DEFENSE IN DEPTH
The immediate fallout was at the political level where the pro-defense Prime Minister David Cameron announced his decision to stand down before October once it became clear voters had rejected his pleas for the UK to remain a member of the 28 nation European Union.
Cameron is likely to be followed out of the exit by the Chancellor George Osborne who, although a critic of many areas of the Ministry of Defence’s performance, helped deliver an unexpected upswing in military spending over the next five years in last November’s strategic defence and security review.
The exit decision has also opened up the possibility that the pro-European Scottish government will seek to call another referendum on whether the country should break away from the union with the rest of the UK.
Leading Scottish National Party officials already have started calling for a new referendum following the independence vote they lost in 2014.
A breakaway by Scotland would have a profound effect on military capabilities here, not least over the question of over the future of the nuclear submarine base at Faslane, Scotland.
Ousting the Royal Navy’s ballistic-missile and hunter-killer submarine fleets from their Scottish home is a key SNP policy.
But, it’s the impact leaving the European Union would have on defense which is the immediate concern to the defense sector, according to analysts.
“It is unrealistic to expect that the defense budget can be entirely exempted from the expenditure cuts that will probably be needed in a post-exit spending review,” said Malcolm Chalmers, the deputy director-general of the Royal United Services Institute think tank in London.
“With the limited resources that are available, the government should make clear that its strategic priorities will be focused on areas of common interest with the UK's European allies, rather than on more global roles,” he said.
In the run-up to the June 23 referendum, Chalmers released a report saying some short-term cuts in spending were probable, but what happens to the defense budget in the long term depends on the extent of a possible deterioration in economic performance.
Peter Luff, the ex-British defense procurement minister, thinks the Conservative Party will be reluctant to make cuts, particularly as it would risk reopening the controversy over the UK meeting NATO’s 2 percent spending target – a commitment the current Chancellor George Osborne signed up to in last year’s spending review.
“Even with a tough austerity budget on the way, it would be quite a brave Chancellor who played with the two-percent NATO commitment again,” he said.
“They, [the Conservatives] will try very hard to continue to ring-fence defense spending, and there is strong support from MP’s for it. The Chancellor, whoever he is, would be very reluctant to cut spending, although he might have to. A lot depends who becomes the next leader,” said Luff.
Questions over the future level of defense spending come at a time when budget pressures are already surfacing.
A National Audit Office report published last week pointed out that the defense budget was coming under pressure in part due to what the financial watchdog said was £25.6 billion, or $35 billion, of additional equipment commitments in the SDSR to acquire new capabilities like Boeing’s P-8 maritime patrol aircraft.
Chalmers said June 24 the government should revisit the SDSR “as an opportunity to recast its defence and security strategies in response to the new circumstances which an exit will create. It should make a point of working very closely with key European partners, especially France and Germany, in doing so,” he said.
Luff said the current SDSR 2015 is already unaffordable and not funded properly. “It has aspirations that cannot be met.
“The UK should consider rethinking the focus of its military activities more strongly towards the security of Europe itself,” said Chalmers.
Defense consultant Howard Wheeldon of Wheeldon Strategic Advisory reckons the immediate impact of the British exit is probably minimal.
“The longer-term impact, though, will to an extent depend very much on who becomes the next prime minister and whether they share the same approach to defense in terms of prioritization. That said, the dangers for defense are very real and I suspect that a new Chancellor may well push the MoD toward a re-examination of SDSR 2015,” said Wheeldon.
The consultant said he did not think the European Union exit would have any bearing on the P-8 maritime patrol aircraft and AH-64E attack helicopters contract awards set to be announced at the upcoming Farnborough air show next month.
One defense executive, who asked not to be named, said that despite the uncertainty, key programs coming up for approval by the government will likely go ahead.
“We will maintain momentum on key programs. My expectation is business will continue in the way, essentially, we are planning, but there will be some twists and turns along the way,” he said.
At a cost of just over £30 billion, the upcoming Parliamentary debate over approval for the next round of investment in a nuclear submarine program to replace the four Vanguard class Trident missile boats is the main item on the agenda.
The executive said the uncertainty caused by the exit vote would slow down investment by British and overseas companies.
“Generally I think there will a question mark over any investment in the UK. It will herald a period where British companies will be careful about the investments they make, waiting for some greater certainty in the context within which they operate and therefore it will slow things down for a while,” he said.
“In the same way anybody thinking of investing in the UK would also see the same political uncertainty. What it might mean is that companies, when faced with investment propositions one inside the UK and one outside, will now look at things slightly differently,” he said.
But, he said the British defense industry overall are a “pretty resilient and persistent bunch, we will tackle the issues, and tackle the new political challenge.”
The executive reckons Britain’s exit will not weigh too heavily on co-operation with nations in Europe, particularly the French.
“From a defense industry perspective, the European Union has no competence so European programs and European relationship are independent of Brussels. I am optimistic we will continue to forge relationships particularly with France,” he said.
“We have yet to see exactly what the response in Europe will be but it’s pretty clear to me that the defense thinking in Germany is distinctly different to the defense thinking in France, who are more aligned with UK. In that sense we remain the more natural partners for programs,” he said.
Luff, though, is not so sure that politics won’t intervene in any discussions over future British co-operation in Europe.
“This must make Franco-British co-operation more difficult,” he said. “It will pose challenges if only because so much of progress in the Anglo-French defense treaty has been achieved by political drive from the top. It’s not clear to me that an incoming British prime minister will have the same treatment Cameron has had,” he said.
In Paris, the French procurement chief said there is a strong bilateral link with Britain but there is now uncertainty in the medium and long term.
“In the defense sector, there is essentially a bedrock based on bilateral cooperation set out in the Lancaster House treaty and supported at a high level,” said Laurent Collet-Billon, head of Direction Générale de l’Armement.
“For now, we do not know the impact of Brexit in our area, as there is not a short-term effect but one in the medium and long term,” he said.
Camille Grand, head of the think tank Fondation pour la Récherche Stratégique, agreed that there was some short-term certainty on a bilateral basis but a worrying lack of clarity further ahead.
“This is bad news for European defense,” he said.