NATO: Implications of European Integration for Allies' Defense Spending
(Letter Report, 06/30/1999, GAO/NSIAD-99-185).
Europe is undergoing profound changes, including the enlargement of the
North Atlantic Treaty Organization (NATO), the adoption of a common
currency, and the planned enlargement of the European Union. Members of
Congress have raised concerns about Europe's ability to share in the
cost of providing a common defense through NATO. This report analyzes
(1) the projected defense spending for several European countries, (2)
the budgetary effects of European Economic and Monetary Union
implementation and enlargement of the European Union, and (3) other
significant factors that may affect the countries' ability to share in
the costs of NATO over the long run.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-99-185
TITLE: NATO: Implications of European Integration for Allies'
Defense Spending
DATE: 06/30/1999
SUBJECT: Economic growth
International organizations
International relations
Foreign governments
Cost sharing (finance)
NATO military forces
Future budget projections
IDENTIFIER: NATO Defense Capabilities Initiative
NATO
European Union
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. This text was extracted from a PDF file. **
** Delineations within the text indicating chapter titles, **
** headings, and bullets have not been preserved, and in some **
** cases heading text has been incorrectly merged into **
** body text in the adjacent column. Graphic images have **
** not been reproduced, but figure captions are included. **
** Tables are included, but column deliniations have not been **
** preserved. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
United States General Accounting Office GAO Report
to the Chairman and Ranking Minority Member, Subcommittee on
Defense, Committee on Appropriations, U.S. Senate June 1999
NATO Implications of European Integration for Allies' Defense
Spending GAO/NSIAD-99-185 United States General Accounting Office
National Security and Washington, D.C. 20548
International Affairs Division B-282890
Letter June 30, 1999 The Honorable Ted Stevens Chairman The
Honorable Daniel Inouye Ranking Minority Member Subcommittee on
Defense Committee on Appropriations United States Senate Europe is
being affected by a number of changes, including the enlargement
of the North Atlantic Treaty Organization (NATO), the adoption of
a common currency, and the planned enlargement of the European
Union (EU). Concerned about Europe's ability to share in the cost
of providing a common defense through NATO, you asked us to assess
how European Economic and Monetary Union (EMU) and the enlargement
of the EU may affect U.S. allies' ability to sustain or increase
their defense budgets. As agreed with your office, this report
provides information and analysis concerning (1) projected defense
spending for several European countries, (2) budgetary effects of
EMU implementation and EU enlargement, and (3) other significant
factors that may affect countries' ability to share in the costs
of NATO over the long run.1 To address these issues, we collected
and analyzed information from the U.S. Departments of Defense,
State, and the Treasury; and from NATO, the EU, the International
Monetary Fund (IMF), the World Bank, the Organization for Economic
Cooperation and Development (OECD), the European Central Bank
(ECB), and several research organizations. Our work focused on
seven European countries--the four West European members of NATO
that collectively accounted for over 75 percent of total European
NATO defense spending in 1998 (Germany, France, Italy, and the
United Kingdom [U.K.]), and the three newest members of NATO (the
Czech Republic, Hungary, and Poland). We collected and analyzed
information from government officials and private sector analysts
in these countries. We visited each of these countries except
France, which is not 1We have ongoing work reviewing the progress
made by our European allies in changing their military forces to
meet the requirements of NATO's Strategic Concept, and will report
its results later this year. Letter Page 1
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 part of NATO's integrated military command. (See app. IV
for a detailed description of our scope and methodology.) Results
in Brief The United States' security strategy depends on
the ability of its allies to join in military operations. This
ability includes being able to train and equip forces to meet
certain requirements. Although EMU requirements for additional
deficit reduction are likely to mean tighter budgets, NATO's West
European member countries generally plan to maintain their defense
budgets at roughly constant levels through 2002. EMU's budgetary
constraints may be offset over time by fiscal benefits and
economic growth. A large number of observers are optimistic about
EMU's effects on economic growth, but concerns remain. The costs
and budgetary impacts of EU enlargement are not readily
identifiable, since several key political decisions regarding the
timing and specific requirements of membership have not been made.
However, these costs are likely to fall largely on prospective,
not current, EU members. Over the long term, defense spending will
face increasing pressure as Europe attempts to deal with a number
of domestic social issues, in particular escalating entitlement
burdens. Spending for public pensions, for example, is already
near or above 10 percent of gross domestic product in France,
Germany, and Italy-more than twice the U.S. percentage-and is
projected to begin to increase sharply in 10-20 years as
populations age. Governments' spending for health care is also
expected to rise, increasing the budgetary pressures from coming
demographic changes. This budget environment means that member
countries are likely to continue to face significant challenges in
modernizing their defense forces to meet NATO requirements.
Ultimately, the amount of resources allocated to defense is a
political decision, driven substantially by views of military
threat as well as other competing budget priorities. If EMU's
fiscal constraints require further spending cuts, for example,
impacts on defense budgets will clearly depend on policy decisions
regarding where those cuts are made. Should EMU and EU
enlargement contribute to stronger economic growth in Europe,
there will be more budgetary resources to address competing needs.
The outcomes from these economic developments and political
decisions have important implications for U.S. defense planning.
Letter Page 2 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 Background The NATO
military alliance of 19 European and North American countries is
supported by its members through several means. First, countries
contribute to NATO's three commonly funded budgets, including the
civil and military budgets and the budget for funding
infrastructure improvements (about $1.6 billion total in 1999).
The United States contributes about 28 percent of these commonly
funded budgets. Countries also support NATO by maintaining forces
and assets that they pledge to NATO through a defense planning
process. NATO does not quantify the cost of forces national
governments commit to NATO, but one way to measure this
contribution is through the level of defense spending. The EU is a
political and economic body of 15 European countries, including 11
NATO members. Member states jointly administer the EU through
three major institutions. The European Union Council of
Ministers, composed of the governments of the member countries,
establishes common EU-wide policies. The European Commission
proposes legislative initiatives and implements policies agreed to
by the Council of Ministers and the European Parliament. The
European Parliament, in tandem with the Council of Ministers, must
approve most of the legislation introduced by the Commission
before it goes into effect.2 EMU is an effort by EU countries to
more closely link their economic policies to achieve greater
economic cooperation and political integration. The most
significant and far-reaching aspect of EMU is the adoption of a
common currency known as the "euro." On January 1, 1999, 11 EU
countries, including 8 members of NATO, locked the exchange rates
of their national currencies to the euro,3 redenominated their
national debt into euros, surrendered control of monetary policy
to the European Central Bank, and began using the euro in
electronic transactions. 4 (Euro currency will not be circulated
until 2002.) The Maastricht Treaty on European Union, signed in
1992, set forth several economic conditions for countries to join
the euro area. These included, in part, reducing general
government deficits to 3 percent of gross domestic product (GDP)
and showing progress toward lowering general government
2Parliament's consent is not required for agricultural price
reviews. 3There are no procedures for countries to leave the euro
area after they have joined. 4EU countries that chose not to adopt
the euro are Denmark, Sweden, and the United Kingdom. Greece
wanted to adopt the euro but could not comply with the economic
criteria. Page 3 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 debt to 60 percent of
GDP.5 The 1997 Growth and Stability Pact requires countries
adopting the euro to further reduce their annual budget deficits
and reach the medium-term objective of having budgets close to
balance or in surplus. Countries that do not comply with these
requirements are subject to sanctions, ranging from public rebuke
from the European Council to fines. In addition to "deepening"
European integration through EMU, the EU is also "widening" to
include the countries of Eastern and Central Europe. The EU
believes that enlarging to Central Europe will help cement peace
and stability in the region through developing closer economic and
political links. Countries seeking EU membership concur with this
potential security benefit and also value the intangible seal of
approval EU membership provides. 5The Treaty defines "general
government" as including Central government, regional or local
government, and social security funds. It also requires countries
have low inflation, low interest rates, stable exchange rates, and
independent central banks compatible with the European Central
Bank. Page 4 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 Figure 1: European
Members of NATO, the EU, and the Euro Area, and First Wave EU
Applicant Countries Iceland Finland Sweden Norway Atlantic Ocean
Estonia Denmark United Ireland Kingdom Netherlands
Poland Germany Belgium
Czech Republic Luxembourg Austria France
Hungary Slovenia Italy Portugal Spain Turkey NATO
Greece EU Eurozone 1st Wave EU Applicant Page 5
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 In December 1997, the European Council determined that
the Czech Republic, Hungary, Poland, and three other countries
were in the best position to meet the EU's general economic and
political membership criteria.6 The European Council, the European
Parliament, all 15 EU member states, and the applicant country
must approve a country's membership before it can enter the EU.
Defense Budget The four West European members of
NATO that we studied plan to Projections
maintain their defense spending at roughly constant levels, after
adjustments for inflation, through 2002. NATO's three newest
members plan to increase defense spending over the period. NATO
countries will generally face substantial challenges in
modernizing their defense forces within projected budgets, due to
high personnel costs, funding needs of large-scale procurements,
and costs of ongoing military operations such as in Kosovo. In
addition, such ongoing programs as NATO's Defense Capabilities
Initiative, as well as the evolving European Security and Defense
Identity, could have budgetary implications that cannot yet be
determined. West European Defense Defense spending levels,
adjusted for inflation, have begun to level off in Spending Levels
off After Germany, France, Italy, and the United Kingdom after
fairly sharp Post-Cold War Decline reductions in the early
1990s. Budget projections of these countries indicate that
generally constant defense budgets are planned through 2002, as
shown in figure 2. These countries generally could not provide
budget projections beyond 2002. NATO uses a standard definition of
"defense expenditure" to facilitate comparison between the defense
budgets of NATO-member countries, which differs in some cases from
definitions in national budgets. For example, some countries do
not include payments toward retirement pensions in their defense
budgets, while the NATO definition includes contributions to
military pensions but not payments to current retirees. In
figures 2, 3, 4, and 5, data from 1980 through 1998 are NATO
figures based on its definition of defense expenditure. Since
NATO defense budget forecasts are classified information, we
calculated projected values using 6Cyprus, Estonia, and Slovenia
were the other three. The Council decided that it was too early
to start bilateral negotiations with Bulgaria, Latvia, Lithuania,
Romania, and Slovakia and offered Turkey a "European Strategy,"
while not including Turkey in the accession process at this time.
Page 6 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 defense budget
projections from host countries and applied the projected growth
rates in defense expenditures to NATO's 1998 spending level for
each country. Figure 2: Historical and Projected Defense Spending
in Four West European Countries, 1980-2002 Billions of 1998 U.S.
dollars 60 50 40 30 20 10 0 1980 1985 1990 1991
1992 1993 1994 1995 1996 1997 1998
1999 2000 2001 2002 Germany France
Italy U.K. Note 1: Budget projections from 2000-2002 are
not available for France; data for 2002 is not available for the
U.K. Note 2: 1998 figures are NATO estimates. NATO will release
actual figures in December 1999. Source: GAO analysis of data from
NATO and national ministries of Defense. The ratio of defense
spending to GDP is one measure of the priority countries place on
spending for defense relative to that for other national goals.
The average defense share of GDP in 1998 was 2.6 percent for all
NATO members and 2.1 percent for European NATO members.7 Using
this measure, defense spending in the West European countries we
studied has generally fallen steadily since the end of the Cold
War, as has that of the 7These figures are calculated using
constant 1990 prices and exchange rates. Page 7
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 United States. Since planned defense spending is roughly
constant and real GDP is projected to grow, defense spending as a
percentage of GDP is expected to continue to decline slightly
during 1999-2002 for the West European countries we studied (see
fig. 3). Figure 3: Historical and Projected Defense Spending as
Percent of GDP for Four West European Countries and the United
States, 1980-2002 Percent of GDP 7 6 5 4 3 2 1 0 1980- 1985-
1990 1991 1992 1993 1994 1995 1996 1997
1998 1999 2000 2001 2002 84 89 Germany
France Italy U.K. U.S. Note: Budget
projections for 2000-2002 are not available for France; data for
2002 is not available for the U.K. Sources: GAO analysis of data
from NATO, national ministries of Defense, and Standard and Poor's
DRI (Lexington, MA). Defense spending in the West European
countries we studied has generally been lower over time as a
percentage of GDP than that of the United States. This difference,
which was particularly significant in the 1980s, continues over
the projected period. This is due to a number of factors,
according to some European officials, such as different spending
priorities, threat perceptions, and views of the determinants of
their security. Other officials Page 8
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 noted that whereas the United States has a global
military presence and interests, European countries generally have
focused on European security. New NATO Members The
Czech Republic, Hungary, and Poland plan to increase defense
Project Defense Spending spending during 1999-2003 to
modernize their forces and meet NATO Increases
requirements. Defense spending declined sharply in these
countries as they transitioned from a large Soviet-era defense
force to the post-Cold War era,8 but spending began to increase in
the mid-1990s as the countries moved closer to NATO membership.
Figure 4 shows historical and projected defense spending levels
for NATO's newest members. Poland's budget shows defense spending
in 1999 declining 0.01 percent in real terms from 1998 in part
because the Polish government removed military health care costs
from the 1999 defense budget. The 1999 defense budget would
increase about 2.9 percent in real terms if health care costs were
included. Similarly, Hungary's 1999 defense budget includes
funding for items that were not included in previous years. When
these items are excluded, the budget decreases in real terms
between 1998 and 1999, according to the U.S. Department of Defense
(DOD).9 8For example, Poland's 1985 defense spending has been
estimated to exceed 8 percent of GDP. 9U.S. government officials
informed us about these changes in the composition of national
defense budgets between 1998 and 1999 for Poland and Hungary. Page
9 GAO/NSIAD-99-185 NATO: European Integration and
Defense Spending B-282890 Figure 4: Historical and Projected
Defense Spending in Three Central European Countries, 1994-2003
Billions of 1998 U.S. dollars 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1994
1995 1996 1997 1998 1999 2000 2001 2002 2003 Poland
Hungary Czech Republic Note: 1998 figures are NATO
estimates. NATO will release actual figures in December 1999.
Sources: GAO analysis of data from NATO and national ministries of
Defense. The Czech Republic, Hungary, and Poland have pledged
continued defense spending increases until they reach the NATO-
Europe average of defense spending as a percent of GDP of 2.1
percent.10 While Poland is currently above that average share,
projections show that defense spending will fall below that share
by 2003. In 1998, based on NATO's definition of defense spending,
the Czech Republic spent an estimated 2 percent of its GDP on
10The Czech Republic and Hungary pledged to increase the defense
budget's share of GDP by 0.1 percent each year. Hungary's
intermediate goal is to reach 1.8 percent of GDP by 2001. Page 10
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 defense, Hungary 1.5 percent, and Poland 2.2 percent.11
Figure 5 shows projected defense spending as a percentage of GDP
for the new NATO members. Figure 5: New NATO Members' Defense
Spending as a Percentage of GDP, 1994-2003 Percent of GDP 3 2 1 0
1994 1995 1996 1997 1998 1999
2000 2001 2002 2003 Poland Hungary
Czech Republic Sources: GAO analysis of data from NATO, national
ministries of Defense, and PlanEcon (Washington, D.C.). While the
three new NATO members met their 1999 defense budgetary
commitments, they had some difficulty in doing so as a result of
lower than expected economic growth and other domestic budgetary
priorities. In Poland, officials told us they planned to spend
more on defense in 1999 but could not, in part, due to numerous
domestic reforms requiring increased funding. However, they
stated that defense spending in the year 2000 and beyond would be
consistent with their planned funding objectives. According to
Hungarian officials, funding for defense had to be balanced with
social spending priorities to avoid creating social tensions and
11Figures for 1998 are NATO estimates. NATO will release actual
figures in December 1999. Page 11 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending B-282890
political instability. U.S. embassy and DOD officials were
concerned that Hungary's 1999 defense funding difficulties may
continue in later years even though NATO requirements would
continue to grow. Given the experiences of 1999, U.S. government
officials we interviewed expressed some concern about future
defense budgets for these countries. They indicated that to meet
NATO's target force goals and make other needed changes,
consistent spending increases are necessary. New Security
Challenges The international security environment presents a
diverse set of challenges Affect Spending Needs very
different from those of the Cold War. NATO's new Strategic
Concept adopted at the Washington Summit in April 1999 recognizes
changes in threats confronting member nations and calls for new
military capabilities.12 This concept stresses that NATO members'
military forces need to be more mobile, flexible, interoperable,
and sustainable than in the past. According to NATO, this means,
for example, developing capabilities for command, control,
communications, intelligence, and surveillance. These
requirements, and others, were laid out at the Washington Summit,
in NATO's Defense Capabilities Initiative. A NATO steering group
has been established to oversee the implementation of the
initiative, the budgetary effects of which cannot yet be
determined. Some countries have acknowledged these needs in
conducting or planning their own defense reviews. Between 1996
and 1998, the United Kingdom and France issued comprehensive
defense reviews that reassessed their security interests and
defense needs. They concluded that modern, high-quality defense
forces can be created without requiring large increases in defense
spending by rigorously setting spending priorities and making
difficult choices. These include reducing personnel and other
support and operating costs, postponing or canceling certain
procurement programs and, in the case of the United Kingdom,
selling unneeded assets and facilities. Germany has just begun an
extensive defense review along similar lines. Some of the same
issues have emerged in defense assessments conducted by the three
new NATO members as they adapt their forces to Western standards.
European officials have stated that improving their defense
capabilities is essential for implementing the 12NATO's 1999
Strategic Concept identifies a variety of military and nonmilitary
risks that are multi-directional in nature and often difficult to
predict. These include: regional instability and the resulting
risk of crises; the proliferation of nuclear, biological, and
chemical weapons; the spread of potentially dangerous technology;
the threat of terrorism, sabotage, and organized crime; and the
uncontrolled movement of large numbers of people, due in some
cases to armed conflicts. Page 12 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending B-282890 European
Security and Defense Initiative, intended to give European
countries the ability to take military action in cases where NATO
as a whole is not militarily engaged. They confirmed this
position at St. Malo, France, in December 1998 and, in June 1999,
the EU member states agreed on the need for capacity for
autonomous military action, which requires having a credible force
and the readiness to use it. Competing Needs Present The
countries we studied face considerable challenges as they try to
Challenges for Defense balance competing needs within defense
budgets. DOD officials told us Budgets that
prioritizing defense needs is one of the key challenges facing
NATO countries as they seek to modernize and restructure their
forces. However, shifting priorities within defense budgets can
be difficult. For example, personnel costs represent a large
portion of defense spending in several countries, such as 60 to 70
percent in Germany, Italy, and Poland, which have traditionally
relied on conscription to staff their armed forces. These
countries are currently examining the cost, as well as other
implications, of reducing their reliance on conscription. In
addition, planned procurements of major items such as the West
European aircraft, the Eurofighter, can consume large portions of
countries' procurement budgets. Finally, out-of-country
deployments, particularly in Bosnia and Kosovo, are requiring
significant budgetary resources in the NATO European countries we
studied. Combined with the expense of large aircraft purchases
and high personnel costs, these operations are affecting the
ability of NATO countries to carry out restructuring and
modernization, according to foreign officials and U.S. embassy
officials. According to DOD and foreign government officials, the
efforts of the Czech Republic, Hungary, and Poland to modernize
and reorganize their defense structures are made more difficult by
limitations in the defense planning and management capabilities
needed for effective resource allocations. (See app. I for
additional information on defense modernization challenges.) In
addition to the costs of military operations, addressing regional
instabilities is expected to have other budgetary effects for EU
member countries. In particular, they have committed to funding
the major portion of the costs of reconstruction operations in the
Balkans, although the specifics regarding funding levels and
sources have not yet been established. Page 13 GAO/NSIAD-
99-185 NATO: European Integration and Defense Spending B-282890
Consequences of EMU EMU and EU enlargement's impacts on defense
spending depend on both and EU Enlargement direct
effects on national budgets and how these institutional changes
will affect the European economy over the long run. The EMU's
requirement for Defense Spending for countries to
limit deficits and debt will continue to constrain government
spending options. At the same time, the enhanced integration
brought about by the euro can have positive effects on economic
growth that may offset fiscal constraints and provide greater
budget flexibility over the longer term. While EU membership may
bring economic benefits to new entrants, meeting membership
criteria will impose significant costs. The magnitude of these
costs and thus their budgetary impact depends on several key
political decisions that have not yet been made, such as the
timing and specific requirements of membership. Applicant
countries are likely to bear most of these costs. EMU's
Implications for EMU has no direct effect on defense
spending, but it can affect the Defense Spending Remain
availability of national resources for defense spending depending
on how Uncertain the euro and its related
requirements influence budgets and economic growth. Adopting the
euro constrains national spending, because countries are required
to attain roughly balanced budgets in the next few years. The
degree to which this will require cuts in government spending
depends in part on economic growth in euro area countries. EMU's
impact on economic growth remains uncertain. A key determinant
will be how national economies restructure in reaction to the
enhanced competitive pressures from EMU. Significant Deficit
Reductions The fiscal requirements associated with EMU have
resulted in significantly Achieved, but Further Cuts lower
budget deficits throughout the EU and will require further
reductions Required among those
countries that have adopted the euro. Since the early 1990s,
countries have significantly reduced their national deficits
through a combination of spending cuts and tax increases. (See
fig. 6.) For example, between 1994 and 1997, Italy reduced its
deficit from 9.2 percent to 2.7 percent of GDP. Page 14
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 Figure 6: Annual General Government Deficits for Four
West European Countries as Percent of GDP, 1990-98 Percent of GDP
12 10 8 6 4 2 0 1990 1991 1992 1993 1994
1995 1996 1997 1998 Germany
France Italy U.K. Source: European
Commission. Countries can achieve required deficit- and debt-to-
GDP ratios by cutting spending, raising taxes, or as a result of
increases in GDP. According to the OECD, countries have so far
achieved compliance with EMU requirements largely through raising
taxes; cutting investment spending and subsidies; and implementing
a series of one-time measures that included Italy's euro-tax, and,
in some countries, the postponement of certain expenditures 1 week
into 1998. In the case of Italy, significant spending reductions
have also been achieved through decreased debt service payments
due largely to lower interest rates.13 Table 1 shows the
combination of spending cuts and revenue increases used to meet
deficit criteria for several countries. 13Italy's long-term yield
on government bonds, a measure of the cost of government
borrowing, dropped from 11.88 percent in 1992 to 6.85 percent in
1997. Page 15 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 Table 1: Sources of
Deficit Reductions in Four West European Countries as a Percent of
GDP, 1990-97 Country Changes in
spending Changes in revenue Germany
-0.3 2.0 France
1.7 2.5 Italy
-5.0 4.8 United Kingdom
-2.0 -0.1 Note: The OECD data
calculates changes in various spending and revenue categories as a
percentage of the country's potential GDP over the 1990-97 period.
Spending includes government transfers as well as other types of
spending. The OECD did not specify the breakdown of government
spending cuts across functional categories. Source: GAO analysis
based on OECD data. Countries within the euro area must make
additional reductions in both debt and deficit levels over the
next few years to comply with the provisions of the 1997 Growth
and Stability Pact. Although 1998 debt levels in France, Germany,
and the United Kingdom were near or below the required 60 percent
of GDP, Italy's debt was 118 percent of GDP. While this
represents progress from the peak debt level of 125 percent of GDP
attained in 1994, Italy must continue to show progress in reducing
government debt to 60 percent of GDP to remain in compliance with
EMU requirements.14 In addition, as table 2 shows, all four EU
countries studied plan to continue to cut deficits to comply with
Stability Pact deficit requirements, although three of the four
countries plan to cut deficits at a slower rate over the next 4
years than was achieved from 1994 to 1998. 14The relationship
between deficit- and debt-to-GDP ratios is complex and depends on
factors such as GDP growth rates, inflation, and interest rates on
outstanding debt. In general, high-debt countries will face
greater fiscal constraints than low-debt countries. For example,
to bring debt below 100 percent of GDP by 2003, Italy plans to
have general government revenue exceed general government
expenditures, except for debt service payments, by 5.5 percent of
GDP. Page 16 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 Table 2: General
Government Deficit for Four West European Countries, Selected
Years, as a Percent of GDP Country
1994 deficit 1998 deficit Planned 2002 deficit
Germany 2.4
2.1 1.0 France
5.8 2.9 0.8 to 1.2 Italy
9.2 2.6 1.0a United
Kingdomb 6.8 0.8
0.2 aItaly's plans are for 2001. bThe United Kingdom chooses to
abide by the euro area's fiscal constraints. Source: European
Commission. Achieving further deficit reduction over the medium
term may prove difficult for some euro area countries. Countries
have made limited progress in reducing deficits since 1997, and
budget plans promise little improvement in the near term,
according to the IMF. OECD officials told us that many European
governments were suffering "fiscal fatigue" from the effort to
meet euro area deficit requirements and did not continue to cut
spending in 1998 to reduce deficits. In March 1999, the European
Central Bank issued a report criticizing governments for this
slowdown in deficit reduction and for assuming that sustained
economic growth and low interest rates would bring compliance with
EMU requirements without further cuts in government spending. The
European Central Bank, the OECD, the IMF, and the European
Commission have expressed concern that, in the event of a severe
or prolonged slowdown in economic growth, government deficits
could fail to meet Stability Pact requirements or could even
exceed the 3-percent deficit limit. According to European
officials, this would reflect badly on the credibility of EMU and
could trigger a political crisis if countries were required to pay
the fines for non-compliance spelled out in the Treaty on European
Union. While discussion of EMU's fiscal requirements focuses on
constraining government spending, the requirements also have
beneficial economic and fiscal effects. European Central Bank
officials have stated that the lower deficits and debt brought
about by EMU will create a more stable economic environment and
contribute to greater economic growth in the future. We have also
reported on the potential benefits to economic growth of lower
Page 17 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending B-282890 deficits.15 In
addition, as Italy's case shows, reducing deficits can also lead
to lower interest rates on sovereign debt and thus reduced
government spending on debt service. Moreover, reductions in debt
levels over time also directly lower debt service costs. Lower
interest payments and levels of debt will increase budgetary
flexibility making resources available for other policy
priorities. If EMU's deficit requirements require further spending
cuts, impacts on defense budgets will clearly depend on policy
decisions of individual governments regarding where those cuts are
made. We heard a range of views from officials and analysts
regarding the potential impact of further budget tightening under
EMU. Several officials told us that defense budgets had already
been affected by deficit reduction measures to date in several
countries. Other officials stated that because current defense
spending levels are low by recent historical standards, they are
unlikely to be cut further. Many officials and analysts stressed
that it is hard to develop a causal link between deficit reduction
requirements and changes in a particular category of spending,
since a number of factors are involved, including political
priorities and rates of economic growth. For example, during the
1990s, Italy cut its general government deficit the most and its
defense spending the least, among the countries we studied. EMU
Should Benefit Economic EMU has broad and important effects on
several aspects of European Growth, but Concerns Remain
economies, including competitiveness, structural reforms, and the
ability of national governments to react to economic downturns.
The impact of EMU on economic growth in Europe depends on how EMU
affects these and other economic factors. On balance, analysts
are guardedly optimistic about the implications of EMU for Europe.
However, concerns remain about how EMU will affect the ability of
national governments to adjust to economic downturns and derive
political consensus to pursue structural reforms. Officials at
the IMF, the EU, and the OECD told us they believe that EMU will
ultimately boost economic growth in Europe but have not quantified
this expected impact. Optimists believe that, in addition to
providing economic benefits from lower deficits, EMU will tie the
countries of Europe closer together, 15Economic growth requires
investment, which over the longer term, depends on savings.
Government deficits represent dissavings since they use funds that
otherwise could be used for investment. For examples of our work
in this area see Budget Issues: Analysis of Long-Term Fiscal
Outlook (GAO/AIMD/OCE-98-19, October 22, 1997) and Budgetary
Policy: Prompt Action Necessary to Avert Long-Term Damage to the
Economy (GAO/OCG-92-2, June 5, 1992). Page 18
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 increase their prosperity, and ultimately improve
security through the beneficial effects of integration. Since
national governments will no longer be able to adjust to downturns
through monetary or exchange rate policy, and the use of fiscal
policy will be constrained, they will have to rely on structural
reforms, such as revising their policies to increase labor
mobility, to address economic problems. Economic efficiency and
growth will increase because countries in the euro area will have
no choice but to allow increased flexibility in labor, capital,
and goods and services markets to stay economically competitive.
Skeptics fear that EMU will create longer, deeper recessions in
parts of Europe and possibly increase political tensions between
countries if workers and firms move across national boundaries.
They believe EMU will ultimately not work because national
governments will lack the political support to maintain balanced
budgets and undertake unpopular economic structural reforms, such
as making it easier for businesses to fire workers. (See app. II
for a further discussion of the mechanisms through which EMU can
affect economic growth.) The link between increased economic
growth and countries' defense budgets is, of course, an indirect
one. In general, stronger growth leads to more resources for all
spending needs, including defense, and weaker growth can squeeze
many budgetary categories. However, changes in the level of
defense spending over time solely due to changes in economic
growth can be relatively small. For example, holding assumptions
about military threat and political support for defense spending
constant, if GDP growth increased (decreased) by 1 percentage
point per year relative to baseline projections, it would take
about 5 years for real defense spending to increase (decrease) by
5 percent.16 EMU's impact on economic growth within the euro area
also has important economic consequences for the newest NATO
members. For example, exchange rates of the Polish and Hungarian
currencies are determined by the values of "currency baskets" that
include the euro. In addition, the Polish, Hungarian, and Czech
economies depend heavily on trade with the countries in the EU.
16This assumes the defense share of GDP declines slightly over the
period, based on existing defense budget projections for the
countries we studied. Page 19 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending B-282890 EU
Enlargement's EU enlargement's effect on resources
available for defense spending Budgetary Impact
depends on how enlargement affects economic growth and on the
Uncertain, but Effects on budgetary costs of meeting
enlargement criteria. Both of these impacts are New Member
Countries likely to be greater for countries joining
the EU than for current members. While applicants expect
membership to improve their economies over the Likely to Be
Greatest long run, meeting EU requirements is likely to
be costly in some areas, although the magnitude of costs depends
on timetables and specific requirements that have not been
established. Current EU members plan to provide financial support
for enlargement primarily through the EU common budget. The EU
financial framework for 2000-2006 limits assistance to applicant
countries to 11 percent of total spending over the period, which
is slightly above 0.1 percent of total EU gross national product
(GNP).17 Most of these funds will not be available until
countries actually join the EU, which is likely to be several more
years. EU Membership Should Benefit EU applicants, whose
average per capita GDP in 1997 was about 32 percent New Members'
Economic of that of current members, expect to derive
broad economic benefits from Growth
membership. Benefits are expected to flow from several factors:
expanded trade due to reduced trade barriers between entrants and
current members, increased foreign investment due to lower risks
and reduced barriers, and overall institutional reforms associated
with joining the EU. Although the requirements of EU membership
often coincide with steps toward general economic development in
applicant countries, the prospect of membership adds an important
motivation for countries to carry out needed reforms. In
addition, because the accession process itself increases investor
confidence, some of the economic benefits should accrue before
formal membership. Finally, applicant countries expect to benefit
through financial assistance from the EU although, as we discuss
later, the EU's current budget limits the commitment to assistance
for applicant countries and new members. Enlargement Requires
Reforms The EU requires that new members have by Applicant
Countries * stable government institutions guaranteeing
democracy, rule of law, and human rights; * a "functioning market
economy" that can withstand competitive pressure and market forces
within the EU; and 17GNP differs from GDP-the total market value
of all the final goods and services produced within an economy in
a given year-in that it includes earnings abroad by a country's
firms and residents and excludes income earned in that country by
foreign firms and residents. Page 20 GAO/NSIAD-99-
185 NATO: European Integration and Defense Spending B-282890 *
the ability to take on EU membership obligations, including the
adoption, implementation, and enforcement of the EU's entire body
of laws, known as the "acquis communautaire." Some of these
criteria are quite general and open to interpretation. For
example, having a functioning market economy can be demonstrated
through showing sustained economic growth with growing private
sector participation. This in turn requires changes across the
spectrum of economic institutions. For example, countries' legal
systems need to include the regulation of property rights so
contracts can be enforced. Adopting and implementing the full
spectrum of EU law, however, requires a number of specific
actions. Adopting the acquis is a massive undertaking for
accession countries. The acquis comprises 80,000 pages of
requirements, which the European Commission has divided into 31
categories, or chapters, for the purpose of carrying out
negotiations with applicants. (See app. III for a complete listing
of these chapters.) Some requirements of adopting the aquis can
be met with simple, technical changes, while others will require
large investments. Meeting EU standards for the environment and
for infrastructure are most likely to constitute the greatest
challenges and costs for the three accession countries we visited.
Enlargement Not Likely for The first accessions to the EU from
the current enlargement process are Several Years
not likely to take place for several years, most likely not until
2004-06, according to U.S. and foreign officials with whom we met.
Applicant countries' own official timetables remain somewhat
shorter-2002 or 2003-as does the timetable officially assumed in
the recently adopted EU budget. Enlargement cannot occur until
(1) applicant countries make sufficient progress in satisfying EU
membership criteria and (2) the EU agrees to reforms in its
decision-making processes and possibly changes in its budget. The
timing of accession is ultimately a political decision on the part
of current EU members. According to several EU and government
officials, while current members have made a political commitment
to the idea of enlargement, they have not made a political
commitment to the timing or conditions under which it will take
place. The degree of support for EU enlargement among current
member populations is mixed. According to a 1998 survey conducted
on behalf of the EU, 42 percent of respondents favored
enlargement, with support ranging from a high of 63 percent in
Sweden to a low of 28 percent in Belgium. Page 21
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 In its report on applicants' progress in meeting EU
membership criteria, issued in late 1998, the European Commission
indicated that while candidates were "broadly on track," countries
still had a long way to go in meeting membership criteria.
According to the Commission, among the Czech Republic, Hungary,
and Poland, Hungary has made the most progress and the Czech
Republic the least. The Commission reports that all the candidate
countries lack the administrative and judicial capacity to
implement the acquis. According to Commission officials, it is
not realistic to expect that all the requirements of the acquis
will be met prior to negotiation. The accession process does
provide for transition periods- periods after membership during
which some requirements can be implemented. Views on how
extensively transition periods will be granted varied among the
officials with whom we talked. Transition periods are generally
expected in some cases, however, particularly in the area of
meeting environmental standards. The need to make politically
difficult changes in EU policies could impede EU enlargement,
according to officials from the EU as well as member and applicant
countries. These include several issues with respect to EU
decision-making structures and procedures in the Council and
Commission, and potentially the EU budget-including the allocation
of funds to support agriculture. EU and member-country officials
stated that reforms of the EU decision-making process are
necessary prior to enlargement. These reforms include reducing
the number of members of the Commission to one per country to
accommodate an increasing number of countries (the largest
countries now have two members); reweighting the voting power of
members in the Council to offset the loss of commissioners; and
increasing the use of majority voting in the Council to replace
the current system of consensus decision-making. A State
Department official characterized the prospect for agreement on
these reforms in the near-term as "dim." The EU financial
framework for 2000-2006 (discussed later) reflects most of the
reforms that the Commission had determined would be necessary for
an expanded EU except with respect to agriculture policy, the area
of greatest contention.18 This has led to the views of some
officials that elements of the budgetary framework will have to be
revisited prior to 18The European Commission laid out in a 1997
document, Agenda 2000, specific changes to EU policies needed
before enlargement. Page 22 GAO/NSIAD-99-185 NATO:
European Integration and Defense Spending B-282890 enlargement.
In presenting the financial framework, the Council acknowledged
that further changes in agriculture assistance payments to current
members may be necessary. However, EU countries receiving the
largest amounts of agricultural subsidies could potentially use
their votes on enlargement to maintain their net level of
assistance from the EU at the expense of new members.19 Future
Budgetary Impacts The budgetary implications of EU
membership for applicant countries Depend on Specific Enlargement
depend on the outcome of ongoing membership negotiations with the
EU. Terms At this point, total cost
estimates have not been developed. While there is general
agreement that meeting EU membership requirements will entail
significant expenditures by applicant countries, quantifying these
costs remains difficult. For example, neither the EU nor the
World Bank, which have both worked with applicants to develop
accession strategies, has developed broad estimates of accession
costs. EU requirements with respect to environmental standards and
transportation infrastructure are expected to be among the
costliest for applicant countries to meet. The most comprehensive
sector-specific estimates are for environmental reforms, where the
World Bank has recently completed analyses of what Poland,
Hungary, and the Czech Republic must do to meet EU environmental
standards. The World Bank has estimated that Poland's public
sector costs of meeting EU requirements could be $5 billion to $11
billion dollars per year for 20 years to cover investment,
operation, and maintenance.20 This represents about 3.4 percent
to 7.5 percent of Poland's 1998 GDP and 1.7 percent to 3.7 percent
of Poland's projected GDP in 2015. The World Bank estimates
Hungary's annual costs of environmental reforms as ranging from
2.1 percent to 5.5 percent of 1997 GDP, and annual costs for the
Czech Republic ranging from 2.5 percent to 3.7 percent of 1997
GDP. The difference between the high and low ends of the cost
ranges are due to different assumptions about what the specific
requirements will be and the details of the compliance plan these
countries and the EU agree to. 19Currently, about half of all EU
appropriations are for agricultural price supports and direct
payments to farmers. Between 1993 and 1997, France was the
leading recipient of EU agricultural support payments, followed by
Germany, Spain, and Italy. Extending these payments to new
entrants, whose economies are, on average, about four times as
reliant on agriculture as current members, would increase
expenditures considerably. 20These calculations assume investments
are spread over their expected life and discounted to reflect the
time value of money. They also exclude what private industry must
spend to meet EU standards. Page 23 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending B-282890 The
World Bank's studies do not determine what portion of estimated
costs will be borne directly by national governments. The
national budgetary impact of these and other requirements depends
on a number of factors, including the degree to which costs are
passed on to consumers-through higher utility bills, for example--
and the types of financing available. According to these studies,
much of the costs would be affordable to households under the low-
cost scenario but not under the high-cost scenario. Moreover,
since these studies focus only on the costs of meeting enlargement
criteria in these areas, they do not attempt to present net
assessments of the criteria's economic costs and benefits. The
World Bank emphasizes that these countries will make many of the
required improvements whether they join the EU or not. A common
theme we heard from officials in accession countries is that there
is substantial overlap between their national development goals
and EU requirements in areas such as the environment. However, EU
requirements can affect the timing of reforms and thus the
relative impact of their costs. For example, Hungarian officials
pointed out that, while commercial vehicles in Hungary will
eventually satisfy EU emission control requirements, membership
criteria will force these requirements to be met by a certain
date. This will compress the period of time over which
adjustments take place, thus increasing annual expenses. New EU
Financial EU members plan to support enlargement
of the Union primarily through Framework Limits
the EU budget, not their national budgets. According to the
financial Expenditures of Current EU framework adopted in March
1999, the EU will appropriate about Members for Enlargement
11 percent of its spending during 2000-2006, about $80 billion
dollars, to applicant and new member countries. This is slightly
above 0.1 percent of current member GNP.21 As illustrated in
figure 7, the financial framework reflects some increase in total
spending, since members' GNP is assumed to grow over the period,
and revenues are limited to a percentage of GNP. The framework
shows only a slight decrease in agriculture and regional
development payments to current members. It assumes some new
members would join in 2002, and then receive a portion of
agriculture and regional development payments. 21Financing for the
EU budget comes from GNP-based contributions, value-added taxes,
and agricultural levies and customs revenues. Member
contributions are limited to a percentage of total EU GNP, which
is 1.27 percent in the newly adopted budget. Page 24
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 The framework reflects the decision to set an explicit
cap on the amount of funds that new members will receive over the
period. According to the EU, there are budgetary walls between
the funding for current and new members. Thus, if enlargement
takes place after 2002, current EU members would not get the funds
earmarked for new members for that year. Figure 7: Planned EU
Spending for Current and Applicant Members, 2000-2006 Billions of
1999 U.S. dollars 120 100 80 60 40 20 0 2000 2001
2002 2003 2004 2005 2006
Current members New members (before joining EU) New
members (after joining EU) Source: European Council. Most of the
financial assistance, 68 percent, given to new members will be for
regional development. The amount of assistance earmarked for new
members is not sufficient to support new members at the same level
as current members. EU officials have stated that the EU's
greatest contribution to the economic development of applicant
countries is not financial assistance, but rather fostering an
environment conducive to Page 25 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending B-282890
increased trade and influxes of private capital. However, a State
Department official stated that this budgetary framework may have
to be modified before enlargement can take place. Defense Budgets
Face Defense budgets face strong and increasing pressures from
demands for Strong and Increasing domestic spending in both West
and Central European countries. Pensions, in particular, are
placing pressure on national budgets and Pressure From
expenditures will increase dramatically as populations age, unless
difficult Domestic Spending reforms are made.
Health care costs are also expected to rise. In the long run, the
pressure from rising entitlement costs may have a greater effect
on countries' defense budgets than EMU or EU enlargement. Recent
budgetary debates in both West and Central European countries have
highlighted the tradeoffs facing decisionmakers as they try to
satisfy demands for social spending within a budgetary environment
characterized by lower economic growth and fiscal constraints.
Social Spending Is a Large The countries we reviewed have
historically spent a large portion of their Portion of National
Budgets GDP and government budgets on social programs such as
pensions, health, and welfare. For example, according to OECD
figures, in 1995-the latest year for which comparable data are
available-France, Germany, Italy, and the United Kingdom spent an
average of 26 percent of GDP on social programs, compared with 16
percent in the United States.22 Public pensions and health
programs are the largest component of government spending for
social programs in these countries, averaging about 80 percent of
the total. Central European governments also devote a significant
portion of GDP to social programs. According to IMF data, using a
slightly different measure than the OECD, the Czech Republic,
Hungary, and Poland spent about 22 percent of GDP in 1997 on
social programs (including pensions, welfare, and health). The
cost of public pension programs has been placing increasing
pressure on government budgets in some countries. Payroll taxes
in several countries, although considered high, do not cover the
annual costs of current pension programs, requiring sometimes
large and growing portions 22According to OECD figures, about half
of total government spending in the United States is for social
programs, about the same as in Western Europe. However,
government spending in Europe is a larger portion of GDP than in
the United States. Page 26 GAO/NSIAD-99-185 NATO:
European Integration and Defense Spending B-282890 of the national
budget to fill the gap.23 For example, in Germany, transfers to
pension funds increased from 16 percent to 22 percent of federal
government spending between 1994 and 1998.24 In Italy, government
contributions to the state pension system increased from 2.3
percent of GDP in 1997 to 2.7 percent in November 1998. In 1998,
the Czech Republic's pension system required payments from the
national budget to finance the gap between payroll taxes and
pension expenditures equivalent to roughly 1.1 percent of GDP.
Officials there told us that without serious change in the current
system, these deficits would continue. However, reforming pension
programs can increase costs in the short term. For example, in
1998, Hungary launched an ambitious reform of its pay-as-you-go
pension program. Although the move to add mandatory individual
savings accounts enhanced the long-term viability of the system,
Hungary's short-term budgetary costs will require payment for two
parallel pension systems over the next several years, reflecting
these transition costs. The growing pressures for spending for
domestic needs such as addressing unemployment and improving
education are reflected in the 1999 budget debates for all the
countries we studied. Germany, for example, increased spending
for education and to reduce youth unemployment while continuing to
spend large sums related to the integration of the eastern region.
France's budget also increased funding directed at lowering
unemployment and improving education, and Italy spent more for
social and regional development. In the United Kingdom, half of
all planned budgetary increases are in education and health. In
Central Europe, Poland is implementing costly pension, health
care, industrial, and local government reform programs. The Czech
Republic's mildly expansionary budget is geared to spur growth.
And Hungary's budget shows increased spending for pensions and
education, as the new government attempts to satisfy campaign
promises while limiting deficit spending. 23Most countries we
studied have multiple public pension programs, and the complex
funding and benefit details of these programs differ from country
to country. Governments collect payroll taxes to support the
current year's public pension outlays. This is known as a "pay-
as-you-go" funding scheme. General government budgets are used to
cover any gaps. Pay-as-you-go schemes are not generally designed
to accumulate and set aside funds to pay for future liabilities.
24National budget figures cannot be compared across countries, due
to significant differences in definitions; spending categories;
and distinctions between national, regional, and local government
responsibilities. Page 27 GAO/NSIAD-99-185 NATO:
European Integration and Defense Spending B-282890 Aging
Populations Present Demographic trends present a huge
budgetary challenge for the countries Budgetary Challenge
we studied, although the budgetary consequences for the United
Kingdom are much less negative than those for the other
countries.25 According to studies by the OECD, the World Bank,
and national governments, in the absence of substantive public
pension reform efforts, budgetary stability will come under
significant strain in the next century. German Central bank
officials, for example, described the projected fiscal
consequences of Germany's demographic problems as catastrophic.
The share of retired elderly (people over 65) in most developed
countries, which grew slowly over the last 25 years, will begin to
rise dramatically after 2010 as the baby boom generation moves
into retirement and other demographic forces play out. These
changes will generally be greater in European countries than in
the United States, as shown in figure 8. 25The U.K.'s population
is aging less rapidly and its pension system is less generous than
in France, Germany, and Italy. The United Kingdom has also
undertaken a series of reforms, including partial privatization of
its pension system, reducing the fiscal burden on the national
government. Page 28 GAO/NSIAD-99-185 NATO:
European Integration and Defense Spending B-282890 Figure 8:
Share of Population Over 65 in Four West European Countries and
the United States, 1960-2030 Percent of population 30 25 20 15 10
5 0 1960 1990 2000 2010 2020
2030 Italy Germany U.K. France U.S.
Source: OECD. The projected impact on public pension expenditures
of these demographic trends for France, Germany, Italy, the United
Kingdom, and the United States is shown in figure 9. Page 29
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 Figure 9: Pension Expenditures as Percent of GDP in Four
West European Countries and the United States, 1995-2050 Percent
of GDP 25 20 15 10 5 0 1995 2000 2010 2020
2030 2040 2050 Italy Germany
U.K. France U.S. Source: OECD. Figure 9 shows
that, using projections based on current trends and policies,
public pension costs in France, Germany, and Italy will consume
growing proportions of total GDP. Predicted costs for the United
Kingdom are lower in part due to reforms that have included lower
benefits. By several measures, based on current policies, the
future budgetary consequences of the trends in France, Germany,
and Italy are very serious. For example, the OECD has estimated
that current pension policies will drive the national debts of
Germany and Italy over 200 percent of GDP by 2030. To maintain
their respective national debts at current levels, the OECD
estimates that Italy and Germany will need to maintain
unrealistically high budget surpluses of 7 percent of GDP or
greater per year by 2030.26 26A 1997 OECD study estimated the net
present value of long-term financing shortfalls of government
pension programs for a number of countries. Expressed as a
percent of a country's 1994 GDP, estimated shortfalls were 24
percent for the United Kingdom, 60 percent for Italy, 62 percent
for Germany, and 102 percent for France. Page 30
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 Central European governments face similar budgetary
problems due to demographic trends. Polish officials have
projected they will reach unsustainable levels of spending in 10
to 15 years. Likewise, Czech officials reported being in the same
situation. Long-term projections for Hungary are somewhat more
optimistic, given recent reforms, although long-term funding
shortfalls are still projected. Aging populations are also
expected to increase health care costs in these countries,
although less dramatically. Public spending on health, which
throughout the 1980s equaled approximately 6 percent of GDP in the
EU countries we studied, began to rise early in the 1990s.
According to one study, this spending is projected to increase to
approximately 9.5 percent of GDP in 2050, under current trends and
policies. Expenditures on health care for the elderly account for
nearly all of this projected increase. According to the OECD, such
estimates are highly dependent on the future cost of medical
technology and the outcome of reforms aimed at improving
efficiency. Although the dramatic budgetary consequences of aging
populations appear to be a number of years away, significant
political and budgetary impacts will be felt sooner, according to
a number of officials and analysts. The longer pension system
reforms are delayed, for example, the more stringent they will
have to be. Officials told us that achieving the political
consensus to carry out reforms to temper the budgetary
consequences of aging populations will be difficult. They also
told us that the hardest and potentially most effective choices,
such as raising the retirement age or reducing benefits, are not
yet being seriously addressed. The political challenges are
compounded by the fact that some long-term reforms can have
negative budgetary consequences in the short to medium term.
Conclusions While neither EMU nor EU enlargement affect defense
spending decisions directly, they can affect the flexibility of
governments to allocate resources to various needs. The impacts
of EMU and EU enlargement on overall government budgets remain
difficult to predict. The estimated costs of meeting some EU
membership requirements are quite high. But just how high these
costs will be, who will pay them, and over what period of time
they will be incurred remain to be determined. Clearly, however,
EU membership is a priority of many Central European countries,
and support for it could fare well as budgetary decisions are
made. Over the next several years, EMU requires additional cuts
in deficits in participating countries. While these cuts are not
large relative to the deficit reductions Page 31
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
B-282890 already made, they are not easily achieved, particularly
in countries that are experiencing slow growth. Since defense is
a relatively small portion of the budget, it can arguably be
protected from cuts. However, if the political support for
defense spending is low, it may be a more attractive target than
other spending. Pressures for increased spending on pensions and
also health care due to aging populations will strain future
budgets in many European countries. Strong economic growth is
clearly a key to governments having any flexibility for meeting
competing needs for resources. Agency Comments and The Defense
Department provided written comments on a draft of this Our
Evaluation report and concurred with our findings
(see app.V). The Department of State provided oral comments on a
draft of this report and concurred with our findings. DOD and the
Department of State also provided technical comments, which we
incorporated where appropriate. In oral comments on a draft of
this report, the Department of the Treasury, the European Union,
the World Bank, and NATO provided technical comments, which we
incorporated where appropriate. As agreed with your office, unless
you publicly announce its contents earlier, we plan no further
distribution of this report until 15 days from its issuance date.
At that time, we will provide copies of this report to other
appropriate congressional Committees; the Honorable William Cohen,
the Secretary of Defense; the Honorable Madeleine Albright, the
Secretary of State; and the Honorable Lawrence Summers, the
Secretary of the Treasury. We will also make copies available to
others upon request. If you or your staff have any questions about
this report, please contact me at (202) 512-4128. Other GAO
contacts and staff acknowledgments are listed in appendix VI.
Benjamin F. Nelson, Director International Relations and Trade
Issues Page 32 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending Page 33 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending Contents Letter
1 Appendix I
38 Composition of Defense Spending in Selected European Countries
Appendix II
44 Possible Effects of European Economic and Monetary Union on
National Economic Growth Appendix III
46 Topics of Negotiation for EU Accession Appendix IV
48 Objectives, Scope, and Methodology Appendix V
51 Comments From the Department of Defense Page 34 GAO/NSIAD-
99-185 NATO: European Integration and Defense Spending Contents
Appendix VI
52 GAO Contacts and Staff Acknowledgements Tables
Table 1: Sources of Deficit Reductions in Four West European
Countries as a Percent of GDP, 1990-97
16 Table 2: General Government Deficit for Four West European
Countries, Selected Years, as a Percent of GDP
17 Table II.1: Ways in Which EMU Could Benefit Economic Growth
44 Table II.2: Ways in Which EMU Could Hurt Economic Growth
45 Figures Figure 1: European Members of NATO, the
EU, and the Euro Area, and First Wave EU Applicant Countries
5 Figure 2: Historical and Projected Defense Spending in Four
West European Countries, 1980-2002
7 Figure 3: Historical and Projected Defense Spending as Percent
of GDP for Four West European Countries and the United States,
1980-2002 8 Figure 4: Historical and Projected Defense Spending
in Three Central European Countries, 1994-2003
10 Figure 5: New NATO Members' Defense Spending as a Percentage
of GDP, 1994-2003
11 Figure 6: Annual General Government Deficits for Four West
European Countries as Percent of GDP, 1990-98
15 Figure 7: Planned EU Spending for Current and Applicant
Members, 2000-2006 25 Figure 8: Share of Population Over 65 in
Four West European Countries and the United States, 1960-2030
29 Figure 9: Pension Expenditures as Percent of GDP in Four West
European Countries and the United States, 1995-2050
30 Figure I.1: Trends in Composition of Defense Spending in Three
West European Countries, 1980-2002, 2003
39 Figure I.2: Trends in Composition of Defense Spending in Three
Central European Countries, 1996-2003
42 Page 35 GAO/NSIAD-99-185 NATO: European Integration
and Defense Spending Contents Abbreviations DOD Department
of Defense EMU Economic and Monetary Union ECB
European Central Bank EU European Union GDP gross
domestic product GNP gross national product IMF
International Monetary Fund NATO North Atlantic Treaty
Organization OECD Organization for Economic Cooperation and
Development Page 36 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending Page 37 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending Appendix I
Composition of Defense Spending in Selected European Countries
Appendix I The defense budget challenges of the West and Central
European countries we studied arise in part from large personnel
costs, large procurement projects, and deployments. Officials
have identified the need to prioritize defense requirements as key
to effectively addressing new security challenges. Western Europe
Personnel expenses for the countries we studied in Western Europe
generally constitute a large portion of their defense budgets-60
to 70 percent in some cases-and have affected the ability of these
countries to appropriate additional funding for defense
modernization. In Germany and Italy, in particular, personnel
expenses, as a share of overall expenses, have been rising in the
Cold War and post-Cold War periods, as shown in figure I.1. While
these countries expect personnel expenses to fall in the future,
this may be complicated by sensitive political and social issues
associated with the elimination of conscription and the reduction
in personnel strength. In the United Kingdom, with its all-
volunteer force, personnel expenses have decreased relative to
other expenses since the end of the Cold War. Page 38
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
Appendix I Composition of Defense Spending in Selected European
Countries Figure I.1: Trends in Composition of Defense Spending
in Three West European Countries, 1980-2002, 2003 United Kingdom
Germany 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0%
0% 84 89
94
84 89 94 1995 1998
1995 1998 2000 2002 1980- 1985-
1990-
1980- 1985- 1990- Italy 100% 80% 60% 40% Other
20%
Equipment 0%
Personnel 84 89
94 1995 1998 2000
2002 1980- 1985-
1990- Note 1: Comparable data for France are not available.
Breakout of future defense spending for the United Kingdom is not
available. Note 2: "Other" primarily includes spending for
operations, maintenance, and infrastructure. Sources: GAO
analysis of data from North Atlantic Treaty Organization (NATO)
and national ministries of Defense. Conscription Compulsory
military service, known as conscription, has been a fundamental
element of defense planning for France, Germany, and Italy since
the end of World War II. It has both integrated the professional
core of the military into society and, in some cases, provided a
source of employment for youth. While conscription may have been
effective during Page 39
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
Appendix I Composition of Defense Spending in Selected European
Countries the Cold War for staffing large territorial armies, the
restrictions attached to it pose problems for post-Cold War
security conflicts, according to officials with whom we met. For
example, conscripts in Italy cannot be deployed to an overseas
conflict or crisis except on a volunteer basis. When they do
volunteer, it can be a costly deployment for the country because
Italy's laws require that the volunteers be paid at a higher rate
when on an overseas deployment. France, Germany, and Italy
acknowledge the lack of flexibility inherent in conscription, as
well as the expense of maintaining large numbers of these forces,
and are in various stages of making or considering changes. A
shift to a professional, volunteer force can initially result in
higher personnel costs, although costs can be lower over time as
the size of the force is decreased, according to U.S. and foreign
officials. In addition, ending conscription can exacerbate
countries' unemployment and associated problems, according to
military personnel specialists. In 1996, the French government
presented a plan for downsizing and professionalizing the French
military, including a massive reduction of conscripts within the
French armed forces, to be accomplished by 2002. Italy has also
begun to professionalize its military forces but is proceeding at
a slower pace than France. The Italian government believes a
gradual transition is necessary because Italy has never had a
professional military, and also because conscription forces have
provided volunteer labor that is relied on by both the military
and the outside community. As a result of this gradual
transition, however, personnel costs, as a percent of total
defense spending, increased from 67 percent to nearly 73 percent
between 1995 and 1998 to accommodate professionalization and
maintain conscription. In May 1999, Germany launched the first
comprehensive study of the structure of its armed forces in almost
30 years. This review, which will look out to the 2010 time
frame, will include an examination of conscription policies.
Procurement of Large The expense of developing and procuring
large military systems Systems significantly
limits flexibility in defense budgets in many European countries,
according to U.S. and European officials. While participation in
such projects can serve national interests, through increasing
employment, enhancing technology, and boosting international
prestige, it can also limit the ability of countries to buy other
needed systems and equipment for modernization programs. The
prime example of this is the EF-2000 "Eurofighter." Of the
countries we reviewed, three are participating in this project--
Germany, Italy, and the United Kingdom. Our analysis shows that
Page 40 GAO/NSIAD-99-185 NATO: European Integration
and Defense Spending Appendix I Composition of Defense Spending in
Selected European Countries Eurofighter procurement is accounting
for a growing portion of the procurement budgets in each of these
three countries. Germany, for example, is procuring 180
Eurofighters, which represents approximately 28 percent of the
costs of its major combat equipment purchases in 1999. This is an
increase from 24 percent in 1998. According to U.S. embassy
officials in Bonn, Eurofighter procurement, in combination with
current overseas deployments, has had a depressing effect on the
funding available for other defense programs. They stated that
many German defense procurement programs have been delayed or are
awaiting a decision whether or not to go forward, as a result of
funding uncertainty. The Eurofighter is also important to the
Italian government because it supports Italian industry and jobs
and provides international prestige. To fund such a large
program, the Italian government is relying in part on financing
sources outside the defense budget, such as the Ministry of Trade
and Industry. Because of this funding arrangement, assessing the
Eurofighter's impact on other defense programs is difficult.
However, military analysts both inside and outside of Italy have
expressed concerns regarding Italy's ability to fund the
Eurofighter as well as other needed systems and equipment,
particularly given costly military deployments such as Kosovo and
expenses involved in moving to a professional military force. The
United Kingdom is procuring 232 Eurofighter aircraft--the largest
number among participating countries. U.S. embassy officials in
London stated that expensive procurement programs such as the
Eurofighter must necessarily affect other programs, particularly
when the defense budget is not growing. Moreover, recent U.K.
government reports indicate high cost overruns from large weapon
system purchases, with the Eurofighter accounting for nearly half
of the total cost overruns. Central Europe Personnel costs also
constitute a large portion of the defense budgets for Poland,
Hungary, and the Czech Republic-between 49 and 61 percent in 1998.
Operational and personnel costs combined equal nearly 80 to 90
percent of the defense budgets, leaving 10 percent or less for
major equipment. According to U.S. embassy and European
government officials, a major challenge for these nations has been
reducing the large, top-heavy, military personnel structures-a
holdover from their membership in the Warsaw Pact. Conscription
is a political and economic issue for these Central European
countries, as it is in the West, and affects these countries'
ability to reduce their military force numbers. Projections
indicate that Page 41 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending Appendix I Composition of Defense
Spending in Selected European Countries personnel expenses, as a
share of overall expenses, will decline slightly in the next 5
years but will still remain a large percent of the overall defense
budget (figure I.2 shows the composition of defense spending in
the Czech Republic, Hungary, and Poland). Figure I.2: Trends in
Composition of Defense Spending in Three Central European
Countries, 1996-2003 Poland
Hungary 100% 100% 80%
80% 60% 60% 40%
40% 20% 20% 0%
0% 1996 1998 2000 2003 1996 1998
2000 2003 Czech Republic 100% 80% 60% 40% 20%
Other Equipment 0% 1996 1998 2000 2003
Personnel Note: "Other" primarily includes spending for
operations, maintenance, and infrastructure. Sources: GAO analysis
of data from NATO and national ministries of Defense. Achieving
defense reform and modernization goals depends on the ability of
these countries to balance competing elements of defense spending.
Undertaking certain high-cost modernization programs could prevent
these Central European nations from meeting their NATO force goal
commitments if the purchases are not carefully planned and
budgeted, Page 42 GAO/NSIAD-99-185 NATO:
European Integration and Defense Spending Appendix I Composition
of Defense Spending in Selected European Countries according to
U.S. Department of Defense (DOD) officials. In recognition of its
budgetary limitations, Hungary has deferred purchase of new
fighter aircraft until after 2001 and will continue to use MIG-
Soviet-built aircraft. The Czech Republic has also deferred
purchasing new fighter aircraft but is proceeding with the
procurement of subsonic multirole jets (the Aero Vodochody L-159).
Poland has decided to move ahead now with new multirole fighter
aircraft but has not decided whether to lease or buy the new
systems. U.S. government officials stated that these aircraft
purchases are feasible for Poland if the country meets GDP-growth
projections of at least 4.2 percent and spends defense budget
increases primarily on procurement. Funding Requirements In our
discussions with U.S. and foreign government officials, nearly all
of of Peace Support them identified the increasing
number of out of country deployments, particularly in the Balkans,
as a growing drain on their defense resources. Operations
Combined with large aircraft purchases and high personnel costs,
these operations are affecting the ability of the NATO countries
we studied to carry out restructuring and modernization, according
to these officials. The expense of the current operation in Kosovo
is requiring some European countries to draw on other government
funds or, in the case of Germany, appropriate supplemental funds
for defense. Defense officials from France and the United Kingdom
told us that requests for additional funding from their treasuries
may be made later this year. Funding the Kosovo operation has
been particularly difficult for the new NATO members because of
their ongoing defense and economic reforms, according to U.S.
government officials. The Czech Republic, for example, plans to
increase its budget deficit in order to fund humanitarian aid. In
Poland, contributions are being funded from budget "reserves," as
a spending contingency fund was quickly exhausted. According to
U.S. embassy officials, the Polish Defense Minister has frequently
complained to the press that the overall budget reserve for
emergencies will also be quickly depleted. Letter Page 43
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
Appendix II Possible Effects of European Economic and Monetary
Union on National Economic Growth
Appendix I I European Economic and Monetary Union (EMU),
particularly the adoption of a common currency, can affect
economic growth in participating countries through several
mechanisms. Overall growth effects depend both on how these
mechanisms individually affect growth, and on how they interact.
Both are subject to considerable uncertainty. Table II.1
summarizes the ways EMU could benefit economic growth. Table II.2
summarizes the ways EMU could harm economic growth. Table II.1:
Ways in Which EMU Could Benefit Economic Growth * Governments will
be forced to undertake structural reforms, especially in improving
the flexibility of labor markets. This will allow economies to
adjust more easily to economic downturns, and therefore benefit
long-term growth. * Maintaining low budget deficits, which EMU
requires, helps establish the foundations for stronger economic
growth by limiting the government sector's absorption of national
savings. * Exchange rate variability among euro area countries is
eliminated. Consumers and businesses will no longer incur currency
conversion costs, and the macro economy will be spared the impacts
of large fluctuations in currency values that harmed European
economies in the early 1990s. * The European Central Bank is
required to keep prices stable, which should contribute to lower
interest rates. * A common currency allows consumers to easily
compare prices across borders, spurring economic competition and
eventually boosting efficiency and productivity. Page 44
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
Appendix II Possible Effects of European Economic and Monetary
Union on National Economic Growth Table II.2: Ways in Which EMU
Could Hurt Economic Growth * Common economic policies,
particularly monetary policies, may not be well-suited to the
needs of various countries that are at different stages of the
business cycle. For example, a single interest rate set by the
European Central Bank for 11 different economies could possibly
lead to stagnation in some countries and overheating in others. *
National leaders will no longer be able to use monetary or
exchange rate policy to cope with economic downturns. Without
these tools, some countries may suffer additional pain from
economic shocks that do relatively little harm to the rest of the
euro area. * The limitations on government spending will constrain
national efforts to increase social spending during times of
recession. * Countries may be unwilling to continue to comply with
EMU's requirements or adopt politically difficult structural
reforms, especially in the labor market. A series of national
decisions at cross-purposes could place tremendous strain on the
ability of EMU to hold together politically. Page 45
GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
Appendix III Topics of Negotiation for EU Accession
Appendix II I Table III.1 presents the 31 chapters of the acquis
communautaire, or the European Union's body of laws, for the EU's
negotiations with EU applicant countries regarding those
countries' adoption of the acquis. Also shown are examples of
topics included in each chapter. Chapter
Examples 1. Free movement of goods Export
procedures; elimination of trade barriers. 2. Freedom of movement
of people Right of residence for employees,
self-employed persons, and students. 3. Freedom to provide
services Service activities including
insurance, banking, and stock exchanges. 4. Free movement of
capital Relations between financial
institutions and consumers. 5. Company law
Formation, mergers, and division of public limited liability
companies. 6. Competition policy
Competition principles; intra-EU dumping practices: and national
trading monopolies. 7. Agriculture
Processing and marketing of agricultural products; agricultural
research; and setting of compensatory amounts. 8. Fisheries
Catch quotas and management of stock; agreements with nonmember
countries. 9. Transport policy
Ground transport safety conditions; shipping vessel registration;
and air route distribution. 10. Taxation
Income and corporate taxes; excise duties; and prevention of tax
evasion and tax avoidance. 11. Economic and monetary union
Limitations on government deficits; harmonized indexes of consumer
prices; and provisions for the introduction of the euro. 12.
Statistics Collection of
statistical information on tourism; statistics on distribution of
earnings. 13. Social policy and employment
Working conditions; wages; and employment incentives. 14. Energy
Coal rates; nuclear energy safeguards; and oil and gas supplies
and stocks. 15. Industrial policy
Research and technological development; competitive pricing and
other sale conditions. 16. Small- and medium-sized enterprises
Interest subsidies for loans; taxation; and technological
innovation. 17. Science and research
General principles and research sectors. 18. Education and
training Mutual recognition of diplomas,
certificates, and other evidence of formal qualifications. 19.
Telecommunications and information Policy on data
processing; directive on competition in the markets for
technologies telecommunications
services. 20. Culture and audiovisual policy
Resolution on electronic publishing and libraries. 21. Regional
policy and coordination of structural Monitoring and coordination
of regional state aid; aid for stricken regions; and instruments
community loans. 22. Environment
Nuclear safety and radioactive waste; water protection and
management; monitoring of atmospheric pollution; prevention of
noise pollution; and chemicals, industrial risk, and
biotechnology. 23. Consumers and health protection
Consumer information; protection of economic interests; and
protection of animals. 24. Cooperation in the fields of justice
and home EU extradition procedures; cooperation to combat
international organized crime. affairs 25. Customs union
Tariff types, quotas, and ceilings. (continued) Page 46
GAO/NSIAD-99-185 NATO Defense Spending and European Integration
Appendix III Topics of Negotiation for EU Accession Chapter
Examples 26. External relations European
political cooperation; multilateral relations; and commercial
policy. 27. Common foreign and security policy Regulation on
the reduction of economic relations with the Federal Republic of
Yugoslavia. 28. Financial control Decision
conferring powers to carry out measures of control regarding EU
revenue and expenditure. 29. Financial and budgetary provisions
Impact on the EU budget of the accession. Arrangements for the
collection of own resources. 30. Institutions
Principles, objectives, and tasks of treaties. 31. Othera
None identified as of June 1, 1999. aThe EU set aside chapter 31
to cover any major issues that arise during negotiations that were
not covered in the preceding chapters. Source: European
Commission. Page 47 GAO/NSIAD-99-185 NATO Defense
Spending and European Integration Appendix IV Objectives, Scope,
and Methodology
Appendix IV The Chairman and the Ranking Minority Member of the
Subcommittee on Defense, Senate Committee on Appropriations, asked
us to assess how the implementation of European EMU and the
enlargement of the EU may affect our European allies' ability to
sustain or increase their defense budgets. To address this issue,
we collected and analyzed information on (1) projected defense
spending for several European countries, (2) budgetary effects of
EMU implementation and EU enlargement, and (3) other significant
factors that may affect countries' ability to share in the costs
of NATO over the long run. Our work focused on seven European
countries: the four members of NATO with the largest defense
budgets in Europe (Germany, France, Italy, and the United Kingdom)
and the three newest members of NATO (Poland, Hungary, and the
Czech Republic). We chose these countries because (1)
collectively they accounted for over 75 percent of the total gross
domestic product (GDP) and defense spending by all European NATO
members and (2) because they included all three newest members of
NATO. We visited all of these countries except France, which is
not part of NATO's integrated military command. We also contacted
officials at DOD, State, and Treasury. We also obtained access to
the World Bank and International Monetary Fund (IMF) officials and
analytical studies through the staffs of the U.S. members of their
Boards of Executive Directors. The European governments in our
study provided us access to reports and staff from a variety of
ministries. To determine levels and composition of defense
spending in Europe, we interviewed and obtained data from
officials in the U.S. government, NATO, EU applicant countries,
current EU member countries, and academic and private sector
institutions. During our visits to NATO countries, we discussed
planned defense spending trends with officials from the ministries
of defense, finance, and treasury; parliaments; national audit
offices; U.S. embassies; and defense research institutes such as
the International Institute for Strategic Studies in London, the
Center for the Study of International Politics in Rome, and the
Government Center for Strategic Studies in Warsaw. We also
collected defense budget data and interviewed officials from the
Central Intelligence Agency, the Defense Intelligence Agency, the
National Defense University, and the Council on Foreign Relations.
To determine past and present defense spending trends (1980-98)
for the figures used in the report, we relied exclusively on NATO
data and its definition of "defense expenditure." NATO defense
budget forecasts for NATO member countries are classified. To
present unclassified information on future defense spending
levels, we obtained Page 48 GAO/NSIAD-99-185 NATO:
European Integration and Defense Spending Appendix IV Objectives,
Scope, and Methodology defense budget projections from the host
countries, calculated yearly growth rates, and applied these
growth rates to NATO's 1998 spending level for each country.
Similarly, for the composition of defense budgets and the breakout
of these budgets into "personnel," "equipment," and "other," we
relied on NATO data for 1980-98. For future trends, we relied on
budget projections from the countries. We applied growth rates
for each of these categories, derived from the countries' budgets,
to NATO's 1998 breakouts. We discussed our methodology with DOD
officials, and they concurred with the logic of our approach. To
assess the consequences of EMU on defense spending, we collected
and analyzed information on EMU's effects on national budgets and
economic growth from the U.S. Department of the Treasury, the
Department of State, and the Department of Defense; the EU; the
European Central Bank; EMU member countries; the World Bank; the
IMF; and academic and private sector organizations. We met with
officials from Germany and Italy to discuss how meeting EMU
membership criteria has affected their national budgets. Within
these countries, we obtained information and met with officials
from the Central banks, the finance ministries, U.S. embassy
staff, and academic institutions. To examine the consequences of
prospective EU enlargement on defense spending, we assessed how
enlargement could affect national budgets and economic growth. We
collected and analyzed information and interviewed officials from
the U.S. government, the EU, applicant governments, current EU
member governments, multilateral institutions, and academic
institutions. We discussed the objectives and total costs of EU
enlargement with officials at the Department of State, the World
Bank, and the EU's Council, Commission, and Parliament. To
identify the potential impact of meeting EU membership criteria on
the respective national budgets of current and applicant members,
we interviewed officials and obtained information from ministries
of finance and foreign affairs. In the applicant countries, we
also met with officials from the national parliaments, EU
integration offices, U.S. embassies, and local academic
institutions. To identify primary nondefense domestic budgetary
trends and pressures, we met with officials from the U.S.
government, current EU member countries, applicant member
countries, multilateral organizations, and academic and private
sector organizations. We obtained data and analytical studies and
interviewed officials from the Organization for Economic
Cooperation and Development, the World Bank, the IMF, and economic
institutes, including PlanEcon. In the countries we visited, we
Page 49 GAO/NSIAD-99-185 NATO: European Integration
and Defense Spending Appendix IV Objectives, Scope, and
Methodology discussed the major areas of the domestic budget with
officials from the Central banks and the ministries of finance,
industry and trade, and labor and social affairs; U.S. embassies;
and local academic institutions. The information in this report
concerning foreign laws and regulations does not reflect our
independent legal analysis, but is based on interviews and
secondary sources. We performed our review from April 1998 to June
1999 in accordance with generally accepted government auditing
standards. Page 50 GAO/NSIAD-99-185 NATO: European
Integration and Defense Spending Appendix V Comments From the
Department of Defense Appendix V Page 51 GAO/NSIAD-99-185
NATO: European Integration and Defense Spending Appendix VI GAO
Contacts and Staff Acknowledgements Appenx idVI GAO Contacts
Harold J. Johnson, (202) 512-4128 Celia Thomas, (202) 512-8987
Acknowledgements In addition to those named above, Dave Maurer,
Elizabeth Guran, Arturo Holguin, Christian Hougen, Bruce Kutnick,
and Jane Li made significant contributions to this report.
(711325) Lteter Page 52 GAO/NSIAD-99-185 NATO Defense
Spending and European Integration Ordering Information The first
copy of each GAO report and testimony is free. Additional copies
are $2 each. Orders should be sent to the following address,
accompanied by a check or money order made out to the
Superintendent of Documents, when necessary, VISA and MasterCard
credit cards are accepted, also. Orders for 100 or more copies to
be mailed to a single address are discounted 25 percent. Orders by
mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC
20013 or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts.
NW) U.S. General Accounting Office Washington, DC Orders may also
be placed by calling (202) 512-6000 or by using fax number (202)
512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of
newly available reports and testimony. To receive facsimile
copies of the daily list or any list from the past 30 days, please
call (202) 512-6000 using a touchtone phone. A recorded menu will
provide information on how to obtain these lists. For information
on how to access GAO reports on the INTERNET, send an e-mail
message with "info" in the body to: info@www.gao.gov or visit
GAO's World Wide Web Home Page at: http://www.gao.gov United
States Bulk Rate General Accounting Office
Postage & Fees Paid Washington, D.C. 20548-0001 GAO
Permit No. GI00 Official Business Penalty for Private Use $300
Address Correction Requested
*** End of document. ***