Defence Implications of Brexit – Further Thoughts

Brexit

The nation has decided, although as we know, there is currently all sorts of activity trying to reverse the decision. But assuming this all calms down and the Government gets on with the business of leaving the European Union, what are the defence implications?

A few thoughts, building on an earlier post that suggested the day to day defence issues would not change significantly but wider economic and political issues would likely be subject to a great deal of change.

Day to Day Matters

Since 1998, various initiatives and treaties have slowly increased the role of the European Union in defence matters for its member states, culminating in the Common Security and Defence Policy (CSDP). The CSDP creates a framework for the military and defence aspects of EU policy. Created when the Treaty of Lisbon was signed in 2009, the CSDP replaces and enlarges the former European Security and Defence Policy (ESDP). The aim of the policy is the establishment of a common European defence capability. It might also be worth mentioning that the UK had a significant role in creating CSDP, no wonder our European partners scratch their heads at our attitude sometimes!

Many on the leave campaign, I think, over exaggerated the timing of a likely ‘EU Army’ but equally, the intended direction of travel was clear and articulated by the EU, greater military integration as a logical extension of greater political integration, it really wasn’t a secret.

We can argue all day about what happened, but it would be pointless, only what will happen is important.

Increasing EU integration without the UK in the EU becomes simultaneously both more likely and less likely. It is more likely because the UK was a brake on the more zealous in the EU for more defence integration but in a post Brexit EU, there are matters of more importance to consider and the widespread and increasing ‘euroscepticism’ on the continent means it is increasingly unlikely.

The degree of UK/EU defence integration is quite low but still tangible.

European defence organisations include the European Defence Agency (EDA), Organisation for Joint Armament Cooperation (OCCAR), European Union Institute for Security Studies (EUISS) and Eurocorps.  Various committees and staff groupings also exist, as does the European Satellite Centre and the EU Intelligence & Situation Centre (EU INTCEN). On a more security than defence basis, EUROPOL is the EU’s law enforcement agency.

OCCAR is an organisation for the through life management of defence projects but only Belgium, France, Germany, Italy, Spain and the UK are so called ‘member states’. In addition to the member states, ‘participating states’ participate in programmes on equal terms; these being Finland, Turkey, Luxembourg, Sweden, Poland and the Netherlands. Programmes managed by OCCAR relevant to the UK equipment programme include the A400M, UK/FRA Maritime Mine Countermeasures and FSF-PAAMS (systems for the Type 45 destroyers).

I can’t see any change in this.

Eurocorps has its roots in a 1992 agreement between France and Germany. The ‘Framework Nations’ are Belgium, France, Germany, Luxembourg, Poland and Spain with ‘Associated States’ being Greece, Italy and Turkey, yes, Turkey. It comprises approximately 1,000 personnel and is deployed on the orders of the Common Committee, it is certified as a High Readiness Force for NATO. EUROCORPS is a headquarters function for the Franco-German Brigade and additional contributions from the framework nations.

This will likely continue, but the UK’s involvement was none to minimal in any case.

Where the UK has been involved to a greater level is EU peacekeeping and stabilisation operations, perhaps more security than defence. Since 2003, the EU has engaged in approximately 30 overseas defence operations. What has characterised these is their relatively low risk, limited mandate and narrowly defined objectives; ceasefire monitoring, training and border assistance etc.

A good example is EUFOR Althea that took over from NATO SFOR in Bosnia and Herzegovina in 2004, it is still active and doing good work. The UK has generally avoided participation in these missions, tending to be deployed on other more demanding operations, but it does support one or two.

EUNAVFOR Somalia (Operation Atalanta), the current counter piracy mission off the Horn of Africa is commanded from the Northwood HQ complex in the UK. Those that think this is the UK being enthusiastic about EU defence are missing the point that in the EU, only the UK has the experience and infrastructure to command a multi-national out of area maritime operation. The current Operation Commander is on Major General Rob Magowan CBE, Royal Marines.

It won’t happen overnight but clearly, EUNAVFOR is an EU organisation that the UK will not be a part of.

The MoD must comply with EU regulations for purchasing equipment and supplies, namely the EU Defence and Security Public Contract Regulations (DSPCR) 2011 that is the enabling UK legislation for the EU Defence and Security Directive (2009/81/EC)

In the reasons why section, it states;

The European Commission (“the Commission”) believes the current EU “Classic” Directives do not always permit effective defence and sensitive security procurement. It believes as a consequence that some EU Member States exempt procurements from these Directives to avoid burdensome rules or for economic reasons rather than to protect national security interests.

The Treaty for the Functioning of the European Union (TFEU) made exceptions for national security procurement exemptions under Article 346. This allowed pretty much anything purchased by national defence ministries to be exempted and national defence industries protected from competition, France buying French aircraft and Germany buying German tanks etc.

The DSPCR attempts to change this and allows non EU regulation procurement only for ‘truly exceptional cases’, nuclear warheads for example. It sets out procedures and thresholds for defence and security procurement with the intent of opening up the EU wide defence market. EU purchasing regulations often get a rough ride but this attempts to open up one of the last remaining closed markets and one look at equipment inventories of France, Germany, Italy and Spain and it becomes immediately obvious why.

Version 1.3 of the MoD’s guidance document were published only a few weeks ago.

The UK is a significant defence exporter, about 20% of the global market, but only a very small amount of this is to the EU. Of the big three, France has the highest percentage of domestic sales, i.e. French guns for French soldiers, at 77%, for the UK, it is 58% and Germany 57%. The UK also accounts for the largest share of EU defence turnover, 31%, compared to the next two, France at 26% and Germany at 17%.

Depending on the nature of the exit negotiations these may remain in force or removed completely. It must be said though, defence exports from the UK to EU nations are relatively modest.

The French Senator, Daniel Reiner, and member of the Senate Defence Commission summed it up quite well a few weeks ago;

I do not all buy the argument that if they leave Europe then we lose a defence partner. We do not lose a defence partner: things will simply not happen in the framework that we had imagined and that we’re having trouble building with them anyway

The A400M will continue to be managed by OCCAR, as it does for Turkey.

The UK/NL amphibious force and the UK/FRA reaction force will continue as now.

The Royal Marines will still train in Norway, Dassault and BAE will still develop FCAS and the Royal Air Force will still work with Eurofighter Jagdflugzeug GmbH for the Typhoon.

Security cooperation is perhaps more of a challenge because it is more integrated but I tend to the position that in matters of security, politics will take a second place. Dedicated and intelligent people doing difficult and dangerous tasks will find a way to protect the citizens of Europe. The structures may be different and there may need to be more bilateral arrangements but underneath the frothy surface, politicians and security professionals will get on with things.

Now that may be seen as a bit wishful thinking without a plan but in this, I have faith, I have faith because too much is at stake.

EUROPOL would continue to operate with the UK, as it does on an operational level with 15 other non-EU organisations including the USA, Interpol, Switzerland, Norway and Iceland. We would of course lose influence with EUROPOL but given that most of Europe now models its anti-terrorist approach on the UK’s CONTEST strategy, not because we are in the EU, but because it is the best way to do it, this might actually be less than we think.

This is a key point, whilst the UK’s influence at a political level on the EU will certainly wane, at an operational level it will continue, simply because we know what we are doing, this would continue, again, because it is in everyone’s self-interest to do so.

From a day to day defence management perspective, I think relatively little will change.

Exchange Rates

If exchange rates, particularly US Dollar and Euro exchange rates move out of expected ranges, the MoD will either be paying more, or less, than expected.

I say expected ranges because the MoD will predict exchange rates and plan accordingly in all future spending.

Payment profiles (when and how much) over a project lifecycle can, and do change. The MoD is no different to any organisation buying products and services from other countries in the same respect. Payment profiles can be adjusted to accommodate short and medium term change in exchange rates after negotiation with suppliers. Slowing payments or speeding them up is a normal activity and currency contingency is a perfectly standard component of major project cost accounting. Sometimes a project suffers, sometimes it benefits, especially over a long project. The NAO Major Projects Report reveals a total of eight adjustments to, for example, the A400M project, because of exchange rate variations.

Exchange rate movement is normal, it is accommodated in project risk accounting and therefore, the knock on effect to other programmes in the equipment plan may not be disastrous, it is why the MoD has contingency budgets and buys foreign currency positions and uses bond financing.

The big question is, can the existing arrangements accommodate both a sustained and large change, outside of expected and planned for parameters.

The answer is of course, that would depend upon the magnitude and duration of the change.

The most recent Major Projects Equipment Report 2015 and Equipment Plan 2015 to 2025 Report from the National Audit Office sounded a warning about how the Equipment Plan is contingent on as yet unrealised ‘efficiency savings’.

The Equipment Plan was always at risk from a failure to achieve these savings, so additional exchange rate induced costs add additional risk to the equipment plan being achievable.

Major projects with significant US Dollar exposure include P-8A, F-35B, Apache E and Protector (Certified Predator B). Because we import relatively small amounts of equipment from EU countries, Euro exposure is arguably less, some in the complex weapons pipeline and MCM projects perhaps, the A400M has already largely been paid for although support contract costs may suffer depending upon direction of travel in exchange rates.

Strategically, Successor is more important than any of those three, although a good case could be made for including P-8 within the Successor cost envelope given the former’s importance to the latter.

There is a flip side, if the Pound weakens significantly against the US Dollar, defence exports from the UK to the USA would potentially rise, perhaps with some interesting implications for products with significant UK content, the F-35B for example.

Currency risk is a very real risk but we do not yet know the longer term future of exchange rates, the current depressed rates and volatility is not the steady state position.

The Wider Economy

Since the global crash the financial infrastructure has reportedly been reformed and strengthened to withstand economic shock and talk of the EU punishing the UK may well be premature. It will come to a balance of political an economic self interest. Because modern economies are interconnected at every level, the logical consequence of the EU punishing the UK is the EU punishing itself. With many parts of the EU’s economy in a much poorer state than the UK it would be against national economic self interest to create artificial barriers to economic activity.

We will just have to wait and see what the negotiating positions are over the coming months.

Whilst exchange rate risk may impact a subset of current and planned defence expenditure, the wider economy will affect them all.

If the wider economy suffers significantly then it is a pretty safe assumption that defence will take its share of the burden, the share to be determined by political considerations.

This assumes that a Government response to a shrinking economy (and by definition government income) will be to reduce public spending instead of raising borrowing or adjusting priorities. If the economy suffers significantly, the Government will likely deploy all three.

It is also unwise to make the assumption that a future economic downturn is wholly attributable to Brexit and a future in which the UK remained in the EU would be immune from the widely predicted global recession.

There has been a widespread acknowledgement that a global down turn was a distinct possibility and the economic problems of many EU members being swept under the carpet by successive rounds of of debt financing. A reasonable person might conclude that whilst the economic risk of Brexit is hugely elevated, the economic risk of remain was far from zero.

If we look at the Treasury’s recent forecast it models a shock and severe shock scenario in which the combination of declining economic activity, increasing debt payments and increasing unemployment costs reduce discretionary public spending by several percentage points.

Defence will unlikely to be immune and shaking the magic ‘efficiency’ tree is equally unlikely to compensate.

In the shock scenario, the increase in Public Sector Net Borrowing would be 0.7% GDP and 1.3% of GDP for 2016/17 and 2017/18. In the severe shock scenarios these rise to 1.1% and 2.1% respectively. Actual increases are predicted to be £17.3 Billion in 2106/17 and £53.5 Billion the year after.

The table below summarises the forecast for those and other years.

Technical_Note_-_Fiscal_impact.pdf_-_2016-06-25_21.14.47

The report notes that even the severe shock scenario does not include potential ‘tipping point’ effects so the final figures could be worse.

The report rightly notes that these figures are based on the assumption that no action was taken to reduce borrowing. As described above, the government would have the option to reduce spending, increase borrowing, change priorities, or a combination of all three.

Summer 2015 Budget commitments included a defence budget increase of 0.5% in real terms per year out to 2021 and others such as increases in special-forces and counter terror budgets. Fundamentally though, the Government has committed to spending 2% of GDP on defence every year to 2020/21.

GDP falls, defence spending falls, in proportion (assuming all other things equal)

Assuming the worst, i.e. the Severe Shock scenario, MoD budgets would reduce in line with GDP reductions by 6% in 2018.

The MoD’s 2017/18 budget is stated to be £36 Billion, a 6% haircut would mean the MoD has about £2 Billion less.

Whether this £2 billion would be spread evenly across personnel, equipment purchases and support is open for discussion. The graphic below shows the distribution of the 2014/15 budget for illustrative purposes.

Finance_and_Economics_Annual_Bulletin_Departmental_Resources_Statistics_2015_-_20151203-TL_Bulletin_Revision.pdf_-_2016-06-26_21.13.26

The 2010 SDSR by way of comparison, inflicted an 8% budget cut.

Remember, the 6% reduction is based on an ‘all things being equal’ reduction in GDP as represented by the severe shock scenario AND maintaining defence spending at 2% of GDP.

Even if spending were maintained at 2% of GDP, it would still mean a reduction in real terms of 6%, two percentage points better than SDSR 2010, which as we  know, was bruising.

There are an awful lot of assumptions here, the main one being that the Treasury ‘Severe Shock’ estimate is realised, let’s be honest, it could be worse, it could be better. Many have challenged the assumptions and modelling methods used by the Treasury and it completely discounts any currency or trade positives, but as the report notes, it excludes tipping point effects which could be even worse.

Would there need to be an SDSR in 2017, not necessarily, although it would seem wise?

The worst case scenario assumes a budget reduction approximately 75% of that in SDSR 2010.

Would we look at the second carrier, F-35B numbers, plans for Apache E, Protector, complex weapons, FCAS, P-8A, Army personnel numbers, Ajax, MIV, Strike Brigades and Project Morpheus, frankly, it would be silly to try and second guess individual cuts because as we know from all past defence reviews, the pain is (adjusted for time) shared equally.

The simple truth is we simply do not know what the future holds for the wider economy but fundamentally, the defence budget is not immune from any rise or fall in our national economic well-being.

Scottish Independence and Irish Unification

Perhaps the biggest elephant in the room is Scottish independence.

It is probably fair to say that the issue of Scottish independence will always exist whilst there is a Scottish National Party (SNP) that enjoys popular support, the decision to leave the EU has prompted fresh calls for another independence referendum.

The breakup of the Union would have significant defence implications, not least being the basing of nuclear attack and Trident submarines. The Successor programme is already planned to consume a significant proportion of the defence budget, moving basing south would make it even more expensive and therefore a larger proportion of a potentially smaller defence budget.

With this in mind, its viability would continue to be questioned, and this would be ‘a big one’. Timing is key, the main gate decision looms and delay places the capability at risk. Scottish independence would squeeze defence capabilities from both ends.

Even with Scottish independence, even with a reduction in GDP and even with wider priorities, I think it would be a very foolish government to withdraw the UK’s strategic deterrent.

It would cost more and mean reductions elsewhere in the budget but this is what happens with priorities.

People predicting an end to Trident in the event of Scotland leaving the UK underestimate its importance outside of pure defence, they might not like it, but if it comes down to a choice between aircraft carriers, fighters and tanks, Trident will win all day every day and twelve times on Sunday.

Will a referendum happen, will the SNP carry that referendum, who knows, but the economic and political landscape is very different from the last time the people of Scotland were asked. Whilst there may well be more enthusiasm now, the reality of a shale pegged Brent Crude at $48 per barrel, the need to join the Euro, various other EU membership requirements and the potential for trade negotiations may well prove to take the shine of current enthusiasm, or it may not.

My personal view is that if the Scots want to go their own way, we must all respect their democratic decision, whatever the consequences.

Who knows, maybe super duper devo max is the more likely outcome but it would be a brave person indeed to predict the outcome of this issue.

Alongside Scottish independence there have been calls from the usual suspects for a border poll but this seems to be a remote possibility and if there was any place where sensible cool heads will prevail, it is in Northern Ireland and the Republic of Ireland.

Nationalist and loyalist terrorism, although seemingly unlikely, is another risk that may be elevated

A Few Thoughts on Priorities

Going forward it would be difficult to propose anything detailed because there is politics and economics to resolve first but it is possible to think out aloud on a few priorities.

It would be sensible to work on an interim SDSR that provides some direction even though many decisions will be dependent upon economic factors beyond the control of the MoD.

There are things the MoD can do that are not wholly dependent on budgets, and those levers should be furiously manipulated in the next few years.

The first lever to pull should be on bilateral arrangements.

Bilateral defence agreements have a track record of quiet success and there is no reason why the UK could not enter into any number of similar arrangements with European nations. Looking north, the first likely candidate could be with Norway, Sweden, Iceland, the Faroe Islands and Greenland. This may mirror potential political partnerships and yes, if Scotland leaves the union, it would also make sense to include them as well.

Existing arrangements with France and the Netherlands should continue, in fact, we should actively strengthen them where we can.

The 2015 SDSR described a far greater ambition than the French equivalent. For France to maintain parity with the UK, she will have to spend more, an unlikely prospect. That said, UK French bilateral defence and security co-operation is the highest it has been for a long time. The original Lancaster House agreement has been implemented with some vigour by both nations and the latest agreement a short time ago adds to it. Joint investments in maritime mine countermeasures, complex weapons and unmanned aircraft systems have been supplemented by lower profile but equally significant cooperation on nuclear and materials technology. The UK has been a stalwart ally of the French, supporting them in Mali and others locations. The French have extremely professional forces and excellent defence industrial and research capabilities. It is irritating in the extreme to see anti French xenophobia mixed up with the EU debate.

Second, the UK should confirm its absolute commitment to NATO, and especially the eastern NATO nations facing a resurgent and threatening Russia.

This makes sense from both a defence and political perspective. The Poles are keen supporters of the EU but they feel threatened by Russia and will be unimpressed with the institutions of the EU, we need allies in the EU to help our exit negotiations and forward basing some Army units in Poland, perhaps even some RAF Typhoons would be a powerful demonstration of commitment to NATO and the east of Europe.

Despite the existence of EU treaties and an overall desire for greater EU defence capabilities, it is NATO that continues to provide the principle means of territorial defence and out of area power projection for European states. Whilst the EU does provide some element of underpinning economic and political power for NATO, when it comes down to it, NATO is the cornerstone of defence.

Defence may also turn out to be one of the UK’s major bargaining chips with the EU in forthcoming negotiations. Although we sometimes turn self-criticism into an art form, the UK has a hugely capable armed forces currently engaged in training and combat operations around the globe, contributing to western security.

We should not forget the UK is still a relatively big dog when it comes to defence, however shabby and threadbare we look upon ourselves sometimes.

The UK is consistently ranked highly in global soft power indices.

Given that the UK is the only nation with a legally mandated 0.7% of GDI spend on Overseas Development Assistance and a range of other soft power levers, it seems unlikely that this will be hugely diminished by Brexit. Given that the UK contributes in excess of 15% of the EU’s ODA budget, a budget over which there is very little accountability and even less UK control, that £1 billion, approximately, will be available for spending by DFiD, which despite people moaning, is much more accountable and transparent.

UK soft power will continue to be held in high regard whether we are in our out.

We all understand the blurring of lines between ODA and defence spending but these are minor issues in the next few years and it we may see some temporary derogation from current rules and commitments in ODA.

If the wider economy does suffer badly, it will be politically impossible to defend 0.7% of GDI on Overseas Development Assistance. Whilst it would seem unlikely for that 0.7% to be reduced to 0.0%, it would seem prudent to plan for a reduction or a more visible changing of priorities to higher profile ‘emergency response’ type capabilities. There has to be a hard-nosed political element for every Pound we spend.

Conversely, the ‘trade not aid’ argument is strengthened by Brexit as the UK is free to pursue bilateral trade arrangements with emerging economies and again, defence may play some small part in this.

The UK’s membership of international organisations will remain unchanged and it would not be ridiculous to suggest that the UK should still take some role in some EU security issues, sanctions against Russia for example. Whilst there is a temptation to try and undermine the EU, this would be against our best interests and publicaly stating that the UK supports the European mainland EU in order to stop any domino effect would be another bargaining chip.

One of the principle fears of the EU and driving forces behind a ‘painful divorce’ is the possibility of contagion.

Making clear that Brexit is a UK only activity and providing positive support for the EU without the UK buys friends. Avoiding providing any succour to European far right parties is simply an act of self-interest, besides being the right thing to do.

Language is important, the presentation is important, wise heads and not buffoonery is needed.

We need to show our European partners the respect they deserve.

The UK and European defence research and industrial base are vital to the wider economy, actually thinking about a defence industrial strategy rather than cuffing it is a more of a necessity than ever.

Finally, we need to think about our service personnel and civil servants in defence, there may be tough times ahead, but providing re-assurance that they remain a priority is vital.

Summary

This all looks at the issue from a narrow ‘defence only’ perspective. The majority have clearly rejected the EU, whether that was a sophisticated rejection of Monnet Schuman objective of a politically unified Europe, a desire for reduced immigration or simply a desire for political accountability, it matters not. Voting motivations will have changed from person to person but polling has shown that for remain voters, the principle concern was economic and for leavers, the principle concern was democratic accountability, regardless of economic impact. This does not mean other factors were not important, but it would seem that efforts to draw simplistic conclusions should be resisted.

Regardless, for the day to day mechanics of defence and security, things may change, but it would be a reasonable assumption that they will not change significantly.

Taking a wider view, the vulnerability of defence to the UK’s economy is no more or less than ever, if the economy suffers, so will defence. The risk of Scottish independence never went away but it could be argued that Brexit presents an increased risk which may be realised, or it may not.

Again, let us not be too certain of the future, a lesson we should all be well schooled in by now.

Until we know, we don’t know.

There are many things we might do to re-assure allies and use our considerable defence capability to enhance the Brexit process, it does not have to be all doom and gloom but please let us not make any mistakes in thinking there are no potentially serious consequences ahead.

Democratic accountability is the foundation of security and that is what most people voted for, short to medium term problems may be many, but ultimately we should not forget that, it is after all, what so many recent conflicts have been about.

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