Saturday 26 May 2007 - SUMMARY of the meeting of the Economics and Security Committee Ursa Menor, Tecnopolo, Funchal, Portugal

I. Opening Remarks

1.  The Chairman, John Tanner (US) began the meeting by welcoming members and speakers, and by thanking the Portuguese delegation.  The draft agenda for the meeting [088 ESC 07 E] and the minutes of the previous meeting [239 ESC 06 E] in Québec City were adopted without comment.

II. Presentation by Lawrence Korb, Senior Fellow at the Center for American Progress and a Senior Advisor to the Center for Defense Information, on The Defense Budget in the United States

2.  Lawrence Korb presented figures of national security-related spending of the US government for the FY 2007. He suggested that the actual cost of wars in Iraq and Afghanistan in the FY 2008 would exceed the administration estimates, adding that the current level of spending would be difficult to maintain once the wars are over, as a significant amount would be allocated to social programmes for the retiring military personnel. Contrary to widely held views, Mr. Korb asserted that the Democrats' control of Congress would not induce a change in defence spending; the party would not want to appear soft on this issue. In addition, military personnel costs will continue to rise; the maintenance of equipment and facilities, i.e. development and procurement of new equipment and the support for ongoing operations, are going to remain very costly.

3. Mr. Korb recalled then Secretary of Defence Donald Rumsfeld's attempts in 2001 to transform the US military by substituting technology for manpower. The future debate on the defence budget would likely be centred on the idea of obtaining new technology. He also suggested that there are two issues that will have major budgetary implications: (1) national missile defence - a litmus test for the Republicans, and (2) strategic nuclear weapons. 

4. André Rouvière (FR) remarked that the problem in Afghanistan cannot be solved in financial terms only and that a search for a comprehensive solution, which would address such issues as drug trafficking, activities of warlords, as well as the Taliban, is indispensable.  Mr. Rouvière also enquired about the role and contribution of private contractors in Iraq and Afghanistan. Mr. Korb pointed out that private contractors play an important role in US global operations. While they are currently subject to the uniform military code of justice and rules of their engagement, the administration should explore this issue more seriously after the conclusion of the operations in Iraq. With regard to Afghanistan, Mr. Korb suggested that the issue of opium and drug lords is one of the Allies' major concerns and that the situation in the country would improve only if solutions to all the abovementioned problems were found.

5. Hugh Bayley (UK) enquired if there was a connection between budgetary constraints and the scale of US involvement in global military operations. Mr. Korb suggested that there was a connection between the US engagement in Iraq and US policy towards Iran. The 82nd airborne brigade - a part of the operational reserve that has traditionally been kept in the United States in order to be able to respond to a crisis around the world - is now fully deployed in Iraq. The fact that 10% of the new military recruits consists of former convicts, inducted with "moral waivers", is another indicator of how stretched the military is. Mr. Korb also underscored the US administration's emphasis on military superiority and military solutions as a first option and the way in which budgetary constraints have undermined this approach.

6. Kurt Bodewig (DE) raised the question of the ratio of the US budget allocated to nuclear weapons. He also asked if there were suggestions for an approach to revitalise the Baker-Hamilton Commission proposals. He also asked about US spending on the Iraq operation and its implications for the concept of military superiority. Mr. Korb responded that US monthly spending in Iraq is approaching $10 billion. While the cost of operations in Iraq will amount to $500 billion, the actual costs of war equal nearly $3 trillion; significant funding will have to be allocated for long-term healthcare for war veterans. Developments in the healthcare sector provide for a greater survival rate among wounded people, and the cost of treatment will be covered by the government. Mr. Korb also noted that US spending on nuclear weapons is equal to $20 billion, which constitutes a small portion of the $500 billion budget. He believes that it is necessary to reduce strategic nuclear weapons and to withdraw tactical nuclear weapons from Europe. He noted that the President took little notice of the Baker-Hamilton Commission proposals and, instead, proceeded directly with escalation. In response to Mr. Bodewig's final question, the speaker pointed to the need to spend more on peacekeeping and stabilisation missions.

7. Oleg Tolkachev (RU) asked what percentage of the budget would be devoted to the missile defence programme in Europe. He asked if the resources for the programme would come from the strategic budget and whether or not the programme would involve all NATO member states. Mr. Korb replied that the current cost of the missile defence programme is $10 billion per year. While pointing out that the Congress will cut some of the money, he expressed his hope that the future president would deal with the missile defence issue from a budgetary perspective. He reiterated the need to reassess the current allocation of resources and gave the example of the currently underfunded National Coast Guard, which could play a crucial role in the prevention of a potential terrorist attack.         

8. David Gamkrelidze (GE) asked about transparency in US defence budgeting and in the funding of healthcare / pension programmes for the military. Mr. Korb replied that the US defence budget system was extraordinarily transparent, with only a few "black" programmes and outlined the making of the healthcare / pension programmes.

9. Petras Austrevicius (LT) asked if, in view of the major security challenges remaining, there were any proposals Mr. Korb would table to change the structure of the budget in order to meet the present-day conditions in the world. Mr. Korb pointed to the need to reduce tactical nuclear weapons. He once again emphasised the necessity to invest in small combat ships, rather than expensive destroyers, as well as airlift, and to concentrate more resources on peacekeeping and stabilisation corps.

10. John Sewel (UK) asked if the speaker believed Rumsfeld's budgetary proposals were inappropriate. Mr. Korb mentioned the major points of Rumsfeld's proposals and pointed out that while the former Secretary of Defense wanted to downsize the army's manpower, he was reluctant to hand over responsibilities in Iraq to the State Department.

11. Valdo Spini (IT) raised the question of the connection between US involvement in Iraq and the defence budget issue. Mr. Korb said that the withdrawal from Iraq would free some financial resources that could be allocated to other needs. He also pointed out the problem of the US budget deficit and the need for balancing.

III.  Presentation by Giorgi Baramidze, Vice Prime Minister of Georgia and State Minister for European and Euro-Atlantic Integration on Georgia's Economic and Political Transition and its Prospects for Euro-Atlantic Integration

12. Giorgi Baramidze began his presentation by mentioning the recent Rose-Roth seminar held in Tbilisi, the main conclusion of which was that "Georgia is moving closer to NATO membership". He stressed that his country, which prior to the 2003 Rose Revolution faced severe problems, undertook reforms in nearly all aspects of governance with the main focus on strengthening democratic institutions and the rule of law, as well as establishing an open market economy. Mr. Baramidze asserted that "Georgia is one of the fastest developing democratic states and has become a contributor to the global security". He briefed the audience on his government's endeavours to eradicate corruption and to create a solid basis for sustainable economic development. He pointed to Georgia's attractiveness to foreign investors. While stressing the achievements of Georgia's current administration, Mr. Baramidze acknowledged its outstanding challenges. He stressed Georgia's resolute adherence to the course of Euro-Atlantic integration and noted that Georgia considered Intensified Dialogue as an important step towards Alliance membership. Mr. Baramidze added that deepening relations with the EU represented another Georgian foreign policy priority. 

13. Mr. Austrevicius asked the speaker to comment on the EU's contribution to border monitoring. He also asked about recent developments in curbing smuggling in Abkhazia. Mr. Baramidze stated that smuggling from Russia still represented a challenge to Georgia. He pointed out that, despite the 1994 agreement, Russia was still running two border passes, to Abkhazia and to South Ossetia. He added that he was hoping for a normalization of this situation, so that Georgia could support Russia's candidacy for the WTO membership. The problem of smuggling through Abkhazia has largely been addressed by lowering some taxes and abandoning others. However, smuggling still represented a problem. Mr. Baramidze stressed that Georgia's success was also due to good policy recommendations coming from the EU and NATO.

14.  Mr. Bodewig acknowledged that the figures in the report on Georgia's economic performance would be updated. He also expressed his interest in learning about Mr. Baramidze's view on the following issues: (1) the effect of the Russian ban to Georgian exports; (2) the quality of the new markets that Georgia is developing; and (3) the outlook for the EU-Georgia relationship and cooperation with the NATO PA. In his reply, Mr. Baramidze characterised the embargo as illegitimate. He noted that it could have potentially devastating effects, but the Georgian economy had not collapsed, largely due to liberal reforms previously implemented. The consequence of the ban was an estimated 2% loss in real GDP growth for 2006; yet Georgia expected 12% GDP growth in 2007. Mr. Baramidze also pointed out that trade liberalisation has been a highly disputed policy, since some companies collapsed. However, those that had not been forced out of the market had become more competitive. Currently Georgian companies are exporting to EU countries, Kazakhstan, Turkey and the United States. Mr. Baramidze characterised the conflicts in Abkhazia and South Ossetia as the most formidable obstacles to Georgia's development. He added that the OSCE has supported the Georgian peace plan for South Ossetia and that Georgian authorities were working on developing a similar one for Abkhazia. As for eventual NATO membership, Mr. Baramidze underlined the enormous support the Georgian public has for accession as well as the consensus among the political parties. He stated that Georgia was not currently seeking EU membership, but was ready to play the role of a good neighbour.

15. In her intervention, Lubov Sliska (RU) asked the speaker if he viewed Georgia's problems as a consequence of the relationship between Russia and Georgia. She asked Mr. Baramidze for his view on Russia's contribution to Georgia's economy. Mr. Baramidze underlined that Russia's policy towards Georgia had slowed growth somehow. He added that in the long term, Russia's policy may prove beneficial since it has compelled Georgia to decrease its dependency on the Russian markets; Georgian products have become more competitive as a result. Mr. Baramidze pointed out that the situation of Georgian workers in Russia was similar to that of the Russian workers in the EU and the United States. They paid taxes to the Russian authorities and worked hard and thus benefit the Russian economy as well. He added that ethnic Georgians in Russia were prosecuted and discriminated against by Russian authorities, and that these matters would be taken up in international tribunals. Mr. Baramidze was keen to underline that Russia and Georgia shared many common interests, including the fight against aggressive separatism, terrorism, organized crime, drugs and weapons smuggling. He expressed his openness to dialogue and his government's commitment to stability, economic development and reforms.

16. Paul Gillmor (US) noted that a number of NATO member countries helped Georgia in its reform process, and asked the speaker to provide an update on that issue. In his answer, Mr. Baramidze named the United States, Germany, United Kingdom, France, Turkey, the Netherlands, Greece, the Baltic States, Poland and Luxembourg for their contributions. He underlined that the Georgian army was small, but was NATO-compatible, disciplined and trained. He praised its performance in Iraq.

IV.  Consideration of the Draft General Report on Trends in Defence Resource Management in Europe and North America and the New Burden Sharing Debate: A Survey [040 ESC 07] by Hugh Bayley (UK), General Rapporteur

17.  The Rapporteur's presentation centred on the issue of defence planning and burden sharing among NATO countries. He noted that the complexity of the current strategic environment increased the difficulties Allies confronted in setting defence priorities and that tight budgets and slow economic growth, as well as divergent threat perceptions, represented major obstacles to adjusting to new strategic realities. The Rapporteur also stressed that the daunting out-of-area operations in which NATO found itself engaged acted not only as a catalyst for transformation, but were also the source of significant budgetary pressures. He therefore suggested that common funding, shared purchasing and mission specialisation within the Alliance were indispensable to eliminating systemic redundancies and to achieving a sustainable increase in members' capabilities. He asserted that more open markets and more coordinated planning procurement were needed to achieve scale economies and reduce costs. Closer cooperation between NATO and the EU, in the Rapporteur's opinion, would also reduce the potential for resource misallocation. The Rapporteur maintained that current operations highlighted the capabilities and spending gaps among members.  He suggested that they also might reveal the so-called gap in the will to accept the full burden of risk - the most serious gap of all. The fact that mission funding was still based on the "costs fall where costs lie" rule was hardly satisfactory for an integrated military structure such as NATO. The Alliance, the Rapporteur concluded, needed to envision new funding and burden sharing mechanisms that would spread the costs paid by those member states fighting on the frontlines in fairer terms.  

18.  Mr. Bodewig praised the report for pointing out that the task sharing is linked to technological requirements. He also stressed the importance of a political agreement in weapon technology. Mr. Bodewig commented on the significance of military spending by NATO member states, underlining that the 2% of GDP allocated to the military is not necessarily the best measure of commitment. He used the example of Germany, which does not meet the percentage, but is the second largest contributor in foreign deployment in NATO operations after the United States.

19. Jos van Gennip (NL) commented on how financial and troops contributions influence the public opinion vis-à-vis NATO. He mentioned that the financial contribution provides an indication of commitment. He also proposed that the report should be forwarded for publication to the Financial Times or the International Herald Tribune.

20. Peter Bottomley (UK) commented that the annex to the report was an excellent instrument for public awareness, helping people understand better how the Alliance works, including the financial aspect of the operations.

21. Mr. Rouvière suggested that the Rapporteur should also add a table including manpower contribution. He noted that since three-quarters of the Alliance members are not even at 2% of GDP in terms of military spending, it is illusory for an Alliance to imagine it can fight. He also warned about the danger of duplication regarding NATO and ESDP, and suggested that the NATO PA should prepare a future report on the NATO-EU cooperation, identifying solutions for better cooperation. He also noted that some countries may be inclined to make only financial contributions to the Alliance, while not putting any troops on the ground.

22.  Ann McKechin (UK) asked about how a consensus should be reached regarding the type of troops that should be sent on missions. She gave the example of the Ecuadorian troops in the Congo, which were not well equipped for the mission and performed poorly. She also addressed the question of cooperation in the defence market and the issue of gaining public support for bigger expenditures. She suggested that one way of presenting it is to focus on the jobs created for the civilian population in producing military goods. 

23.  The Rapporteur responded to these points, thanked all the speakers and noted that these ideas would be taken into consideration in the final report.

V.  Consideration of the Draft Special Report on The Economic Situation in Moldova [143 ESCEW 07] by Kurt Bodewig (Germany), Acting Rapporteur and Chairman

24.  The Rapporteur's presentation focused on the Republic of Moldova, the poorest country in Europe and one that poses a range of security, social and economic challenges to the region and to Europe as a whole. He noted that the Transnistrian "frozen conflict", as well as the country's dubious role as a hub of human trafficking and smuggling, have led analysts to characterize it as one of the last serious security challenges within Europe. Mr. Bodewig added that Moldova was also seeking a closer partnership with the EU and the West in general and this, in turn, was complicating its relations with Russia, which supported it politically, economically and financially. The Rapporteur discussed the political and economic situation in Moldova and Transnistria, the regional dimensions of the situation there, and efforts to foster cooperation between Moldova and that breakaway region.

25.  Constantin Nita (RO) commented on Romania's assistance to the Republic of Moldova, and pointed out that the Romanian authorities initiated the process of opening two more consulates in the Republic of Moldova. He also stressed the importance of using the full name of the country, the Republic of Moldova, instead of Moldova, given the political sensitivities, and objected to the phrasing of paragraph 39 in the report.

26. Mr. Bottomley and the Rapporteur stated that using the country name, Moldova, would not generate confusion, and that paragraph 39 simply describes a fact.

27.  Mr. Austrevicius commented on the demographic changes in Transnistria, and underlined that Transnistrians were attracted to Russian citizenship and that Moldovan citizens value Romanian citizenship more. He suggested that the report included some demographic data. The Rapporteur noted that Romanian citizenship appeals to Moldovan citizens largely because of Romania's EU membership, and that the EU should pay more attention to this issue.

VI.  Consideration of the Draft Report of the Sub-Committee on East West Economic Co-operation on Economic and Political Transition in Georgia [042 ESCEW 07] presented by Kurt Bodewig (Germany), Acting Rapporteur and Chairman

28. The Rapporteur explored the rapid and deep economic, political and social reforms that Georgia has undertaken since the 2003 Rose Revolution. He focused on the dramatic improvement of the main macroeconomic indicators over these four years. He evaluated the impact of the recent economic standoff with Russia and the energy dispute.  Georgia's strategic position along the South Caucasian energy corridor was also discussed. In addition, the Rapporteur discussed Georgia's principal foreign policy ambitions, particularly its relationships with Russia, the United States and the EU.  Finally, the Rapporteur spoke about Georgia's defence policy, its aspirations to join NATO and its prospects for doing so.

29.  Franis Saifullin (RU) objected that the report failed to consider the possibility that Georgia might have provoked the Russian action. He also objected to what he considered to be the common perspective that Russia was responsible for the problems in the South Caucasus. Mr. Saifullin noted that Russian military were arrested and deported from Georgia without a sound reason, and that Georgian products were banned because of their poor quality. The Rapporteur defended his report assessment. He mentioned that the issue of product quality was "in the eye of the beholder", that other markets did not reject them. He also stressed that the effect of the blockade was not negative for Georgia, and that the report called for the removal of trade barriers.

30.  Several participants, including representatives of the Georgian delegation and Mr. Gillmor, suggested updating the economic data presented by the Rapporteur.

VII.  Consideration of the Draft Report of the Sub-Committee on Transatlantic Economic Relations on The Rise of the East-Asian Economic System: Implications for Europe and North America [041 ESCTER 07] presented by Petras Austrevicius (Lithuania) and John Boozman (USA), Co-rapporteurs

31. The Co-rapporteurs discussed China's rise in a regional context by looking at the economic trends in East Asia as a whole.  The first major change that they addressed was the dynamic economic growth of the region. It was suggested that the victory of liberal economic policy-making over centrally planned economies has led to a significant increase in economic activity throughout the region and to an expansion of the flow of goods and capital. These large growth rates meant that East Asia currently played an ever-larger role in the global economy as a whole. The Rapporteurs also noted that the region's countries were growing more economically interdependent.  East Asia was no longer just an offshore resource for Western companies, but a thriving economic zone with its own purchasing needs that were being filled by expanded regional trade. The Rapporteurs pointed out that there is no overarching framework or organization like the European Union or NATO to structure relations among the players in the region and that a confusing array of regional and bilateral trade agreements govern economic relations among the countries of East Asia.  While there are some concerns that the trend towards increasing economic regionalism will lead to a "Fortress Asia," for the moment most countries in the region see the creation of such a bloc as a second best option.  While North America looks at Asia across a vast ocean, the European economy is beginning to focus on land links to Asia across its enormous shared landmass.  Europe's integrationist model of regional development has a certain appeal in the region, as does its commitment to multilateralism in international diplomacy.  This difference could either complement that of the United States or create frictions, depending how these different perspectives are managed politically and diplomatically. Europe and North America cannot afford to be pitted against each other in the region.

32.  Mr. Sewel expressed his interest in learning more about the implications of a decrease in US domestic consumption for China. He asked about the potential consequences for the United States of a revaluation of China's currency, and the potential security implications if China were to switch its reserves from US dollars to the euro. Mr. Boozman commented that a decrease in US consumption would have a worldwide impact, given the size of the US economy. He pointed out that one issue of concern would be an increase in the gasoline price in China that would determine an increase of the US price, which in turn would lead to smaller disposable income in the United States. He also noted that Chinese and US economies are interconnected, and that a problem in one country would invariably have consequences in the other as well.

33.   Mr. Sewel suggested that Chinese society was more willing than the western societies to take economic hardship in order to achieve political advantage.

34.  Mr. Austrevicius pointed out that China's trade with regions other than the United States was increasing as well, and he interpreted this as a sign of Chinese wisdom, praising it for not "putting all its eggs in one basket".

35.  Mr. Gillmor mentioned that the US experience showed that currency manipulation might lead to significant job losses. He commented that the Chinese were moving slowly in correcting the problems.

VIII.Final Remarks

36. The Chairman thanked the Portuguese delegation, the speakers, the interpreters and the NATO PA staff and closed the meeting.

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