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Europe’s guns, debt and corruption

This second of two essays on military spending and the EU crisis, explores the role of the European arms trade, corruption and the role of arms exporting countries in fuelling a debt crisis, and why these 'odious' debts need to be written off. See Part One here.

As social infrastructure is being slashed throughout most of Europe, spending on weapon systems has hardly been reduced. Perversely, military lobbyists warn of 'disaster' if any further cuts are made to military spending. But the real disaster has emerged from years of high military spending and corrupt arms deals. See Part One: Austerity in Europe: tighten the military belt

As we saw in the previous part, despite rhetoric from military bigwigs claiming that any further military cuts would endanger not only national security, but also the economy, military spending in Europe today is still at a higher level than ten years ago.

It rose over most of the past decade, sometimes very strongly – double digits in the case of Greece, Finland and Cyprus - only to fall over the past two or three years, and only in countries hardest hit by the crisis, like Greece and Italy.

Against the background of heavy slashing of social infrastructure, that was the least that could be expected. But most of those cuts come years too late, especially because major arms programmes have financial repercussions for many years to come: both repayment of debts and operational costs burden future governments’ budgets for many years.

So, wherever military expenditure has been cut, it was mostly on personnel costs – pensions, wages, jobs – rather than budgets for new weapons bought. Perversely, despite the emerging economic crisis the average budget for equipment in Europe went up 10% between 2006 and 2010. And that’s of course where the arms industry comes in.

Booming business

The arms industry has enormously profited from post-9/11 increases in military budgets. The hundred largest companies in the sector sold arms to the value of €318 billion in 2011, 51 per cent higher in real terms than in 2002, but 5 per cent down on 2010 – the first decline in sales since the mid-1990s!

This decline can be seen as a consequence of withdrawals from Afghanistan and Iraq, as well as the most recent cutbacks in the Global North. Long-running contracts and budget cycles had so far spared most procurement programmes. Both oil-rich and developing nations continue to be the primary focus of foreign arms sales activity by weapons suppliers, with Saudi Arabia and India the main recipients.

The global arms industry is dominated by western companies, with 44 of the 100 largest companies from the US, representing 60% per cent of their sales. Thirty EU-based companies make up another 29 per cent of the total. The five largest of them are BAE Systems, EADS, Finmeccanica, Thales and Safran.

All these companies have lobbyists working in Brussels, or else are represented through the AeroSpace and Defence Industries Association of Europe (ASD), the industry’s main lobbying arm. There are ample inducements for them to be active in Brussels: lobbying for a more robust EU military posture, more favourable legislation or access to EU research money.

Besides, most EU governments support the industry based in their respective countries, with domestic orders as well as in securing new markets abroad, stressing the need to safeguard employment and to maintain a viable military industry. This comes in addition to the different forms of subsidies and support - both direct and indirect, such as tax breaks.

With regard to putting national interests over an ethical foreign policy, it appears nothing has been learned from the uproar over arms sales to dictators in countries such as Bahrain, Egypt, Libya, Syria and Yemen, when the Arab Spring broke out in 2011. In early 2013 French president François Hollande visited the United Arab Emirates (UAE) to push them to buy the Rafale fighter aircraft. This came after UK prime minister David Cameron had visited the UAE and Saudi Arabia in November 2012, to promote major arms deals. Such arms sales to controversial destinations are typically facilitated by government-guaranteed export credits.

Similarly there are no lessons learned from the major corruption scandals which  especially exposed the way deals are done – the BAE-Al Yamamah case being the most infamous one. EADS and Finmeccanica are currently under official investigation because of corruption allegations. The UK Serious Fraud Office is investigating corruption claims in a case relating to a £2 billion Saudi National Guard project run by an EADS branch. Finmeccanica is under official investigation because of corruption allegations over a €560 million helicopter deal with India by its AgustaWestland unit, which has already seen the arrest of the former chairman of the company.

But large arms deals and rampant corruption have also troubled European countries – especially those which now face the highest debts.

Greece: reckless military spending

Clearly, Greece is in deep crisis – financial, economic and social. The Greek national debt reached crisis levels in 2010, following which the country received a bailout loan package from the IMF and other EU countries, and also instituted government austerity measures. These have, of course, proved controversial and generated intense debate about what went wrong, who was responsible and how the dire situation could be retrieved.

The question of inflated military spending has loomed in the background, thrown into relief when the governments of lending countries – like Germany and France – are emphatic on the priority of settling outstanding bills with arms suppliers in their jurisdiction, while at the same time insisting on swingeing cuts in public spending and other austerity measures.

Greece has been Europe’s main military spender in relative terms for most of the past four decades, spending twice as much of its GDP on defence as the EU average, from an average 6 per cent in the 1970s and 1980s to 3 per cent in the first decade of this century. According to economist Angelos Philippides, if you could account for Greece’s decades of formidable military spending “there would be no debt at all”.

Wherever cuts have been made, they have mostly “affected salaries, but not the arsenal. Greece already has a lot of weapons for a small country and can easily defend itself," according to a research associate of the Institute for Security and Defence Analysis in Athens.

The Greek military budget peaked in 2009 at €7.2 billion. Already in 2006 a high-level military official was quoted as saying: “Overspending in the last 10 years has resulted in the accumulation of excessive obligations for the financial servicing of the existing contracts, amounting to more than €9.5 billion”.

For Greece, longstanding tensions with Turkey over the Aegean Sea and Cyprus have provided the justification for high spending levels. Such justifications have lost most of their credibility since both are NATO members and tensions have greatly diminished.

In 2010 a Turkish diplomat said Turkey would reciprocate if the Greeks froze or cut defence procurement, at the same time criticising Germany and France for seeking to sell military equipment to Greece: “Even those countries that are trying to help Greece at this time of difficulty are offering to sell them new military equipment. Greece doesn’t need new tanks or missiles or submarines or fighter planes, neither does Turkey. It’s time to cut military expenditure throughout the world, but especially between Turkey and Greece. Neither Greece nor Turkey needs either German or French submarines.” 

Later that year, Greek deputy prime minister Theodore Pangalos said that he felt “forced to buy weapons we do not need” and that the deals made him feel “national shame”. While France and Germany have always denied charges that they pushed their weapon deals with Athens as a precondition for participation in the financial rescue of the country, insiders confirm the pressure was real.

Prominent French Green MEP Daniel Cohn-Bendit recalled that while in Athens in 2010, then-prime minister George Papandreou told him that Berlin and Paris did not want Greece to slash military spending, as that would hurt contracts with French and German industry. These countries also insisted that Greece should use part of the first tranche of financial aid from the EU to pay for arms contracts. “If you really want to balance the budget in Greece, you have to attack the military budget”, said Cohn-Bendit. “The Greek problem is the military budget”. As an aide to Papandreou told Reuters:

“No one is saying ‘Buy our warships or we won’t bail you out.’ But the clear implication is that they will be more supportive if we do”.

The US and Germany have benefited especially from Greece’s decades of excessive military spending, together with France, the Netherlands and Russia. Among the more recent purchases from the US are Boeing Apache attack helicopters, Lockheed Martin F-16s and Raytheon’s Patriot air defence missile systems. In January 2013 the Greek government approved a €184 million deal to buy spare parts for its F-16s.

Greece also paid hard cash for big-ticket items from Germany: submarines, frigates and battle tanks. While Chancellor Angela Merkel told Greece “to do its homework” on debt reductions, “the military deals illustrate how Germany and other creditors have in some ways benefited from Greece’s profligacy, and how that is coming back to haunt them”, according to the Wall Street Journal.

The bulk of French arms deals with Greece were concluded just prior to and deep into the financial and economic crisis, regardless of what rescue plans were enforced upon the country. In 2010 alone - the same year the first bailout was negotiated - Paris granted arms export licences for Greece worth €876 million, out of a total of EU arms exports to the country worth just over one billion euros. 

Also France is strengthening ties with Greece through a lease deal for two FREMM-type frigates, after an initial sales programme for four of these frigates failed due to financial constraints and German opposition. French shipyard DCNS is desperate to sell these frigates after its own government cut its original 17-ship order down to eleven.

The Greek government has so far had little success in privatising the largely publicly-owned arms industry. The privatisation plans were agreed as part of the EU bailout of Athens. Greece’s military industry has historically been inefficient, loss-making and faced with liquidity problems. “The [Greek] economy received just a marginal profit in terms of new jobs compared to the amount spent and the Hellenic defence industry finds itself almost exactly where it has started from, if not even in a worse situation: struggling to survive. Even though things went wrong for both the economy and the domestic defence industry, it seems the decision makers across the defence domain have not yet learned their lesson”, wrote a Greek insider in Military Technology magazine.

Italy: cuts in personnel, not procurement

The main target of Italy’s defence cuts is the number of personnel, with reductions proposed from the current 180,000 to 150,000 soldiers, including many senior officers; 30 per cent of the military bases will be closed over the next ten years. Under the proposals personnel costs should make up half of the budget, compared to the current 70 per cent, trying to safeguard equipment programmes as much as possible. Six new frigates, two submarines and a multirole support ship will be commissioned before 2020, besides new drones, helicopters and fighter jets for the navy.

The only seemingly significant cut in arms purchases concerns the prestigious Joint Strike Fighter (JSF) project, with the order reduced from 131 to 90 aircraft. However, the steeply increased costs of the project mean that this reduction is unlikely to save any money from the original budget of €15 billion. “My personal view is that we cannot afford to cut too much, because we still have a strong industrial base, and we think that base has to be supported”, told air force chief Giuseppe Bernardis.

While local politicians and trade unions have generally strongly backed arms industry jobs, former Labour, Health and Welfare minister Maurizio Sacconi made clear that “state contracts occur if they are really needed, whether for defence or security, and certainly not to keep facilities busy and save jobs.”

Spain: crippling debts, unneeded weapons

Spain’s 29 per cent increase in military expenditure between 2000 and 2008 was one of the biggest in western Europe. Spain initiated 19 military programmes from 2000 which “arguably lacked clear strategic justification”, according to SIPRI researcher Sam Perlo-Freeman. The recession means it faces major problems repaying a €26-30 billion debt to arms suppliers. As then-secretary of state for defence Constantino Méndez pointed out in 2010: “We should not have acquired systems that we are not going to use, for conflict situations that do not exist and, what is worse, with funds that we did not have then and we do not have now.”

Due to the deteriorating economic situation Spain reduced its military expenditure by 18 per cent between 2008 and 2011. With one per cent of its GDP spent on defence, Spain now has the third lowest percentage within NATO, after Luxembourg and Hungary. But it still faces huge problems in repaying debts for its unnecessary military programmes. In September 2012 the government arranged a special credit line to pay off €1.8 billion of outstanding debts to the arms industry accumulated over the previous two years.

There are also plans to reduce military personnel numbers over the next decade: the defence ministry’s Vision 2025 report envisages a 15,000 cut in troop numbers, 10 per cent of the MoD’s employees. Spain has raised government support to facilitate exports, to make up for falling domestic orders. It has also called for the consolidation of the local armaments industry to strengthen it and secure its survival. Spain hopes to win a controversial contract from Saudi Arabia for 250 Leopard 2 tanks, in competition with Germany – the original builder of the tank. 

Germany greasing the wheels 

Corruption in the arms trade contributes roughly 40 per cent to all corruption in global transactions, according to SIPRI. "This corruption exacts a heavy toll on purchasing and selling countries, undermining democratic institutions of accountability and diverting valuable resources away from pressing social needs", according to the think tank. Transparency International singles out Greece and Portugal, where “corruption is so deeply ingrained it poses a direct threat to democratic legitimacy and jeopardises economic recovery”.

Portuguese Socialist MEP Ana Gomes also sees a key role for Brussels here: 

“What we don't see is political courage on the part of the EU institutions, notably the European Commission, to actually tackle this question of corruption that is at the root of the current crisis. Corruption in the management of banks, which were not properly regulated and supervised, and corruption in the public sector in relation to defence procurements.”

Two recent major corruption cases in Europe involve submarine sales to Greece and Portugal by the German Submarine consortium, including among others Ferrostaal.

In 2011, German prosecutors succeeded in convicting two former managers of Ferrostaal for paying €62 million in bribes to key Greek and Portuguese officials in connection with the submarine deals. Two former Ferrostaal managers were given quite lenient sentences, while Ferrostaal itself was fined €140 million for 'obtaining an economic advantage' through its two employees. 

In 2004 Portugal – under then prime minister Manuel Barroso (now EU Commissioner) - signed a deal to purchase two submarines for one billion euros – the single largest arms deal the country had ever agreed. More than a dozen suspicious brokerage and consulting agreements related to the deal were identified, all of which were designed "to obfuscate the money trails," so as to pass on payments "to decision-makers in the Portuguese government, ministries or navy." The Portuguese state suffered losses of at least €34 million, which it is trying to recover through the courts. Even worse, the two submarines will account for about 40 per cent of defence spending until 2023.

Ana Gomes, the Portuguese MEP, is "disappointed" that her government did not stand up to the German administration and freeze payments until the corruption case was finalised: "It would have been a courageous gesture to show that Portugal is a country whose people are victims of corrupt practices between German and Portuguese officials and companies."

In 2000 Greece ordered one submarine from the German Submarine Consortium (GSC) in a contract worth €1.14 billion. Delivery was delayed by contractual disputes until the end of 2010. Plans for the costly purchase of a further five such submarines have been thrown into question by the need for cutbacks. In 2010 vice-admiral Stelios Fenekos resigned to protest the submarine deal. “How can you say to people we are buying more subs at the same time we want you to cut your salaries and pensions?” he said. 

Up to eight arms deals signed by the Greek government since the late 1990s are being investigated by judicial authorities for possible illegal bribes and kickbacks to state officials and politicians. Among these are the purchase of US-made Patriot missiles and the German submarine deal. Former defence minister Akis Tsochatzopoulos, his wife and 17 others are on trial for kickbacks from arms purchases. Tsochatzopoulos, a founding member of the PASOK socialist party, is alleged to have pocketed €20 million in kickbacks between 1998 and 2001, including €8 million from Ferrostaal in the submarine deal.

"There's a level of hypocrisy here that is hard to miss”, says Greek SIRYZA MP Dimitris Papadimoulis:

“Corruption in Greece is frequently singled out as a cause for waste but at the same time companies like Ferrostaal and Siemens are pioneers in the practice. A big part of our defence spending is bound up with bribes, black money that funds the [mainstream] political class in a nation where governments have got away with it by long playing on peoples' fears." 


About the author

Frank Slijper is a senior researcher at the Campagne tegen Wapenhandel (Dutch Campaign against arms trade) and a research associate with the Transnational Institute (TNI). His study ‘Guns, debt and corruption – Military spending and the EU crisis was published in April, 2013.


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