By Ripping NATO, Trump Makes Europe Nervous and Arms Trade Happyby
Allies boost military budgets amid doubt they can rely on U.S.
Weapons makers look forward to spending spree as stocks surge
Donald Trump is right to say America’s NATO allies aren’t paying their fair share. But, to the delight of the arms industry, that may be changing.
Trump himself is the change-maker. He reaffirmed his skepticism about the North Atlantic Treaty Organization, and his readiness to make deals with Russia, in European media interviews published last weekend. Trump isn’t famous for his policy consistency, but those positions have held fairly steady -- leaving European leaders wondering whether they can still rely on the American security umbrella.
“Let’s not fool ourselves,” German Chancellor Angela Merkel said last week. “There is no infinite guarantee.”
So Merkel’s Germany, and many other European nations, are boosting military budgets. The plans predate Trump, and under NATO rules they should’ve been carried out long ago. The alliance expects its members to spend 2 percent of gross domestic product on defense. But it’s no secret that most of them don’t. The shortfall added up to about $121 billion last year at 2010 prices, according to Bloomberg calculations based on NATO country estimates.
Since Trump is promising to increase America’s already enormous military budget too, the prospect of a European arms-shopping spree is a win-win for suppliers. Investors have noticed: From Raytheon Co. to Lockheed Martin Corp. to Thales SA, defense contractors have hit all-time highs since Trump’s election.
“This is the best market for defense in many years, across the board,” said Richard Aboulafia, an aerospace analyst with the Teal Group in Fairfax, Virginia.
NATO was established after World War II to protect western democracies against the Soviet Union. A key tenet is that an attack on any alliance member is considered an attack on all. And that’s what Trump has questioned.
If Russia moved against one of NATO’s Baltic members, Trump told the New York Times in July, he’d come to their aid only after reviewing whether they have “fulfilled their obligations to us.”
Before the Trump ascendancy, NATO members had agreed in 2014 to move toward the 2 percent threshold. One-fifth of that money is supposed to be used to buy hardware. European Union nations, most of which are also in NATO, also promised to boost defense spending at their year-end summit last month.
Germany, which spent 1.2 percent of GDP on defense last year according to NATO figures, has announced the biggest increase in 25 years -- an extra 10.6 billion euros ($11.2 billion) through 2020. France has approved increased outlays for 2017. Altogether, 19 of NATO’s 28 members have boosted military budgets in the past 18 months, according to a Bank of America Merrill Lynch report.
Antoni Macierewicz, Poland’s defense minister, said the country expects to complete a deal this year for a missile-defense system. The nation also is weighing new submarines, helicopters and potentially “a large number” of fighter aircraft, he said Wednesday in a news conference in Warsaw.
To be sure, even in Europe’s “new strategic reality” in which NATO guarantees are no longer unconditional, some defense budgets will likely fall short, said Jan Techau, head of the Richard C. Holbrooke Forum at the American Academy in Berlin. “The Europeans will have to do something,” he said. “But I have my doubts that we’ll get across-the-board 2 percent spending.”
Still, Trump’s presidency may increase the likelihood they’ll follow through. Raytheon’s Chief Executive Officer Thomas Kennedy sees a parallel with Middle Eastern nations that stepped up spending during the Obama administration as the U.S. signaled its attention would shift elsewhere.
“These countries were given a message to beef up their defensive system,” Kennedy said at an industry conference in November. Raytheon “saw that writing on the wall” and was able to register “significant international growth” in the period, he said. The company signed a $2.4 billion deal in 2014 to sell a missile defense system to Qatar, for example.
Mideastern arms spending increased by about one-third during Obama’s first six years, according to the Stockholm International Peace Research Institute, which monitors the weapons trade.
“We also see those same messages on the wall now with this new administration,” Kennedy said. “We’re going to see, we believe, even more uptick in Europe.”
BAE Systems Plc, Europe’s biggest defense contractor, also stands to benefit. Its chairman, Roger Carr, welcomed the pressure from America’s president-elect. “I personally agree with his stance on the whole business of NATO,” Carr told Bloomberg TV in Davos yesterday. “If you’re a participant, you should be a contributor.”
Raytheon and BAE were among the defense stocks that surged the day after Trump’s election, as analysts rushed to recommend them. Barclays upgraded Lockheed Martin Corp., Northrop Grumman Corp. and L3 Technologies Inc. as analyst Carter Copeland said Trump’s win “gives new life to a bullish trade.” The main S&P defense index has added 11 percent since then, almost double the gain on the broader S&P 500.
“All of the big defense companies will find a way to participate in these buildups,” retired U.S. Army General Wesley Clark, a former NATO supreme allied commander, said in an interview.
Of course, Trump’s international policy remains embryonic. His nominees for key posts have sounded less conciliatory toward Russia: Prospective Defense Secretary James Mattis branded it a “strategic competitor” at a Senate confirmation hearing last week, and stressed the importance of NATO. Mattis did echo Trump, though, by saying he’d encourage alliance members to spend more on defense.
Some of the extra European cash would go to local suppliers, but U.S. companies have an advantage with big-ticket items like Lockheed’s fighter jets, said Loren Thompson, chief operating officer of the Lexington Institute.
“Given the pressure that Trump is exerting, it’s easy to imagine more will sign onto the F-35 program, to the tanker program, to the trainer program,” said Thompson, who’s also a Lockheed consultant.
The new administration isn’t all upside for defense contractors. Trump has already called out companies like Lockheed and Boeing Co. for their high prices.
Still, the combination of a maverick president, insecure allies and unresolved conflicts worldwide probably suits the industry.
“Threats are rising,” Thompson said. “Although that is bad news for most people, it’s good news for arms makers.”