Lots of reasons, as you would expect.

  • Shifting priorities: societies make choices about what matters to them most, and Western countries increasingly value social welfare spending over national security.
  • Threat perception: it's hard to avoid the conclusion that the decline in European defence spending since the end of the Cold War is linked to the collapse of the military threat that NATO was established to defend against.
  • Wealth: countries that have more, spend more. And defence spending tends to have a high correlation with GDP levels.

But as participants at the IISS's Geo-Economics and Strategy conference here in Bahrain heard this morning, none of these factors can alone explain defence spending trends, and each has exceptions. How do we explain, for instance, the relatively modest European defence spending cuts in the aftermath of the Soviet collapse? And given that Australia maintained a strong economy since the GFC and identified China as a source of strategic risk in its 2009 Defence White Paper, why has defence spending fallen?

One thing is clear: governments exercise a huge distortionary role in the defence-industrial sector. Despite the fact that domestic defence spending is not an efficient way to grow an economy or increase employment, governments cannot resist it. One participant at the conference pointed out that Europe has massive overcapacity in defence production. If it was organised rationally, the European defence sector would look more like civil aerospace or the pharamaceutical industry, but governments keep it largely in its Cold War form.

And yet, it was also pointed out that the European defence sector is still dependent on products that originate in the Cold War. It's hard to think of a major European defence project that does not have its origins in that period. So the question is, what happens in the 2020s when those systems lose their attractiveness in the international market? What does Europe bring to the table then? China still has a poor record as an arms exporter, but the rise of its defence-industrial sector may be timed just right for a rapid ascent in the next decade.