Home About Archives RSS Feed

The Independent Investor: Truth About NATO & Defense Spending

By Bill SchmickiBerkshires columnist
While it would appear that President Donald Trump left the London NATO Summit this week empty-handed, the truth is he has already achieved what several presidents before him could not. Unfortunately, it is a shallow victory at best.
 
Just a week ago, in preparation for President Trump's visit, the North Atlantic Treaty Organization announced a change in the funding of its budget. It agreed to reduce the United States' contribution to the alliance (now 22 percent) and redistribute the costs to other members. As a result, the U.S. and Germany will now pay the same amount. Each will contribute 16 percent of NATO's central budget.
 
The problem is that NATO's central budget, which only amounts to $2.5 billion annually, is just a drop in the bucket when thinking about the ongoing defense of Europe. The alliance was formed after World War II as a means to counter the Soviet Union's growing domination in Europe and the rest of the world.
 
The idea of a collective defense — "One for all and all for one" — was a good one at the time. The assumption was that each nation member would see to its own defense spending, while contributing to the direct budget of NATO, which was miniscule in comparison.
 
Over the decades since its founding, it became apparent that, with the exception of the United States, most of the 29 members of the alliance were not spending nearly enough on their own defense readiness. The issue came to a head by 2014 when the members agreed that they would increase their own defense spending to 2 percent of their Gross Domestic Product (GDP) no later than 2024. 
 
Therein lies the beef, since only nine members have reached that goal so far. In the meantime, the U.S. spends 3.4 percent of GDP on defense, which amounts to roughly 69 percent of overall defense spending among the NATO alliance. This year alone, the U.S. will spend $693 billion. That makes the amount members spend on the NATO budget mere peanuts in the grand scheme of things.
 
The 2014 agreement, however, is really a "paper tiger," since there is no penalty if a member fails to reach the 2 percent target. To be fair, most NATO members did increase defense spending this year, which makes it five years in a row. However, that was not nearly enough in President Trump's opinion.
 
"ALL NATO NATIONS must meet their 2 percent commitment, and that must ultimately go to 4 percent," was the tweeted message dictated to NATO by our commander-in-chief. That might be easier said than done, in my opinion. This week, the president has threatened additional tariffs on European imports if NATO members do not comply.
 
To be fair, our European allies are democracies and cannot simply up their defense spending without the agreement of their voters. At the same time, most Europeans have far less appetite for defense spending in general than Americans.
 
In addition, given Trump's overwhelming lack of popularity within European nations, it would be practically impossible for EU leaders to convince their citizens to increase defense spending based simply on Trump's demands. In fact, it is likely the opposite would occur.
 
That leaves one obvious avenue left to force a solution — threatened U.S. departure from NATO. The ramifications of such a move on Trump's part would go far beyond economics. I am sure that possibility is the stuff of nightmares that may keep our military establishment up at night. Many politicians on both sides of the aisle might also have a problem with such a move. And yet, I would not put it past this president to venture down that road, if only as a negotiating ploy to get some of what he wants.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
0 Comments
     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Williamstown Moves Ahead on Interim Police Chief Plan, Department Investigation
Governor Baker's 2021 State of the Commonwealth Address
TD Bank, Citizens Bank Closing in North Adams
Pittsfield Officials Warn of Malfunctioning Light at North, Linden
Adams Nomination Papers Now Available
Boston Marathon Moved to October at Earliest
Pittsfield Officials Urge Caution Against Vaccination Scams
Dentist Joins CHP Family Dental Center
Pittsfield Human Service Programs Receive CDBG Funds
Remote Work May Offer Financial Benefits
 
 


Categories:
@theMarket (355)
Independent Investor (450)
Retired Investor (27)
Archives:
January 2021 (3)
January 2020 (2)
December 2020 (6)
November 2020 (8)
October 2020 (7)
September 2020 (6)
August 2020 (6)
July 2020 (10)
June 2020 (7)
May 2020 (9)
April 2020 (9)
March 2020 (5)
February 2020 (7)
Tags:
Metals Stock Market Recession Banks Currency Energy Markets Interest Rates Euro Selloff Oil Europe Retirement Congress Wall Street Pullback Housing Jobs Deficit Stimulus Stocks Commodities Federal Reserve Rally Economy Europe Bailout Fiscal Cliff Taxes Japan Crisis Debt Election Debt Ceiling Greece
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Equities Register New Highs, Until They Don't
The Retired Investor: The Reflation Trade
The Retired Investor: Asia: The Investment Case
The Retired Investor: Where Have All the Christmas Trees Gone?
The Retired Investor: Oil's Comeback
@theMarket: Same Old Stimulus Song
The Retired Investor: Markets Ignore China Sanctions
@theMarket: Markets Bet on Stimulus Sweepstakes
The Retired Investor: Bitcoin Is Back
@theMarket: Market Cyclicals Take the Lead