Defense a Victim of Greek Tragedy?

Defense a Victim of Greek Tragedy?
May 6, 2010

NEWTOWN, Conn. — While Greek citizens struggle to accept the reforms needed to rectify the country's long-standing structural and fiscal problems, questions persist as to what will be cut in exchange for a three-year EUR110 billion ($145 billion) bailout package from the European Union and the International Monetary Fund. While it is known that retirement ages will be raised, the pension system reformed, and the public sector reduced, it is not known exactly how the expected wide-ranging government budget cuts will affect Greek defense.

Despite the country's tip into recession and the government's knowledge of the rapidly approaching twin debt/deficit crisis, the Greek defense budget actually rose nominally by 6.9 percent in 2009 from EUR5.81 billion to EUR6.24 billion ($8.67 billion). Such a reoccurrence is unlikely in the future, as the Greek budget deficit - over 13 percent of GDP in 2009 - must be shrunk down to the 3 percent ceiling mandated by the EU under its Stability & Growth Pact eurozone rules by 2014. That date was set by the EU and IMF as part of its bailout agreement.

Already the 2010 defense budget has been reduced, albeit slightly, down to EUR6 billion ($7.85 billion), or roughly 2.8 percent of GDP. The latter figure represents the highest annual allocation in real terms among all of Europe's NATO member states. By comparison, the two highest nominal defense spenders in Europe - the U.K. and France - allocate 2.3 and 2 percent, respectively, toward their militaries on an annual basis. Like Greece, these countries face serious budget deficit and national debt crises on the horizon and will be forced by fiscal reality to curtail future defense budget growth.

“As part of the sharp austerity measures confronting Greece, the armed forces will have to accept the bad-tasting medicine the rest of the country is being forced to swallow in order to spare the nation from bankruptcy,” said FI's European Defense Analyst Dan Darling. “How severe the budgetary shrinkage will be remains to be seen, but with the Greek economy expected to contract by up to 4 percent this year and again in 2011, the reality is that meeting the current investment level of 2.8 percent of GDP is a near impossibility.”

At the same time, Greece's traditional unease with neighboring Turkey ensures that defense spending will not suffer the deep chop of Athens' budgetary axe. Turkey has emerged over the last decade as a growing regional power and despite a rapprochement between the two countries, lingering issues remain involving territorial disagreements and questions about the diplomatic status of Turkish-controlled northern Cyprus. Though Turkish officials have insisted that Greece continues to perpetuate an irrational fear of a Turkish threat, Hellenic distrust of its Anatolian neighbors runs deep. While trade has increased over the years and cross-political and military visits have occurred, territorial incursions by the Turks in the Aegean continue.

Though alleviating tensions with Turkey will help ease the Greek defense budgetary crunch, it will not eliminate it altogether. Despite their shared NATO membership, Greece will continue to view Turkey as its principal strategic threat, and unless Ankara reciprocates with hard evidence of a military climb-down (reducing its air and sea presence from disputed territory, removing forces from northern Cyprus, shrinking its defense budget), Athens will no doubt feel it necessary to maintain a worthy state of military preparedness.

The problem for Greece will come primarily in its defense equipment budget. Under its two medium-term defense armament programs (referred to as the EMPAE) approved in July 2006, the Greek defense establishment planned to invest a total EUR26.8 billion ($39.4 billion) toward equipment procurement and maintenance. However, the bulk of the first-term (2006-2010) program money (EUR11.4 billion, $16.7 billion) was used to pay off debt for equipment procured under a previous EMPAE. The second program, covering the period from 2011-2015, planned on a EUR15.4 billion ($22.7 billion) budget. Instead, what remains for the second-term budget will likely be used much like its predecessor - to pay off debts accrued under the preceding EMPAE.

IMF chief Dominique Strauss-Kahn insisted on May 2 that traditional levels of Greek defense investment will be "clearly reduced" under the austerity measures implemented by the government as part of the agreed-upon bailout. But with lingering modernization programs (namely for multipurpose frigates, advanced trainers, and new-generation fighters) and unfortunate geography requiring heavy air and sea surveillance, the Greek defense budget can only be slashed so much. Expecting it to fall by much more than 10 percent over the coming three years might prove untenable. A 20 percent reduction would bring annual allocations through 2013 down below EUR5 billion.

“The benefits of such budgetary thriftiness would be felt more in Ankara than in Athens, as this would allow Turkey to continue increasing its geopolitical influence eastward and southward into its former Ottoman domain,” said Darling.