GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Subcommittee on 

Defense, Committee on Appropriations, 

U.S. Senate

June 1999 NATO

Implications of 

European Integration 

for Allies’ Defense 

Spending 

GAO/NSIAD-99-185

Page 1 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-282890 Letter

June 30, 1999

The Honorable Ted Stevens

Chairman

The Honorable Daniel Inouye

Ranking Minority Member

Subcommittee on Defense

Committee on Appropriations

United States Senate

Europe is being affected by a number of changes, including the 

enlargement of the North Atlantic Treaty Organization (NATO), the 

adoption of a common currency, and the planned enlargement of the 

European Union (EU). Concerned about Europe’s ability to share in the 

cost of providing a common defense through NATO, you asked us to assess 

how European Economic and Monetary Union (EMU) and the enlargement 

of the EU may affect U.S. allies’ ability to sustain or increase their defense 

budgets. As agreed with your office, this report provides information and 

analysis concerning (1) projected defense spending for several European 

countries, (2) budgetary effects of EMU implementation and EU 

enlargement, and (3) other significant factors that may affect countries’ 

ability to share in the costs of NATO over the long run.1

To address these issues, we collected and analyzed information from the 

U.S. Departments of Defense, State, and the Treasury; and from NATO, the 

EU, the International Monetary Fund (IMF), the World Bank, the 

Organization for Economic Cooperation and Development (OECD), the 

European Central Bank (ECB), and several research organizations. Our 

work focused on seven European countries--the four West European 

members of NATO that collectively accounted for over 75 percent of total 

European NATO defense spending in 1998 (Germany, France, Italy, and the 

United Kingdom [U.K.]), and the three newest members of NATO (the 

Czech Republic, Hungary, and Poland). We collected and analyzed 

information from government officials and private sector analysts in these 

countries. We visited each of these countries except France, which is not 

1

We have ongoing work reviewing the progress made by our European allies in changing their military 

forces to meet the requirements of NATO’s Strategic Concept, and will report its results later this year.

Letr
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Page 2 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

part of NATO’s integrated military command. (See app. IV for a detailed 

description of our scope and methodology.) 

Results in Brief The United States’ security strategy depends on the ability of its allies to 

join in military operations. This ability includes being able to train and 

equip forces to meet certain requirements. Although EMU requirements 

for additional deficit reduction are likely to mean tighter budgets, NATO’s 

West European member countries generally plan to maintain their defense 

budgets at roughly constant levels through 2002. EMU’s budgetary 

constraints may be offset over time by fiscal benefits and economic 

growth. A large number of observers are optimistic about EMU’s effects on 

economic growth, but concerns remain. The costs and budgetary impacts 

of EU enlargement are not readily identifiable, since several key political 

decisions regarding the timing and specific requirements of membership 

have not been made. However, these costs are likely to fall largely on 

prospective, not current, EU members.

Over the long term, defense spending will face increasing pressure as 

Europe attempts to deal with a number of domestic social issues, in 

particular escalating entitlement burdens. Spending for public pensions, 

for example, is already near or above 10 percent of gross domestic product 

in France, Germany, and Italy—more than twice the U.S. percentage—and 

is projected to begin to increase sharply in 10-20 years as populations age. 

Governments’ spending for health care is also expected to rise, increasing 

the budgetary pressures from coming demographic changes. This budget 

environment means that member countries are likely to continue to face 

significant challenges in modernizing their defense forces to meet NATO 

requirements.

Ultimately, the amount of resources allocated to defense is a political 

decision, driven substantially by views of military threat as well as other 

competing budget priorities. If EMU’s fiscal constraints require further 

spending cuts, for example, impacts on defense budgets will clearly depend 

on policy decisions regarding where those cuts are made. Should EMU and 

EU enlargement contribute to stronger economic growth in Europe, there 

will be more budgetary resources to address competing needs. The 

outcomes from these economic developments and political decisions have 

important implications for U.S. defense planning.

Letr
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Page 3 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Background The NATO military alliance of 19 European and North American countries 

is supported by its members through several means. First, countries 

contribute to NATO’s three commonly funded budgets, including the civil 

and military budgets and the budget for funding infrastructure 

improvements (about $1.6 billion total in 1999). The United States 

contributes about 28 percent of these commonly funded budgets. 

Countries also support NATO by maintaining forces and assets that they 

pledge to NATO through a defense planning process. NATO does not 

quantify the cost of forces national governments commit to NATO, but one 

way to measure this contribution is through the level of defense spending.

The EU is a political and economic body of 15 European countries, 

including 11 NATO members. Member states jointly administer the EU 

through three major institutions. The European Union Council of 

Ministers, composed of the governments of the member countries, 

establishes common EU-wide policies. The European Commission 

proposes legislative initiatives and implements policies agreed to by the 

Council of Ministers and the European Parliament. The European 

Parliament, in tandem with the Council of Ministers, must approve most of 

the legislation introduced by the Commission before it goes into effect. 2

EMU is an effort by EU countries to more closely link their economic 

policies to achieve greater economic cooperation and political integration. 

The most significant and far-reaching aspect of EMU is the adoption of a 

common currency known as the “euro.” On January 1, 1999, 11 EU 

countries, including 8 members of NATO, locked the exchange rates of 

their national currencies to the euro,3

 redenominated their national debt 

into euros, surrendered control of monetary policy to the European Central 

Bank, and began using the euro in electronic transactions. 4 (Euro currency 

will not be circulated until 2002.)

The Maastricht Treaty on European Union, signed in 1992, set forth several 

economic conditions for countries to join the euro area. These included, in 

part, reducing general government deficits to 3 percent of gross domestic 

product (GDP) and showing progress toward lowering general government 

2

Parliament’s consent is not required for agricultural price reviews.

3

There are no procedures for countries to leave the euro area after they have joined.

4

EU countries that chose not to adopt the euro are Denmark, Sweden, and the United Kingdom. Greece 

wanted to adopt the euro but could not comply with the economic criteria.
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Page 4 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

debt to 60 percent of GDP.5 The 1997 Growth and Stability Pact requires 

countries adopting the euro to further reduce their annual budget deficits 

and reach the medium-term objective of having budgets close to balance or 

in surplus. Countries that do not comply with these requirements are 

subject to sanctions, ranging from public rebuke from the European 

Council to fines.

In addition to “deepening” European integration through EMU, the EU is 

also “widening” to include the countries of Eastern and Central Europe. 

The EU believes that enlarging to Central Europe will help cement peace 

and stability in the region through developing closer economic and political 

links. Countries seeking EU membership concur with this potential 

security benefit and also value the intangible seal of approval EU 

membership provides.

5

The Treaty defines “general government” as including Central government, regional or local 

government, and social security funds. It also requires countries have low inflation, low interest rates, 

stable exchange rates, and independent central banks compatible with the European Central Bank.
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Page 5 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Figure 1: European Members of NATO, the EU, and the Euro Area, and First Wave EU Applicant Countries

France

Belgium

Luxembourg

Germany

Netherlands

Spain

Italy

NATO

EU

Eurozone

1st Wave EU Applicant

Norway

Sweden

Finland

Iceland

Poland

Estonia

Austria

United

Kingdom

Czech

Republic

Hungary

Turkey

Denmark

Slovenia

Portugal

Greece

Atlantic

Ocean

Ireland
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Page 6 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

In December 1997, the European Council determined that the Czech 

Republic, Hungary, Poland, and three other countries were in the best 

position to meet the EU’s general economic and political membership 

criteria.6

 The European Council, the European Parliament, all 15 EU 

member states, and the applicant country must approve a country’s 

membership before it can enter the EU. 

Defense Budget 

Projections

The four West European members of NATO that we studied plan to 

maintain their defense spending at roughly constant levels, after 

adjustments for inflation, through 2002. NATO’s three newest members 

plan to increase defense spending over the period. NATO countries will 

generally face substantial challenges in modernizing their defense forces 

within projected budgets, due to high personnel costs, funding needs of 

large-scale procurements, and costs of ongoing military operations such as 

in Kosovo. In addition, such ongoing programs as NATO’s Defense 

Capabilities Initiative, as well as the evolving European Security and 

Defense Identity, could have budgetary implications that cannot yet be 

determined.

West European Defense 

Spending Levels off After 

Post-Cold War Decline

Defense spending levels, adjusted for inflation, have begun to level off in 

Germany, France, Italy, and the United Kingdom after fairly sharp 

reductions in the early 1990s. Budget projections of these countries 

indicate that generally constant defense budgets are planned through 2002, 

as shown in figure 2. These countries generally could not provide budget 

projections beyond 2002.

NATO uses a standard definition of “defense expenditure” to facilitate 

comparison between the defense budgets of NATO-member countries, 

which differs in some cases from definitions in national budgets. For 

example, some countries do not include payments toward retirement 

pensions in their defense budgets, while the NATO definition includes 

contributions to military pensions but not payments to current retirees. In 

figures 2, 3, 4, and 5, data from 1980 through 1998 are NATO figures based 

on its definition of defense expenditure. Since NATO defense budget 

forecasts are classified information, we calculated projected values using 

6

Cyprus, Estonia, and Slovenia were the other three. The Council decided that it was too early to start 

bilateral negotiations with Bulgaria, Latvia, Lithuania, Romania, and Slovakia and offered Turkey a 

“European Strategy,” while not including Turkey in the accession process at this time. 
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Page 7 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

defense budget projections from host countries and applied the projected 

growth rates in defense expenditures to NATO’s 1998 spending level for 

each country. 

Figure 2: Historical and Projected Defense Spending in Four West European Countries, 1980-2002

Note 1: Budget projections from 2000-2002 are not available for France; data for 2002 is not available 

for the U.K.

Note 2: 1998 figures are NATO estimates. NATO will release actual figures in December 1999.

Source: GAO analysis of data from NATO and national ministries of Defense.

The ratio of defense spending to GDP is one measure of the priority 

countries place on spending for defense relative to that for other national 

goals. The average defense share of GDP in 1998 was 2.6 percent for all 

NATO members and 2.1 percent for European NATO members.7

 Using this 

measure, defense spending in the West European countries we studied has 

generally fallen steadily since the end of the Cold War, as has that of the 

0

10

20

30

40

50

60

Germany France Italy U.K.

Billions of 1998 U.S. dollars

 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

7

These figures are calculated using constant 1990 prices and exchange rates.
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Page 8 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

United States. Since planned defense spending is roughly constant and real 

GDP is projected to grow, defense spending as a percentage of GDP is 

expected to continue to decline slightly during 1999-2002 for the West 

European countries we studied (see fig. 3).

Figure 3: Historical and Projected Defense Spending as Percent of GDP for Four West European Countries and the United 

States, 1980-2002

Note: Budget projections for 2000-2002 are not available for France; data for 2002 is not available for 

the U.K.

Sources: GAO analysis of data from NATO, national ministries of Defense, and Standard and Poor’s 

DRI (Lexington, MA).

Defense spending in the West European countries we studied has generally 

been lower over time as a percentage of GDP than that of the United States. 

This difference, which was particularly significant in the 1980s, continues 

over the projected period. This is due to a number of factors, according to 

some European officials, such as different spending priorities, threat 

perceptions, and views of the determinants of their security. Other officials 

84 89

Germany France Italy U.K. U.S.

0

1

2

3

4

5

6

7

1980- 1985- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Percent of GDP
B-282890

Page 9 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

noted that whereas the United States has a global military presence and 

interests, European countries generally have focused on European 

security. 

New NATO Members 

Project Defense Spending 

Increases

The Czech Republic, Hungary, and Poland plan to increase defense 

spending during 1999-2003 to modernize their forces and meet NATO 

requirements. Defense spending declined sharply in these countries as 

they transitioned from a large Soviet-era defense force to the post-Cold War 

era,8

 but spending began to increase in the mid-1990s as the countries 

moved closer to NATO membership.

Figure 4 shows historical and projected defense spending levels for NATO’s 

newest members. Poland’s budget shows defense spending in 1999 

declining 0.01 percent in real terms from 1998 in part because the Polish 

government removed military health care costs from the 1999 defense 

budget. The 1999 defense budget would increase about 2.9 percent in real 

terms if health care costs were included. Similarly, Hungary’s 1999 defense 

budget includes funding for items that were not included in previous years. 

When these items are excluded, the budget decreases in real terms 

between 1998 and 1999, according to the U.S. Department of Defense 

(DOD).9

8

For example, Poland’s 1985 defense spending has been estimated to exceed 8 percent of GDP.

9

U.S. government officials informed us about these changes in the composition of national defense 

budgets between 1998 and 1999 for Poland and Hungary.
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Page 10 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Figure 4: Historical and Projected Defense Spending in Three Central European 

Countries, 1994-2003

Note: 1998 figures are NATO estimates. NATO will release actual figures in December 1999.

Sources: GAO analysis of data from NATO and national ministries of Defense. 

The Czech Republic, Hungary, and Poland have pledged continued defense 

spending increases until they reach the NATO-Europe average of defense 

spending as a percent of GDP of 2.1 percent.10 While Poland is currently 

above that average share, projections show that defense spending will fall 

below that share by 2003. In 1998, based on NATO’s definition of defense 

spending, the Czech Republic spent an estimated 2 percent of its GDP on

10The Czech Republic and Hungary pledged to increase the defense budget’s share of GDP by

0.1 percent each year. Hungary’s intermediate goal is to reach 1.8 percent of GDP by 2001. 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Poland Hungary Czech Republic

Billions of 1998

U.S. dollars
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Page 11 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

defense, Hungary 1.5 percent, and Poland 2.2 percent.11 Figure 5 shows 

projected defense spending as a percentage of GDP for the new NATO 

members. 

Figure 5: New NATO Members’ Defense Spending as a Percentage of GDP, 1994-2003

Sources: GAO analysis of data from NATO, national ministries of Defense, and PlanEcon

(Washington, D.C.).

While the three new NATO members met their 1999 defense budgetary 

commitments, they had some difficulty in doing so as a result of lower than 

expected economic growth and other domestic budgetary priorities. In 

Poland, officials told us they planned to spend more on defense in 1999 but 

could not, in part, due to numerous domestic reforms requiring increased 

funding. However, they stated that defense spending in the year 2000 and 

beyond would be consistent with their planned funding objectives. 

According to Hungarian officials, funding for defense had to be balanced 

with social spending priorities to avoid creating social tensions and 

11Figures for 1998 are NATO estimates. NATO will release actual figures in December 1999.

0

1

2

3

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Poland Hungary Czech Republic

Percent of GDP
B-282890

Page 12 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

political instability. U.S. embassy and DOD officials were concerned that 

Hungary’s 1999 defense funding difficulties may continue in later years 

even though NATO requirements would continue to grow. Given the 

experiences of 1999, U.S. government officials we interviewed expressed 

some concern about future defense budgets for these countries. They 

indicated that to meet NATO’s target force goals and make other needed 

changes, consistent spending increases are necessary.

New Security Challenges 

Affect Spending Needs

The international security environment presents a diverse set of challenges 

very different from those of the Cold War. NATO’s new Strategic Concept 

adopted at the Washington Summit in April 1999 recognizes changes in 

threats confronting member nations and calls for new military 

capabilities.12 This concept stresses that NATO members’ military forces 

need to be more mobile, flexible, interoperable, and sustainable than in the 

past. According to NATO, this means, for example, developing capabilities 

for command, control, communications, intelligence, and surveillance. 

These requirements, and others, were laid out at the Washington Summit, 

in NATO’s Defense Capabilities Initiative. A NATO steering group has been 

established to oversee the implementation of the initiative, the budgetary 

effects of which cannot yet be determined.

Some countries have acknowledged these needs in conducting or planning 

their own defense reviews. Between 1996 and 1998, the United Kingdom 

and France issued comprehensive defense reviews that reassessed their 

security interests and defense needs. They concluded that modern, 

high-quality defense forces can be created without requiring large increases 

in defense spending by rigorously setting spending priorities and making 

difficult choices. These include reducing personnel and other support and 

operating costs, postponing or canceling certain procurement programs 

and, in the case of the United Kingdom, selling unneeded assets and 

facilities. Germany has just begun an extensive defense review along 

similar lines. Some of the same issues have emerged in defense 

assessments conducted by the three new NATO members as they adapt 

their forces to Western standards. European officials have stated that 

improving their defense capabilities is essential for implementing the 

12NATO’s 1999 Strategic Concept identifies a variety of military and nonmilitary risks that are 

multi-directional in nature and often difficult to predict. These include: regional instability and the 

resulting risk of crises; the proliferation of nuclear, biological, and chemical weapons; the spread of 

potentially dangerous technology; the threat of terrorism, sabotage, and organized crime; and the 

uncontrolled movement of large numbers of people, due in some cases to armed conflicts.
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Page 13 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

European Security and Defense Initiative, intended to give European 

countries the ability to take military action in cases where NATO as a whole 

is not militarily engaged. They confirmed this position at St. Malo, France, 

in December 1998 and, in June 1999, the EU member states agreed on the 

need for capacity for autonomous military action, which requires having a 

credible force and the readiness to use it. 

Competing Needs Present 

Challenges for Defense 

Budgets 

The countries we studied face considerable challenges as they try to 

balance competing needs within defense budgets. DOD officials told us 

that prioritizing defense needs is one of the key challenges facing NATO 

countries as they seek to modernize and restructure their forces. However, 

shifting priorities within defense budgets can be difficult. For example, 

personnel costs represent a large portion of defense spending in several 

countries, such as 60 to 70 percent in Germany, Italy, and Poland, which 

have traditionally relied on conscription to staff their armed forces. These 

countries are currently examining the cost, as well as other implications, of 

reducing their reliance on conscription. In addition, planned procurements 

of major items such as the West European aircraft, the Eurofighter, can 

consume large portions of countries’ procurement budgets. Finally, 

out-of-country deployments, particularly in Bosnia and Kosovo, are 

requiring significant budgetary resources in the NATO European countries 

we studied. Combined with the expense of large aircraft purchases and 

high personnel costs, these operations are affecting the ability of NATO 

countries to carry out restructuring and modernization, according to 

foreign officials and U.S. embassy officials. According to DOD and foreign 

government officials, the efforts of the Czech Republic, Hungary, and 

Poland to modernize and reorganize their defense structures are made 

more difficult by limitations in the defense planning and management 

capabilities needed for effective resource allocations. (See app. I for 

additional information on defense modernization challenges.)

In addition to the costs of military operations, addressing regional 

instabilities is expected to have other budgetary effects for EU member 

countries. In particular, they have committed to funding the major portion 

of the costs of reconstruction operations in the Balkans, although the 

specifics regarding funding levels and sources have not yet been 

established.
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Page 14 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Consequences of EMU 

and EU Enlargement 

for Defense Spending 

EMU and EU enlargement’s impacts on defense spending depend on both 

direct effects on national budgets and how these institutional changes will 

affect the European economy over the long run. The EMU’s requirement 

for countries to limit deficits and debt will continue to constrain 

government spending options. At the same time, the enhanced integration 

brought about by the euro can have positive effects on economic growth 

that may offset fiscal constraints and provide greater budget flexibility over 

the longer term. While EU membership may bring economic benefits to 

new entrants, meeting membership criteria will impose significant costs. 

The magnitude of these costs and thus their budgetary impact depends on 

several key political decisions that have not yet been made, such as the 

timing and specific requirements of membership. Applicant countries are 

likely to bear most of these costs.

EMU’s Implications for 

Defense Spending Remain 

Uncertain

EMU has no direct effect on defense spending, but it can affect the 

availability of national resources for defense spending depending on how 

the euro and its related requirements influence budgets and economic 

growth. Adopting the euro constrains national spending, because countries 

are required to attain roughly balanced budgets in the next few years. The 

degree to which this will require cuts in government spending depends in 

part on economic growth in euro area countries. EMU’s impact on 

economic growth remains uncertain. A key determinant will be how 

national economies restructure in reaction to the enhanced competitive 

pressures from EMU. 

Significant Deficit Reductions 

Achieved, but Further Cuts 

Required

The fiscal requirements associated with EMU have resulted in significantly 

lower budget deficits throughout the EU and will require further reductions 

among those countries that have adopted the euro. Since the early 1990s, 

countries have significantly reduced their national deficits through a 

combination of spending cuts and tax increases. (See fig. 6.) For example, 

between 1994 and 1997, Italy reduced its deficit from 9.2 percent to

2.7 percent of GDP.
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Page 15 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Figure 6: Annual General Government Deficits for Four West European Countries as Percent of GDP, 1990-98

Source: European Commission.

Countries can achieve required deficit- and debt-to-GDP ratios by cutting 

spending, raising taxes, or as a result of increases in GDP. According to the 

OECD, countries have so far achieved compliance with EMU requirements 

largely through raising taxes; cutting investment spending and subsidies; 

and implementing a series of one-time measures that included Italy’s 

euro-tax, and, in some countries, the postponement of certain expenditures 

1 week into 1998. In the case of Italy, significant spending reductions have 

also been achieved through decreased debt service payments due largely to 

lower interest rates.13 Table 1 shows the combination of spending cuts and 

revenue increases used to meet deficit criteria for several countries.

0

2

4

6

8

10

12

1990 1991 1992 1993 1994 1995 1996 1997 1998

Germany France Italy U.K.

Percent of GDP

13Italy’s long-term yield on government bonds, a measure of the cost of government borrowing, dropped 

from 11.88 percent in 1992 to 6.85 percent in 1997.
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Page 16 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Table 1: Sources of Deficit Reductions in Four West European Countries as a 

Percent of GDP, 1990-97

Note: The OECD data calculates changes in various spending and revenue categories as a 

percentage of the country’s potential GDP over the 1990-97 period. Spending includes government 

transfers as well as other types of spending. The OECD did not specify the breakdown of government 

spending cuts across functional categories.

Source: GAO analysis based on OECD data.

Countries within the euro area must make additional reductions in both 

debt and deficit levels over the next few years to comply with the 

provisions of the 1997 Growth and Stability Pact. Although 1998 debt levels 

in France, Germany, and the United Kingdom were near or below the 

required 60 percent of GDP, Italy’s debt was 118 percent of GDP. While this 

represents progress from the peak debt level of 125 percent of GDP 

attained in 1994, Italy must continue to show progress in reducing 

government debt to 60 percent of GDP to remain in compliance with EMU 

requirements.14 In addition, as table 2 shows, all four EU countries studied 

plan to continue to cut deficits to comply with Stability Pact deficit 

requirements, although three of the four countries plan to cut deficits at a 

slower rate over the next 4 years than was achieved from 1994 to 1998.

Country Changes in spending Changes in revenue

Germany -0.3 2.0

France 1.7 2.5

Italy -5.0 4.8

United Kingdom -2.0 -0.1

14The relationship between deficit- and debt-to-GDP ratios is complex and depends on factors such as 

GDP growth rates, inflation, and interest rates on outstanding debt. In general, high-debt countries will 

face greater fiscal constraints than low-debt countries. For example, to bring debt below 100 percent of 

GDP by 2003, Italy plans to have general government revenue exceed general government expenditures, 

except for debt service payments, by 5.5 percent of GDP.
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Page 17 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Table 2: General Government Deficit for Four West European Countries, Selected 

Years, as a Percent of GDP

a

Italy’s plans are for 2001.

b

The United Kingdom chooses to abide by the euro area’s fiscal constraints.

Source: European Commission.

Achieving further deficit reduction over the medium term may prove 

difficult for some euro area countries. Countries have made limited 

progress in reducing deficits since 1997, and budget plans promise little 

improvement in the near term, according to the IMF. OECD officials told us 

that many European governments were suffering “fiscal fatigue” from the 

effort to meet euro area deficit requirements and did not continue to cut 

spending in 1998 to reduce deficits. In March 1999, the European Central 

Bank issued a report criticizing governments for this slowdown in deficit 

reduction and for assuming that sustained economic growth and low 

interest rates would bring compliance with EMU requirements without 

further cuts in government spending. The European Central Bank, the 

OECD, the IMF, and the European Commission have expressed concern 

that, in the event of a severe or prolonged slowdown in economic growth, 

government deficits could fail to meet Stability Pact requirements or could 

even exceed the 3-percent deficit limit. According to European officials, 

this would reflect badly on the credibility of EMU and could trigger a 

political crisis if countries were required to pay the fines for 

non-compliance spelled out in the Treaty on European Union.

While discussion of EMU’s fiscal requirements focuses on constraining 

government spending, the requirements also have beneficial economic and 

fiscal effects. European Central Bank officials have stated that the lower 

deficits and debt brought about by EMU will create a more stable economic 

environment and contribute to greater economic growth in the future. We 

have also reported on the potential benefits to economic growth of lower

Country 1994 deficit 1998 deficit Planned 2002 deficit

Germany 2.4 2.1 1.0

France 5.8 2.9 0.8 to 1.2

Italy 9.2 2.6 1.0a

United Kingdomb 6.8 0.8 0.2
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Page 18 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

deficits.15 In addition, as Italy’s case shows, reducing deficits can also lead 

to lower interest rates on sovereign debt and thus reduced government 

spending on debt service. Moreover, reductions in debt levels over time 

also directly lower debt service costs. Lower interest payments and levels 

of debt will increase budgetary flexibility making resources available for 

other policy priorities.

If EMU’s deficit requirements require further spending cuts, impacts on 

defense budgets will clearly depend on policy decisions of individual 

governments regarding where those cuts are made. We heard a range of 

views from officials and analysts regarding the potential impact of further 

budget tightening under EMU. Several officials told us that defense 

budgets had already been affected by deficit reduction measures to date in 

several countries. Other officials stated that because current defense 

spending levels are low by recent historical standards, they are unlikely to 

be cut further. Many officials and analysts stressed that it is hard to 

develop a causal link between deficit reduction requirements and changes 

in a particular category of spending, since a number of factors are involved, 

including political priorities and rates of economic growth. For example, 

during the 1990s, Italy cut its general government deficit the most and its 

defense spending the least, among the countries we studied.

EMU Should Benefit Economic 

Growth, but Concerns Remain

EMU has broad and important effects on several aspects of European 

economies, including competitiveness, structural reforms, and the ability 

of national governments to react to economic downturns. The impact of 

EMU on economic growth in Europe depends on how EMU affects these 

and other economic factors. On balance, analysts are guardedly optimistic 

about the implications of EMU for Europe. However, concerns remain 

about how EMU will affect the ability of national governments to adjust to 

economic downturns and derive political consensus to pursue structural 

reforms. Officials at the IMF, the EU, and the OECD told us they believe 

that EMU will ultimately boost economic growth in Europe but have not 

quantified this expected impact.

Optimists believe that, in addition to providing economic benefits from 

lower deficits, EMU will tie the countries of Europe closer together, 

15Economic growth requires investment, which over the longer term, depends on savings. Government 

deficits represent dissavings since they use funds that otherwise could be used for investment. For 

examples of our work in this area see Budget Issues: Analysis of Long-Term Fiscal Outlook

(GAO/AIMD/OCE-98-19, October 22, 1997) and Budgetary Policy: Prompt Action Necessary to Avert 

Long-Term Damage to the Economy (GAO/OCG-92-2, June 5, 1992).
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Page 19 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

increase their prosperity, and ultimately improve security through the 

beneficial effects of integration. Since national governments will no longer 

be able to adjust to downturns through monetary or exchange rate policy, 

and the use of fiscal policy will be constrained, they will have to rely on 

structural reforms, such as revising their policies to increase labor mobility, 

to address economic problems. Economic efficiency and growth will 

increase because countries in the euro area will have no choice but to allow 

increased flexibility in labor, capital, and goods and services markets to 

stay economically competitive.

Skeptics fear that EMU will create longer, deeper recessions in parts of 

Europe and possibly increase political tensions between countries if 

workers and firms move across national boundaries. They believe EMU 

will ultimately not work because national governments will lack the 

political support to maintain balanced budgets and undertake unpopular 

economic structural reforms, such as making it easier for businesses to fire 

workers. (See app. II for a further discussion of the mechanisms through 

which EMU can affect economic growth.)

The link between increased economic growth and countries’ defense 

budgets is, of course, an indirect one. In general, stronger growth leads to 

more resources for all spending needs, including defense, and weaker 

growth can squeeze many budgetary categories. However, changes in the 

level of defense spending over time solely due to changes in economic 

growth can be relatively small. For example, holding assumptions about 

military threat and political support for defense spending constant, if GDP 

growth increased (decreased) by 1 percentage point per year relative to 

baseline projections, it would take about 5 years for real defense spending 

to increase (decrease) by 5 percent.16

EMU’s impact on economic growth within the euro area also has important 

economic consequences for the newest NATO members. For example, 

exchange rates of the Polish and Hungarian currencies are determined by 

the values of “currency baskets” that include the euro. In addition, the 

Polish, Hungarian, and Czech economies depend heavily on trade with the 

countries in the EU. 

16This assumes the defense share of GDP declines slightly over the period, based on existing defense 

budget projections for the countries we studied.
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Page 20 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

EU Enlargement’s 

Budgetary Impact 

Uncertain, but Effects on 

New Member Countries 

Likely to Be Greatest

EU enlargement’s effect on resources available for defense spending 

depends on how enlargement affects economic growth and on the 

budgetary costs of meeting enlargement criteria. Both of these impacts are 

likely to be greater for countries joining the EU than for current members. 

While applicants expect membership to improve their economies over the 

long run, meeting EU requirements is likely to be costly in some areas, 

although the magnitude of costs depends on timetables and specific 

requirements that have not been established. Current EU members plan to 

provide financial support for enlargement primarily through the EU 

common budget. The EU financial framework for 2000-2006 limits 

assistance to applicant countries to 11 percent of total spending over the 

period, which is slightly above 0.1 percent of total EU gross national 

product (GNP).17 Most of these funds will not be available until countries 

actually join the EU, which is likely to be several more years.

EU Membership Should Benefit 

New Members’ Economic 

Growth

EU applicants, whose average per capita GDP in 1997 was about 32 percent 

of that of current members, expect to derive broad economic benefits from 

membership. Benefits are expected to flow from several factors: 

expanded trade due to reduced trade barriers between entrants and current 

members, increased foreign investment due to lower risks and reduced 

barriers, and overall institutional reforms associated with joining the EU. 

Although the requirements of EU membership often coincide with steps 

toward general economic development in applicant countries, the prospect 

of membership adds an important motivation for countries to carry out 

needed reforms. In addition, because the accession process itself increases 

investor confidence, some of the economic benefits should accrue before 

formal membership. Finally, applicant countries expect to benefit through 

financial assistance from the EU although, as we discuss later, the EU’s 

current budget limits the commitment to assistance for applicant countries 

and new members.

Enlargement Requires Reforms 

by Applicant Countries 

The EU requires that new members have

• stable government institutions guaranteeing democracy, rule of law, and 

human rights;

• a “functioning market economy” that can withstand competitive 

pressure and market forces within the EU; and

17GNP differs from GDP—the total market value of all the final goods and services produced within an 

economy in a given year—in that it includes earnings abroad by a country’s firms and residents and 

excludes income earned in that country by foreign firms and residents.
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Page 21 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

• the ability to take on EU membership obligations, including the 

adoption, implementation, and enforcement of the EU’s entire body of 

laws, known as the “acquis communautaire.”

Some of these criteria are quite general and open to interpretation. For 

example, having a functioning market economy can be demonstrated 

through showing sustained economic growth with growing private sector 

participation. This in turn requires changes across the spectrum of 

economic institutions. For example, countries’ legal systems need to 

include the regulation of property rights so contracts can be enforced. 

Adopting and implementing the full spectrum of EU law, however, requires 

a number of specific actions. Adopting the acquis is a massive undertaking 

for accession countries. The acquis comprises 80,000 pages of 

requirements, which the European Commission has divided into 31 

categories, or chapters, for the purpose of carrying out negotiations with 

applicants. (See app. III for a complete listing of these chapters.) Some 

requirements of adopting the aquis can be met with simple, technical 

changes, while others will require large investments. Meeting EU 

standards for the environment and for infrastructure are most likely to 

constitute the greatest challenges and costs for the three accession 

countries we visited.

Enlargement Not Likely for 

Several Years

The first accessions to the EU from the current enlargement process are 

not likely to take place for several years, most likely not until 2004-06, 

according to U.S. and foreign officials with whom we met. Applicant 

countries’ own official timetables remain somewhat shorter—2002 or 

2003—as does the timetable officially assumed in the recently adopted EU 

budget. Enlargement cannot occur until (1) applicant countries make 

sufficient progress in satisfying EU membership criteria and (2) the EU 

agrees to reforms in its decision-making processes and possibly changes in 

its budget. 

The timing of accession is ultimately a political decision on the part of 

current EU members. According to several EU and government officials, 

while current members have made a political commitment to the idea of 

enlargement, they have not made a political commitment to the timing or 

conditions under which it will take place. The degree of support for EU 

enlargement among current member populations is mixed. According to a 

1998 survey conducted on behalf of the EU, 42 percent of respondents 

favored enlargement, with support ranging from a high of 63 percent in 

Sweden to a low of 28 percent in Belgium. 
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Page 22 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

In its report on applicants’ progress in meeting EU membership criteria, 

issued in late 1998, the European Commission indicated that while 

candidates were “broadly on track,” countries still had a long way to go in 

meeting membership criteria. According to the Commission, among the 

Czech Republic, Hungary, and Poland, Hungary has made the most 

progress and the Czech Republic the least. The Commission reports that 

all the candidate countries lack the administrative and judicial capacity to 

implement the acquis. According to Commission officials, it is not realistic 

to expect that all the requirements of the acquis will be met prior to 

negotiation. The accession process does provide for transition periods—

periods after membership during which some requirements can be 

implemented. Views on how extensively transition periods will be granted 

varied among the officials with whom we talked. Transition periods are 

generally expected in some cases, however, particularly in the area of 

meeting environmental standards.

The need to make politically difficult changes in EU policies could impede 

EU enlargement, according to officials from the EU as well as member and 

applicant countries. These include several issues with respect to EU 

decision-making structures and procedures in the Council and 

Commission, and potentially the EU budget—including the allocation of 

funds to support agriculture.

EU and member-country officials stated that reforms of the EU 

decision-making process are necessary prior to enlargement. These 

reforms include reducing the number of members of the Commission to 

one per country to accommodate an increasing number of countries (the 

largest countries now have two members); reweighting the voting power of 

members in the Council to offset the loss of commissioners; and increasing 

the use of majority voting in the Council to replace the current system of 

consensus decision-making. A State Department official characterized the 

prospect for agreement on these reforms in the near-term as “dim.” 

The EU financial framework for 2000-2006 (discussed later) reflects most 

of the reforms that the Commission had determined would be necessary for 

an expanded EU except with respect to agriculture policy, the area of 

greatest contention.18 This has led to the views of some officials that 

elements of the budgetary framework will have to be revisited prior to 

18The European Commission laid out in a 1997 document, Agenda 2000, specific changes to EU policies 

needed before enlargement.
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Page 23 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

enlargement. In presenting the financial framework, the Council 

acknowledged that further changes in agriculture assistance payments to 

current members may be necessary. However, EU countries receiving the 

largest amounts of agricultural subsidies could potentially use their votes 

on enlargement to maintain their net level of assistance from the EU at the 

expense of new members.19

Future Budgetary Impacts 

Depend on Specific Enlargement 

Terms

The budgetary implications of EU membership for applicant countries 

depend on the outcome of ongoing membership negotiations with the EU. 

At this point, total cost estimates have not been developed. While there is 

general agreement that meeting EU membership requirements will entail 

significant expenditures by applicant countries, quantifying these costs 

remains difficult. For example, neither the EU nor the World Bank, which 

have both worked with applicants to develop accession strategies, has 

developed broad estimates of accession costs.

EU requirements with respect to environmental standards and 

transportation infrastructure are expected to be among the costliest for 

applicant countries to meet. The most comprehensive sector-specific 

estimates are for environmental reforms, where the World Bank has 

recently completed analyses of what Poland, Hungary, and the Czech 

Republic must do to meet EU environmental standards. The World Bank 

has estimated that Poland’s public sector costs of meeting EU requirements 

could be $5 billion to $11 billion dollars per year for 20 years to cover 

investment, operation, and maintenance.20 This represents about

3.4 percent to 7.5 percent of Poland’s 1998 GDP and 1.7 percent to

3.7 percent of Poland’s projected GDP in 2015. The World Bank estimates 

Hungary’s annual costs of environmental reforms as ranging from

2.1 percent to 5.5 percent of 1997 GDP, and annual costs for the Czech 

Republic ranging from 2.5 percent to 3.7 percent of 1997 GDP. The 

difference between the high and low ends of the cost ranges are due to 

different assumptions about what the specific requirements will be and the 

details of the compliance plan these countries and the EU agree to.

19Currently, about half of all EU appropriations are for agricultural price supports and direct payments 

to farmers. Between 1993 and 1997, France was the leading recipient of EU agricultural support 

payments, followed by Germany, Spain, and Italy. Extending these payments to new entrants, whose 

economies are, on average, about four times as reliant on agriculture as current members, would 

increase expenditures considerably.

20These calculations assume investments are spread over their expected life and discounted to reflect 

the time value of money. They also exclude what private industry must spend to meet EU standards.
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Page 24 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

The World Bank’s studies do not determine what portion of estimated costs 

will be borne directly by national governments. The national budgetary 

impact of these and other requirements depends on a number of factors, 

including the degree to which costs are passed on to consumers—through 

higher utility bills, for example--and the types of financing available. 

According to these studies, much of the costs would be affordable to 

households under the low-cost scenario but not under the high-cost 

scenario. Moreover, since these studies focus only on the costs of meeting 

enlargement criteria in these areas, they do not attempt to present net 

assessments of the criteria’s economic costs and benefits.

 The World Bank emphasizes that these countries will make many of the 

required improvements whether they join the EU or not. A common theme 

we heard from officials in accession countries is that there is substantial 

overlap between their national development goals and EU requirements in 

areas such as the environment. However, EU requirements can affect the 

timing of reforms and thus the relative impact of their costs. For example, 

Hungarian officials pointed out that, while commercial vehicles in Hungary 

will eventually satisfy EU emission control requirements, membership 

criteria will force these requirements to be met by a certain date. This will 

compress the period of time over which adjustments take place, thus 

increasing annual expenses.

New EU Financial 

Framework Limits 

Expenditures of Current EU 

Members for Enlargement

EU members plan to support enlargement of the Union primarily through 

the EU budget, not their national budgets. According to the financial 

framework adopted in March 1999, the EU will appropriate about

11 percent of its spending during 2000-2006, about $80 billion dollars, to 

applicant and new member countries. This is slightly above 0.1 percent of 

current member GNP.21

As illustrated in figure 7, the financial framework reflects some increase in 

total spending, since members’ GNP is assumed to grow over the period, 

and revenues are limited to a percentage of GNP. The framework shows 

only a slight decrease in agriculture and regional development payments to 

current members. It assumes some new members would join in 2002, and 

then receive a portion of agriculture and regional development payments. 

21Financing for the EU budget comes from GNP-based contributions, value-added taxes, and 

agricultural levies and customs revenues. Member contributions are limited to a percentage of total EU 

GNP, which is 1.27 percent in the newly adopted budget. 
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Page 25 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

The framework reflects the decision to set an explicit cap on the amount of 

funds that new members will receive over the period. According to the EU, 

there are budgetary walls between the funding for current and new 

members. Thus, if enlargement takes place after 2002, current EU 

members would not get the funds earmarked for new members for that 

year.

Figure 7: Planned EU Spending for Current and Applicant Members, 2000-2006

Source: European Council.

Most of the financial assistance, 68 percent, given to new members will be 

for regional development. The amount of assistance earmarked for new 

members is not sufficient to support new members at the same level as 

current members. EU officials have stated that the EU’s greatest 

contribution to the economic development of applicant countries is not 

financial assistance, but rather fostering an environment conducive to 

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006

Current members New members (before joining EU) New members (after joining EU)

Billions of 1999

U.S. dollars
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Page 26 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

increased trade and influxes of private capital. However, a State 

Department official stated that this budgetary framework may have to be 

modified before enlargement can take place.

Defense Budgets Face 

Strong and Increasing 

Pressure From 

Domestic Spending 

Defense budgets face strong and increasing pressures from demands for 

domestic spending in both West and Central European countries. 

Pensions, in particular, are placing pressure on national budgets and 

expenditures will increase dramatically as populations age, unless difficult 

reforms are made. Health care costs are also expected to rise. In the long 

run, the pressure from rising entitlement costs may have a greater effect on 

countries’ defense budgets than EMU or EU enlargement. Recent 

budgetary debates in both West and Central European countries have 

highlighted the tradeoffs facing decisionmakers as they try to satisfy 

demands for social spending within a budgetary environment characterized 

by lower economic growth and fiscal constraints.

Social Spending Is a Large 

Portion of National Budgets

The countries we reviewed have historically spent a large portion of their 

GDP and government budgets on social programs such as pensions, health, 

and welfare. For example, according to OECD figures, in 1995—the latest 

year for which comparable data are available—France, Germany, Italy, and 

the United Kingdom spent an average of 26 percent of GDP on social 

programs, compared with 16 percent in the United States.22 Public 

pensions and health programs are the largest component of government 

spending for social programs in these countries, averaging about

80 percent of the total. Central European governments also devote a 

significant portion of GDP to social programs. According to IMF data, 

using a slightly different measure than the OECD, the Czech Republic, 

Hungary, and Poland spent about 22 percent of GDP in 1997 on social 

programs (including pensions, welfare, and health).

The cost of public pension programs has been placing increasing pressure 

on government budgets in some countries. Payroll taxes in several 

countries, although considered high, do not cover the annual costs of 

current pension programs, requiring sometimes large and growing portions

22According to OECD figures, about half of total government spending in the United States is for social 

programs, about the same as in Western Europe. However, government spending in Europe is a larger 

portion of GDP than in the United States.
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Page 27 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

of the national budget to fill the gap.23 For example, in Germany, transfers 

to pension funds increased from 16 percent to 22 percent of federal 

government spending between 1994 and 1998. 24 In Italy, government 

contributions to the state pension system increased from 2.3 percent of 

GDP in 1997 to 2.7 percent in November 1998. In 1998, the Czech 

Republic’s pension system required payments from the national budget to 

finance the gap between payroll taxes and pension expenditures equivalent 

to roughly 1.1 percent of GDP. Officials there told us that without serious 

change in the current system, these deficits would continue. 

However, reforming pension programs can increase costs in the short term. 

For example, in 1998, Hungary launched an ambitious reform of its 

pay-as-you-go pension program. Although the move to add mandatory 

individual savings accounts enhanced the long-term viability of the system, 

Hungary’s short-term budgetary costs will require payment for two parallel 

pension systems over the next several years, reflecting these transition 

costs.

The growing pressures for spending for domestic needs such as addressing 

unemployment and improving education are reflected in the 1999 budget 

debates for all the countries we studied. Germany, for example, increased 

spending for education and to reduce youth unemployment while 

continuing to spend large sums related to the integration of the eastern 

region. France’s budget also increased funding directed at lowering 

unemployment and improving education, and Italy spent more for social 

and regional development. In the United Kingdom, half of all planned 

budgetary increases are in education and health. In Central Europe, Poland 

is implementing costly pension, health care, industrial, and local 

government reform programs. The Czech Republic’s mildly expansionary 

budget is geared to spur growth. And Hungary’s budget shows increased 

spending for pensions and education, as the new government attempts to 

satisfy campaign promises while limiting deficit spending. 

23Most countries we studied have multiple public pension programs, and the complex funding and 

benefit details of these programs differ from country to country. Governments collect payroll taxes to 

support the current year’s public pension outlays. This is known as a “pay-as-you-go” funding scheme. 

General government budgets are used to cover any gaps. Pay-as-you-go schemes are not generally 

designed to accumulate and set aside funds to pay for future liabilities.

24National budget figures cannot be compared across countries, due to significant differences in 

definitions; spending categories; and distinctions between national, regional, and local government 

responsibilities.
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Page 28 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Aging Populations Present 

Budgetary Challenge

Demographic trends present a huge budgetary challenge for the countries 

we studied, although the budgetary consequences for the United Kingdom 

are much less negative than those for the other countries.25 According to 

studies by the OECD, the World Bank, and national governments, in the 

absence of substantive public pension reform efforts, budgetary stability 

will come under significant strain in the next century. German Central 

bank officials, for example, described the projected fiscal consequences of 

Germany’s demographic problems as catastrophic.

The share of retired elderly (people over 65) in most developed countries, 

which grew slowly over the last 25 years, will begin to rise dramatically 

after 2010 as the baby boom generation moves into retirement and other 

demographic forces play out. These changes will generally be greater in 

European countries than in the United States, as shown in figure 8.

25The U.K.’s population is aging less rapidly and its pension system is less generous than in France, 

Germany, and Italy. The United Kingdom has also undertaken a series of reforms, including partial 

privatization of its pension system, reducing the fiscal burden on the national government.
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Page 29 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Figure 8: Share of Population Over 65 in Four West European Countries and the 

United States, 1960-2030

Source: OECD.

The projected impact on public pension expenditures of these 

demographic trends for France, Germany, Italy, the United Kingdom, and 

the United States is shown in figure 9. 

0

5

10

15

20

25

30

1960 1990 2000 2010 2020 2030

Italy Germany U.K. France U.S.

Percent of population
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Page 30 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Figure 9: Pension Expenditures as Percent of GDP in Four West European Countries 

and the United States, 1995-2050

Source: OECD.

Figure 9 shows that, using projections based on current trends and policies, 

public pension costs in France, Germany, and Italy will consume growing 

proportions of total GDP. Predicted costs for the United Kingdom are 

lower in part due to reforms that have included lower benefits. By several 

measures, based on current policies, the future budgetary consequences of 

the trends in France, Germany, and Italy are very serious. For example, the 

OECD has estimated that current pension policies will drive the national 

debts of Germany and Italy over 200 percent of GDP by 2030. To maintain 

their respective national debts at current levels, the OECD estimates that 

Italy and Germany will need to maintain unrealistically high budget 

surpluses of 7 percent of GDP or greater per year by 2030.26

26A 1997 OECD study estimated the net present value of long-term financing shortfalls of government 

pension programs for a number of countries. Expressed as a percent of a country’s 1994 GDP, 

estimated shortfalls were 24 percent for the United Kingdom, 60 percent for Italy, 62 percent for 

Germany, and 102 percent for France. 

0

5

10

15

20

25

1995 2000 2010 2020 2030 2040 2050

Italy Germany U.K. France U.S.

Percent of GDP
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Page 31 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

Central European governments face similar budgetary problems due to 

demographic trends. Polish officials have projected they will reach 

unsustainable levels of spending in 10 to 15 years. Likewise, Czech officials 

reported being in the same situation. Long-term projections for Hungary 

are somewhat more optimistic, given recent reforms, although long-term 

funding shortfalls are still projected.

Aging populations are also expected to increase health care costs in these 

countries, although less dramatically. Public spending on health, which 

throughout the 1980s equaled approximately 6 percent of GDP in the EU 

countries we studied, began to rise early in the 1990s. According to one 

study, this spending is projected to increase to approximately 9.5 percent 

of GDP in 2050, under current trends and policies. Expenditures on health 

care for the elderly account for nearly all of this projected increase. 

According to the OECD, such estimates are highly dependent on the future 

cost of medical technology and the outcome of reforms aimed at improving 

efficiency.

Although the dramatic budgetary consequences of aging populations 

appear to be a number of years away, significant political and budgetary 

impacts will be felt sooner, according to a number of officials and analysts. 

The longer pension system reforms are delayed, for example, the more 

stringent they will have to be. Officials told us that achieving the political 

consensus to carry out reforms to temper the budgetary consequences of 

aging populations will be difficult. They also told us that the hardest and 

potentially most effective choices, such as raising the retirement age or 

reducing benefits, are not yet being seriously addressed. The political 

challenges are compounded by the fact that some long-term reforms can 

have negative budgetary consequences in the short to medium term.

Conclusions While neither EMU nor EU enlargement affect defense spending decisions 

directly, they can affect the flexibility of governments to allocate resources 

to various needs. The impacts of EMU and EU enlargement on overall 

government budgets remain difficult to predict. The estimated costs of 

meeting some EU membership requirements are quite high. But just how 

high these costs will be, who will pay them, and over what period of time 

they will be incurred remain to be determined. Clearly, however, EU 

membership is a priority of many Central European countries, and support 

for it could fare well as budgetary decisions are made. Over the next 

several years, EMU requires additional cuts in deficits in participating 

countries. While these cuts are not large relative to the deficit reductions 
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Page 32 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 

already made, they are not easily achieved, particularly in countries that 

are experiencing slow growth. Since defense is a relatively small portion of 

the budget, it can arguably be protected from cuts. However, if the political 

support for defense spending is low, it may be a more attractive target than 

other spending. Pressures for increased spending on pensions and also 

health care due to aging populations will strain future budgets in many 

European countries. Strong economic growth is clearly a key to 

governments having any flexibility for meeting competing needs for 

resources.

Agency Comments and 

Our Evaluation

The Defense Department provided written comments on a draft of this 

report and concurred with our findings (see app.V). The Department of 

State provided oral comments on a draft of this report and concurred with 

our findings. DOD and the Department of State also provided technical 

comments, which we incorporated where appropriate. In oral comments 

on a draft of this report, the Department of the Treasury, the European 

Union, the World Bank, and NATO provided technical comments, which we 

incorporated where appropriate.

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 15 days from its 

issuance date. At that time, we will provide copies of this report to other 

appropriate congressional Committees; the Honorable William Cohen, the 

Secretary of Defense; the Honorable Madeleine Albright, the Secretary of 

State; and the Honorable Lawrence Summers, the Secretary of the 

Treasury. We will also make copies available to others upon request.

If you or your staff have any questions about this report, please contact me 

at (202) 512-4128. Other GAO contacts and staff acknowledgments are 

listed in appendix VI.

Benjamin F. Nelson, Director

International Relations and Trade Issues
Page 33 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending 
Page 34 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Contents

Letter 1

Appendix I

Composition of 

Defense Spending in 

Selected European 

Countries

38

Appendix II

Possible Effects of 

European Economic 

and Monetary Union on 

National Economic 

Growth

44

Appendix III

Topics of Negotiation 

for EU Accession

46

Appendix IV

Objectives, Scope, and 

Methodology

48

Appendix V

Comments From the 

Department of Defense

51
Contents

Page 35 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Appendix VI

GAO Contacts and 

Staff 

Acknowledgements

52

Tables Table 1: Sources of Deficit Reductions in Four West European

Countries as a Percent of GDP, 1990-97 16

Table 2: General Government Deficit for Four West European

Countries, Selected Years, as a Percent of GDP 17

Table II.1: Ways in Which EMU Could Benefit Economic Growth 44

Table II.2: Ways in Which EMU Could Hurt Economic Growth 45

Figures Figure 1: European Members of NATO, the EU, and the Euro Area,

and First Wave EU Applicant Countries 5

Figure 2: Historical and Projected Defense Spending in Four West

European Countries, 1980-2002 7

Figure 3: Historical and Projected Defense Spending as Percent of

GDP for Four West European Countries and the United States,

1980-2002 8

Figure 4: Historical and Projected Defense Spending in Three Central 

European Countries, 1994-2003 10

Figure 5: New NATO Members’ Defense Spending as a Percentage of

GDP, 1994-2003 11

Figure 6: Annual General Government Deficits for Four West

European Countries as Percent of GDP, 1990-98 15

Figure 7: Planned EU Spending for Current and Applicant Members, 

2000-2006 25

Figure 8: Share of Population Over 65 in Four West European

Countries and the United States, 1960-2030 29

Figure 9: Pension Expenditures as Percent of GDP in Four West

European Countries and the United States, 1995-2050 30

Figure I.1: Trends in Composition of Defense Spending in Three West 

European Countries, 1980-2002, 2003 39

Figure I.2: Trends in Composition of Defense Spending in Three

Central European Countries, 1996-2003 42
Contents

Page 36 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Abbreviations

DOD Department of Defense

EMU Economic and Monetary Union

ECB European Central Bank

EU European Union

GDP gross domestic product

GNP gross national product

IMF International Monetary Fund

NATO North Atlantic Treaty Organization

OECD Organization for Economic Cooperation and Development
Page 37 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending
Page 38 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Appendix I

Composition of Defense Spending in Selected 

European Countries ApenxIdi

The defense budget challenges of the West and Central European countries 

we studied arise in part from large personnel costs, large procurement 

projects, and deployments. Officials have identified the need to prioritize 

defense requirements as key to effectively addressing new security 

challenges.

Western Europe Personnel expenses for the countries we studied in Western Europe 

generally constitute a large portion of their defense budgets—60 to 70 

percent in some cases—and have affected the ability of these countries to 

appropriate additional funding for defense modernization. In Germany and 

Italy, in particular, personnel expenses, as a share of overall expenses, have 

been rising in the Cold War and post-Cold War periods, as shown in figure 

I.1. While these countries expect personnel expenses to fall in the future, 

this may be complicated by sensitive political and social issues associated 

with the elimination of conscription and the reduction in personnel 

strength. In the United Kingdom, with its all-volunteer force, personnel 

expenses have decreased relative to other expenses since the end of the 

Cold War.
Appendix I

Composition of Defense Spending in Selected 

European Countries

Page 39 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Figure I.1: Trends in Composition of Defense Spending in Three West European 

Countries, 1980-2002, 2003

Note 1: Comparable data for France are not available. Breakout of future defense spending for the 

United Kingdom is not available.

Note 2: “Other” primarily includes spending for operations, maintenance, and infrastructure.

Sources: GAO analysis of data from North Atlantic Treaty Organization (NATO) and national ministries 

of Defense.

Conscription Compulsory military service, known as conscription, has been a 

fundamental element of defense planning for France, Germany, and Italy 

since the end of World War II. It has both integrated the professional core 

of the military into society and, in some cases, provided a source of 

employment for youth. While conscription may have been effective during 

United Kingdom Germany

0%

20%

40%

60%

80%

100%

1980-841985-891990-94

19951998

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Italy

Other

Equipment

Personnel 1980-84 1985-89

1990-94

1995199820002002

1980-841985-891990-94

199519982000

2002
Appendix I

Composition of Defense Spending in Selected 

European Countries

Page 40 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

the Cold War for staffing large territorial armies, the restrictions attached 

to it pose problems for post-Cold War security conflicts, according to 

officials with whom we met. For example, conscripts in Italy cannot be 

deployed to an overseas conflict or crisis except on a volunteer basis. 

When they do volunteer, it can be a costly deployment for the country 

because Italy’s laws require that the volunteers be paid at a higher rate 

when on an overseas deployment. 

France, Germany, and Italy acknowledge the lack of flexibility inherent in 

conscription, as well as the expense of maintaining large numbers of these 

forces, and are in various stages of making or considering changes. A shift 

to a professional, volunteer force can initially result in higher personnel 

costs, although costs can be lower over time as the size of the force is 

decreased, according to U.S. and foreign officials. In addition, ending 

conscription can exacerbate countries’ unemployment and associated 

problems, according to military personnel specialists. In 1996, the French 

government presented a plan for downsizing and professionalizing the 

French military, including a massive reduction of conscripts within the 

French armed forces, to be accomplished by 2002. Italy has also begun to 

professionalize its military forces but is proceeding at a slower pace than 

France. The Italian government believes a gradual transition is necessary 

because Italy has never had a professional military, and also because 

conscription forces have provided volunteer labor that is relied on by both 

the military and the outside community. As a result of this gradual 

transition, however, personnel costs, as a percent of total defense 

spending, increased from 67 percent to nearly 73 percent between 1995 and 

1998 to accommodate professionalization and maintain conscription. In 

May 1999, Germany launched the first comprehensive study of the 

structure of its armed forces in almost 30 years. This review, which will 

look out to the 2010 time frame, will include an examination of 

conscription policies.

Procurement of Large 

Systems

The expense of developing and procuring large military systems 

significantly limits flexibility in defense budgets in many European 

countries, according to U.S. and European officials. While participation in 

such projects can serve national interests, through increasing employment, 

enhancing technology, and boosting international prestige, it can also limit 

the ability of countries to buy other needed systems and equipment for 

modernization programs. The prime example of this is the EF-2000 

“Eurofighter.” Of the countries we reviewed, three are participating in this 

project--Germany, Italy, and the United Kingdom. Our analysis shows that 
Appendix I

Composition of Defense Spending in Selected 

European Countries

Page 41 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Eurofighter procurement is accounting for a growing portion of the 

procurement budgets in each of these three countries. Germany, for 

example, is procuring 180 Eurofighters, which represents approximately

28 percent of the costs of its major combat equipment purchases in 1999. 

This is an increase from 24 percent in 1998. According to U.S. embassy 

officials in Bonn, Eurofighter procurement, in combination with current 

overseas deployments, has had a depressing effect on the funding available 

for other defense programs. They stated that many German defense 

procurement programs have been delayed or are awaiting a decision 

whether or not to go forward, as a result of funding uncertainty.

The Eurofighter is also important to the Italian government because it 

supports Italian industry and jobs and provides international prestige. To 

fund such a large program, the Italian government is relying in part on 

financing sources outside the defense budget, such as the Ministry of Trade 

and Industry. Because of this funding arrangement, assessing the 

Eurofighter’s impact on other defense programs is difficult. However, 

military analysts both inside and outside of Italy have expressed concerns 

regarding Italy’s ability to fund the Eurofighter as well as other needed 

systems and equipment, particularly given costly military deployments 

such as Kosovo and expenses involved in moving to a professional military 

force.

The United Kingdom is procuring 232 Eurofighter aircraft--the largest 

number among participating countries. U.S. embassy officials in London 

stated that expensive procurement programs such as the Eurofighter must 

necessarily affect other programs, particularly when the defense budget is 

not growing. Moreover, recent U.K. government reports indicate high cost 

overruns from large weapon system purchases, with the Eurofighter 

accounting for nearly half of the total cost overruns.

Central Europe Personnel costs also constitute a large portion of the defense budgets for 

Poland, Hungary, and the Czech Republic—between 49 and 61 percent in 

1998. Operational and personnel costs combined equal nearly 80 to

90 percent of the defense budgets, leaving 10 percent or less for major 

equipment. According to U.S. embassy and European government officials, 

a major challenge for these nations has been reducing the large, top-heavy, 

military personnel structures—a holdover from their membership in the 

Warsaw Pact. Conscription is a political and economic issue for these 

Central European countries, as it is in the West, and affects these countries’ 

ability to reduce their military force numbers. Projections indicate that 
Appendix I

Composition of Defense Spending in Selected 

European Countries

Page 42 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

personnel expenses, as a share of overall expenses, will decline slightly in 

the next 5 years but will still remain a large percent of the overall defense 

budget (figure I.2 shows the composition of defense spending in the Czech 

Republic, Hungary, and Poland).

Figure I.2: Trends in Composition of Defense Spending in Three Central European 

Countries, 1996-2003

Note: “Other” primarily includes spending for operations, maintenance, and infrastructure.

Sources: GAO analysis of data from NATO and national ministries of Defense.

Achieving defense reform and modernization goals depends on the ability 

of these countries to balance competing elements of defense spending. 

Undertaking certain high-cost modernization programs could prevent these 

Central European nations from meeting their NATO force goal 

commitments if the purchases are not carefully planned and budgeted, 

0%

20%

40%

60%

80%

100%

1996 1998 2000 2003

Poland Hungary

0%

20%

40%

60%

80%

100%

1996 1998 2000 2003

0%

20%

40%

60%

80%

100%

1996 1998 2000 2003

Czech Republic

Other

Equipment

Personnel
Appendix I

Composition of Defense Spending in Selected 

European Countries

Page 43 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

according to U.S. Department of Defense (DOD) officials. In recognition of 

its budgetary limitations, Hungary has deferred purchase of new fighter 

aircraft until after 2001 and will continue to use MIG-Soviet-built aircraft. 

The Czech Republic has also deferred purchasing new fighter aircraft but is 

proceeding with the procurement of subsonic multirole jets (the Aero 

Vodochody L-159). Poland has decided to move ahead now with new 

multirole fighter aircraft but has not decided whether to lease or buy the 

new systems. U.S. government officials stated that these aircraft purchases 

are feasible for Poland if the country meets GDP-growth projections of at 

least 4.2 percent and spends defense budget increases` primarily on 

procurement. 

Funding Requirements 

of Peace Support 

Operations

In our discussions with U.S. and foreign government officials, nearly all of 

them identified the increasing number of out of country deployments, 

particularly in the Balkans, as a growing drain on their defense resources. 

Combined with large aircraft purchases and high personnel costs, these 

operations are affecting the ability of the NATO countries we studied to 

carry out restructuring and modernization, according to these officials. 

The expense of the current operation in Kosovo is requiring some 

European countries to draw on other government funds or, in the case of 

Germany, appropriate supplemental funds for defense. Defense officials 

from France and the United Kingdom told us that requests for additional 

funding from their treasuries may be made later this year. Funding the 

Kosovo operation has been particularly difficult for the new NATO 

members because of their ongoing defense and economic reforms, 

according to U.S. government officials. The Czech Republic, for example, 

plans to increase its budget deficit in order to fund humanitarian aid. In 

Poland, contributions are being funded from budget “reserves,” as a 

spending contingency fund was quickly exhausted. According to U.S. 

embassy officials, the Polish Defense Minister has frequently complained 

to the press that the overall budget reserve for emergencies will also be 

quickly depleted. 

Lret
Page 44 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Appendix II

Possible Effects of European Economic and 

Monetary Union on National Economic 

Growth ApenxIdi

European Economic and Monetary Union (EMU), particularly the adoption 

of a common currency, can affect economic growth in participating 

countries through several mechanisms. Overall growth effects depend 

both on how these mechanisms individually affect growth, and on how they 

interact. Both are subject to considerable uncertainty. Table II.1 

summarizes the ways EMU could benefit economic growth. Table II.2 

summarizes the ways EMU could harm economic growth.

Table II.1: Ways in Which EMU Could Benefit Economic Growth

• Governments will be forced to undertake structural reforms, 

especially in improving the flexibility of labor markets. This will 

allow economies to adjust more easily to economic downturns, and 

therefore benefit long-term growth.

• Maintaining low budget deficits, which EMU requires, helps establish 

the foundations for stronger economic growth by limiting the 

government sector’s absorption of national savings.

• Exchange rate variability among euro area countries is eliminated. 

Consumers and businesses will no longer incur currency conversion 

costs, and the macro economy will be spared the impacts of large 

fluctuations in currency values that harmed European economies in 

the early 1990s.

• The European Central Bank is required to keep prices stable, which 

should contribute to lower interest rates.

• A common currency allows consumers to easily compare prices 

across borders, spurring economic competition and eventually 

boosting efficiency and productivity.
Appendix II

Possible Effects of European Economic and 

Monetary Union on National Economic 

Growth

Page 45 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Table II.2: Ways in Which EMU Could Hurt Economic Growth

• Common economic policies, particularly monetary policies, may not 

be well-suited to the needs of various countries that are at different 

stages of the business cycle. For example, a single interest rate set by 

the European Central Bank for 11 different economies could possibly 

lead to stagnation in some countries and overheating in others.

• National leaders will no longer be able to use monetary or exchange 

rate policy to cope with economic downturns. Without these tools, 

some countries may suffer additional pain from economic shocks that 

do relatively little harm to the rest of the euro area.

• The limitations on government spending will constrain national 

efforts to increase social spending during times of recession.

• Countries may be unwilling to continue to comply with EMU’s 

requirements or adopt politically difficult structural reforms, 

especially in the labor market. A series of national decisions at 

cross-purposes could place tremendous strain on the ability of EMU 

to hold together politically.
Page 46 GAO/NSIAD-99-185 NATO Defense Spending and European Integration

Appendix III

Topics of Negotiation for EU Accession ApenxIdi

Table III.1 presents the 31 chapters of the acquis communautaire, or the 

European Union’s body of laws, for the EU’s negotiations with EU 

applicant countries regarding those countries’ adoption of the acquis. Also 

shown are examples of topics included in each chapter.

Chapter Examples

1. Free movement of goods Export procedures; elimination of trade barriers.

2. Freedom of movement of people Right of residence for employees, self-employed persons, and students.

3. Freedom to provide services Service activities including insurance, banking, and stock exchanges.

4. Free movement of capital Relations between financial institutions and consumers.

5. Company law Formation, mergers, and division of public limited liability companies.

6. Competition policy Competition principles; intra-EU dumping practices: and national trading monopolies.

7. Agriculture Processing and marketing of agricultural products; agricultural research; and setting of 

compensatory amounts.

8. Fisheries Catch quotas and management of stock; agreements with nonmember countries.

9. Transport policy Ground transport safety conditions; shipping vessel registration; and air route 

distribution.

10. Taxation Income and corporate taxes; excise duties; and prevention of tax evasion and tax 

avoidance.

11. Economic and monetary union Limitations on government deficits; harmonized indexes of consumer prices; and 

provisions for the introduction of the euro.

12. Statistics Collection of statistical information on tourism; statistics on distribution of earnings.

13. Social policy and employment Working conditions; wages; and employment incentives.

14. Energy Coal rates; nuclear energy safeguards; and oil and gas supplies and stocks.

15. Industrial policy Research and technological development; competitive pricing and other sale 

conditions. 

16. Small- and medium-sized enterprises Interest subsidies for loans; taxation; and technological innovation.

17. Science and research General principles and research sectors.

18. Education and training Mutual recognition of diplomas, certificates, and other evidence of formal 

qualifications.

19. Telecommunications and information

 technologies

Policy on data processing; directive on competition in the markets for 

telecommunications services. 

20. Culture and audiovisual policy Resolution on electronic publishing and libraries.

21. Regional policy and coordination of structural

 instruments

Monitoring and coordination of regional state aid; aid for stricken regions; and 

community loans.

22. Environment Nuclear safety and radioactive waste; water protection and management; monitoring 

of atmospheric pollution; prevention of noise pollution; and chemicals, industrial risk, 

and biotechnology.

23. Consumers and health protection Consumer information; protection of economic interests; and protection of animals.

24. Cooperation in the fields of justice and home

 affairs

EU extradition procedures; cooperation to combat international organized crime.

25. Customs union Tariff types, quotas, and ceilings.

(continued)
Appendix III

Topics of Negotiation for EU Accession

Page 47 GAO/NSIAD-99-185 NATO Defense Spending and European Integration

a

The EU set aside chapter 31 to cover any major issues that arise during negotiations that were not 

covered in the preceding chapters.

Source: European Commission.

Chapter Examples

26. External relations European political cooperation; multilateral relations; and commercial policy.

27. Common foreign and security policy Regulation on the reduction of economic relations with the Federal Republic of 

Yugoslavia.

28. Financial control Decision conferring powers to carry out measures of control regarding EU revenue 

and expenditure.

29. Financial and budgetary provisions Impact on the EU budget of the accession. Arrangements for the collection of own 

resources.

30. Institutions Principles, objectives, and tasks of treaties.

31. Othera None identified as of June 1, 1999.
Page 48 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Appendix IV

Objectives, Scope, and Methodology ApenxIVdi

The Chairman and the Ranking Minority Member of the Subcommittee on 

Defense, Senate Committee on Appropriations, asked us to assess how the 

implementation of European EMU and the enlargement of the EU may 

affect our European allies’ ability to sustain or increase their defense 

budgets. To address this issue, we collected and analyzed information on 

(1) projected defense spending for several European countries, (2) 

budgetary effects of EMU implementation and EU enlargement, and (3) 

other significant factors that may affect countries’ ability to share in the 

costs of NATO over the long run. 

Our work focused on seven European countries: the four members of 

NATO with the largest defense budgets in Europe (Germany, France, Italy, 

and the United Kingdom) and the three newest members of NATO (Poland, 

Hungary, and the Czech Republic). We chose these countries because

(1) collectively they accounted for over 75 percent of the total gross 

domestic product (GDP) and defense spending by all European NATO 

members and (2) because they included all three newest members of 

NATO. We visited all of these countries except France, which is not part of 

NATO’s integrated military command. We also contacted officials at DOD, 

State, and Treasury. We also obtained access to the World Bank and 

International Monetary Fund (IMF) officials and analytical studies through 

the staffs of the U.S. members of their Boards of Executive Directors. The 

European governments in our study provided us access to reports and staff 

from a variety of ministries.

To determine levels and composition of defense spending in Europe, we 

interviewed and obtained data from officials in the U.S. government, NATO, 

EU applicant countries, current EU member countries, and academic and 

private sector institutions. During our visits to NATO countries, we 

discussed planned defense spending trends with officials from the 

ministries of defense, finance, and treasury; parliaments; national audit 

offices; U.S. embassies; and defense research institutes such as the 

International Institute for Strategic Studies in London, the Center for the 

Study of International Politics in Rome, and the Government Center for 

Strategic Studies in Warsaw. We also collected defense budget data and 

interviewed officials from the Central Intelligence Agency, the Defense 

Intelligence Agency, the National Defense University, and the Council on 

Foreign Relations. To determine past and present defense spending trends 

(1980-98) for the figures used in the report, we relied exclusively on NATO 

data and its definition of “defense expenditure.” NATO defense budget 

forecasts for NATO member countries are classified. To present 

unclassified information on future defense spending levels, we obtained 
Appendix IV

Objectives, Scope, and Methodology

Page 49 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

defense budget projections from the host countries, calculated yearly 

growth rates, and applied these growth rates to NATO’s 1998 spending level 

for each country. Similarly, for the composition of defense budgets and the 

breakout of these budgets into “personnel,” “equipment,” and “other,” we 

relied on NATO data for 1980-98. For future trends, we relied on budget 

projections from the countries. We applied growth rates for each of these 

categories, derived from the countries’ budgets, to NATO’s 1998 breakouts. 

We discussed our methodology with DOD officials, and they concurred 

with the logic of our approach.

To assess the consequences of EMU on defense spending, we collected and 

analyzed information on EMU’s effects on national budgets and economic 

growth from the U.S. Department of the Treasury, the Department of State, 

and the Department of Defense; the EU; the European Central Bank; EMU 

member countries; the World Bank; the IMF; and academic and private 

sector organizations. We met with officials from Germany and Italy to 

discuss how meeting EMU membership criteria has affected their national 

budgets. Within these countries, we obtained information and met with 

officials from the Central banks, the finance ministries, U.S. embassy staff, 

and academic institutions.

To examine the consequences of prospective EU enlargement on defense 

spending, we assessed how enlargement could affect national budgets and 

economic growth. We collected and analyzed information and interviewed 

officials from the U.S. government, the EU, applicant governments, current 

EU member governments, multilateral institutions, and academic 

institutions. We discussed the objectives and total costs of EU enlargement 

with officials at the Department of State, the World Bank, and the EU’s 

Council, Commission, and Parliament. To identify the potential impact of 

meeting EU membership criteria on the respective national budgets of 

current and applicant members, we interviewed officials and obtained 

information from ministries of finance and foreign affairs. In the applicant 

countries, we also met with officials from the national parliaments, EU 

integration offices, U.S. embassies, and local academic institutions.

To identify primary nondefense domestic budgetary trends and pressures, 

we met with officials from the U.S. government, current EU member 

countries, applicant member countries, multilateral organizations, and 

academic and private sector organizations. We obtained data and 

analytical studies and interviewed officials from the Organization for 

Economic Cooperation and Development, the World Bank, the IMF, and 

economic institutes, including PlanEcon. In the countries we visited, we 
Appendix IV

Objectives, Scope, and Methodology

Page 50 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

discussed the major areas of the domestic budget with officials from the 

Central banks and the ministries of finance, industry and trade, and labor 

and social affairs; U.S. embassies; and local academic institutions.

The information in this report concerning foreign laws and regulations 

does not reflect our independent legal analysis, but is based on interviews 

and secondary sources.

We performed our review from April 1998 to June 1999 in accordance with 

generally accepted government auditing standards.
Page 51 GAO/NSIAD-99-185 NATO: European Integration and Defense Spending

Appendix V

Comments From the Department of Defense ApenxVdi
Page 52 GAO/NSIAD-99-185 NATO Defense Spending and European Integration

Appendix VI

GAO Contacts and Staff Acknowledgements AppendxViI

GAO Contacts Harold J. Johnson, (202) 512-4128

Celia Thomas, (202) 512-8987

Acknowledgements In addition to those named above, Dave Maurer, Elizabeth Guran, Arturo

Holguin, Christian Hougen, Bruce Kutnick, and Jane Li made significant 

contributions to this report.

(711325) Lret
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