militaries have to be prepared for and if you look at the French White Paper in 2008 the same kind of conclusions a much more flexible adaptable kind of force posture capable of some projection capability at distance and then how sustainable is that well it's not sustainable clearly on a national basis so is it gonna is it going to overcome some of these impediments to more multinational cooperation Arnold? Arnold de Borger of CSIS what procurement common procurement programs have been adopted in Europe between like-minded neighbors such as Belgium and Holland I don't have a good catalog of those kinds of programs but I think the fact that they haven't really come to our attention as we've looked at them tells me there aren't very many and from a transatlantic point of view of course there are even fewer and one of the great challenges that we face is that the few that we have don't seem to be doing quite as well as we would like them to do and so that tends to raise the spectra of cost overrun schedule slippages et cetera that you commonly have in defense programs and that leads then to pressure to say well can't we just get rid of that but the value of a transatlantic cooperation or a cross national cooperation has to be taken into account as part of that equation I think with that we're close to our 10 o'clock hour I think you all would be happy to spend the rest of your day reading this report we'll be happy, it'll be of course posted on our website and we eagerly request your reactions and inputs and insights as we go forward we'll continue to be monitoring this and trying to expand our coverage and our prediction capabilities as well I wanna thank you all for being here this morning and thank you for your interest in this topic