Bloomberg Audio Studios. Podcasts. Radio. News. I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. We spent over a trillion dollars over the last short period, a trillion, in order to protect these countries from Russia. and has nothing to do with us. We have an ocean, but it's been a long-term thing and they haven't treated us right. Europeans have that first task of government is to keep our country safe. The second task is to have a strong economy. And you need both to deter the Russians. We need strong economies, healthy finances, connected to strong economies, but first of all, we have to defend ourselves. We are all committed to an increase in European defense investments. that there's burden shifting in an orderly way, but very decisive way. Around the world, governments are pouring more than $2 trillion into defence. From drones to missiles to AI systems, a more unstable world has sparked a rush to beef up military resources. After haranguing from President Trump, NATO members have pledged to spend 5% of GDP on defence. The money is flowing, but the results are mixed. Here's why defence spending isn't delivering. Becca Wasser leads defence research at Bloomberg Economics, and she joins us now for more. Becca, put this in context for us. Who is spending more on defence and how significant are the sums of money involved? Most governments have pledged that they're going to meet NATO's new goal of spending 3.5% of GDP on core defence spending, with the additional 1.5% of GDP on associated military spending, things like infrastructure. But if you look at Europe's five largest economies, they are likely to well undershoot that target. Some of the modeling that my team has done at Bloomberg Economics, we've looked at it, and they're probably going to come closer to meeting about 3% of GDP by 2030. you're going to see Germany as one of the largest economies really spearhead Europe's defense buildup while others like the UK France and Italy they have modest hikes and modest hikes in spend but others like Spain are likely to well undershoot that target even though they are raising defence spending slightly And to put it in sort of bigger context almost all of this is going to be debt financed. And we are talking about debt into the hundreds of billions. Okay, so there are huge amounts of money involved then. Where is it going? And what results is that money delivering so far? So the biggest challenge is not on defense spending. The biggest challenge is translating that increased defense spend into genuine military capabilities. And Europe faces some very sizable capability gaps. They have essentially organized to have peacetime militaries. But a revisionist Russia and resurgent aggression in the European continent with Russia's invasion of Ukraine really changed that. Additionally, more recently, we've seen the U.S. reduce its contributions to the NATO force model, taking some forces and capabilities away from Europe's ability to deter Russia from any potential aggression. So that means that you've got these huge gaps in what European militaries already have in their arsenals. And these are things that are offensive, like long range strikes, some of those longer range missiles that you would need in a potential conflict. They also range things like air defense interceptors that we've seen this enormous need for from Ukraine, but also in the Iran war. And then some of the capability gaps are really on these unsexy areas, but things that are critically important, things like space based intelligence and surveillance assets, things like command and control systems. These are so important for Europe to be able to operate together. But these are the types of things that Europe needs to be spending money on. And they're starting to do that. But there's no way for them to kind of quickly fill these gaps. Part of that is because there are all of these, you know, weapons development projects that are in process, but they're not yet mature. And so that means that Europe is probably going to have to rely on buying more weapons from the United States and from external providers if they want to fill the gaps in the near term. That stands in the face of European defense autonomy Europe desire to go it alone in the face of reduced American reliability And it also means that there could be a temporal gap that Russia could exploit before Europe is able to actually make that defence spend turn into tangible military assets So what's needed then to address those gaps? Can anything be done about it? I think there's a lot that can be done. And we're already seeing Europe already starting to do the right things. But I think there is this higher risk right now of European defense industrial fragmentation, where for good measure, all of these countries want to see the increase in defense spend flow back to their own countries, to their own local economies, to be able to have domestic benefit. That all makes sense, but that does risk creating a number of different weapons programs with weapons that might not be interoperable, that might not be able to work together very well. It also means that you're going to have essentially companies that are producing weapons in smaller amounts because the contracts are going to be smaller. In order to overcome this, Europe would need to pick some winners and some losers and have a little bit of industrial consolidation. And that's a really tricky thing to be done domestically. But I think as time goes on, as some of these programmes mature, as there is the need for really filling these gaps quickly and within Europe's defence industry, we are going to see that play out over time. Is this a uniquely European challenge? Obviously, Europe has been upping its defence spending, most notably as it tries to increase these new NATO targets. But do the United States and China face any similar challenges in trying to beef up their own defences? Listen, defence spending is hard. Weapons capability development is hard. Fielding some of these military capabilities is even harder. So all countries essentially have the same challenges, but they look a little bit different. China is notoriously opaque about its defence spending. And the true number that it spends on defense is likely a fraction of what we know publicly. But China has been able to essentially take some of its national industries and use them to produce defense equipment, which is why you see it producing capabilities at a rate that is much higher than the United States and much, much higher than Europe. For the United States, it has a very high defense spend. If you look at this year budget request it trillion But still the U only spends about 3 percent of its GDP on defense which is much lower than what it spent during the Cold War And right now the U defense industry is overstretched. It can't produce weapons as fast as it needs to. It doesn't have enough capacity. It doesn't have the surge capability that it needs, particularly as it now needs to replenish its own stockpiles after the Iran war, let alone fulfill the needs of so many global customers and countries that have bought US weapons. So each country has its own unique challenges. But I think the math behind defence spending and capability development is very much the same. How do new technologies, newer forms of weapons factor into this conversation? How much of investment in research is a part of this? I think traditionally, countries have really focused on spending on military personnel. In recent years, we've seen that shift towards spending more toward equipment. But even smaller than that is the percentage of defence spending that goes to research and development. So, you know, there is going to need to be an increase in research and development spending for that next generation of weapons. But at the same time, we see countries really wanting to do things not only faster, but cheaper. And this is why we have such an emphasis on things like low-cost drones, in part to reduce some of the manpower challenges that some countries face and some of the fiscal challenges that they face when it comes to being able to buy some of this really expensive equipment. So I think we're going to continue to see some bending on AI drones, lower cost missiles in order to essentially get the dynamic of the cost per shot down and try and make it so that different countries and different militaries can do more potentially with less. Becca Wasser leading our defence research at Bloomberg Economics. Thank you. For more explanations like this from our team of 3000 journalists and analysts around the world, go to Bloomberg.com slash explainers. I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.
