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UNCLAS        BERLIN 03468

SIPDIS
CX2BERLN:
    ACTION: POL POLMIL
    INFO:   DAO DCM JIS PAO GA DAOBONN AMB ODC ECON CHRON
CXBERLIN:
    ACTION: POL POLMIL
    INFO:   DAO DCM JIS PAO GA DAOBONN AMB ODC ECON CHRON

DISSEMINATION: POLMIL
CHARGE: PROG

APPROVED: POL: JBAUMAN
DRAFTED: POL: TSCHULZ
CLEARED: DAO: TMCCANDLESS; POL: JRATHKE; POL: KKERO; ECON: DNEUMANN

VZCZCRLI504
RR RUEHC RUEHBSA RUEHBS RUEHZL
DE RUEHRL #3468/01 3450711
ZNR UUUUU ZZH
R 110711Z DEC 06
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC 6355
INFO RUEHBSA/NATO SUPPORT ACTIVITY BRUSSELS BE
RUEHBS/USEU BRUSSELS
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 003468 
 
SIPDIS 
 
BERLIN 3145 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: NATO GM
SUBJECT: Germany's FY 2007 Defense Budget: More Shadow than Light 
 
 
-------- 
Summary: 
-------- 
 
¶1. (U) The Bundestag approved a 472 million Euro increase of the MOD 
budget in FY 2007 on November 24, 2006.  This marginal increase 
follows a series of nominal cuts in defense spending and exemplifies 
the continued low priority for defense:  While the national budget 
will grow by 3.2 percent, defense spending will rise only by 1.9 
percent, well below expected inflation for the upcoming year. 
Although Chancellor Merkel in September expressed the view that 
Germany should spend more on defense, this sentiment has not been 
fully realized.  End Summary 
 
--------------- 
How Much Extra? 
--------------- 
 
¶2. (U) Compared to FY 06 the official budget will increase from 23.8 
billion to 28.4 billion Euros.  Of the additional 4.6 billion Euros, 
4.2 billion Euros amount to a technical transfer of pension 
appropriations to the MOD's budget -- meaning no net gain from this 
substantial pot.  The remaining 400 Euros million are devoted to the 
3 percent VAT increase (which will make procurement more expensive) 
and expenses associated with other out-of-area operations. 
 
--------------------------------------------- 
First Absolute MOD Budget Increase Since 2003 
--------------------------------------------- 
 
¶3. (U) The MOD's marginal budget increase gives it some breathing 
space to maintain its scheduled military transformation.  Many 
analysts believed the plan would have required substantial revisions 
if there had been no increases in defense spending.  Projections for 
the upcoming years are 28.7 billion Euros (FY 2008), 29.1 billion 
Euros (FY 2009) and 29.5 billion Euros (FY 2010). 
 
¶4. (U) Despite the current and projected increases, German defense 
spending will remain well below NATO's target of 2 percent GDP.  The 
MOD will have less flexibility than the increasing numbers might 
suggest because much of the increased out-year funding will go to 
existing large-ticket commitments such as the Eurofighter and the 
A400M. 
 
----------------------------------------- 
Good News: Internal Shifts Free Resources 
----------------------------------------- 
 
¶5. (U) Confronted with limited political support for increased 
defense spending, the MOD has been successfully refocusing its 
resources on the needs of the 21st century.  Defense investment was 
beefed up from 24.5 percent (5.9 billion Euros in 2001) to 26 
percent (6.5 billion Euros in 2007).  Operational expenditures have 
been reduced from more than 75 percent in 2001 to about 70 percent 
in FY 2007 by closing down excess military installations, downsizing 
obsolete and expensive military equipment (i.e. Germany's tank 
force) and cuts in civilian support staff. 
 
¶6. (U) New cooperation models with private contractors (joint 
ventures, outsourcing) resulted in further significant savings in 
operational expenditure. 
 
------------------------------------ 
Comment: Funding Crisis Not Over Yet 
------------------------------------ 
 
¶7. (U) Chancellor Merkel's expressed desire for Germany to spend 
more on defense in the long-term remains an aspiration.  Despite the 
increased focus on defense issues in foreign policy (reftel), the 
increase in defense spending will mainly be absorbed by the effects 
of the VAT increase, making it extremely difficult for the MOD to 
initiate or fund new projects. 
 
¶8. (U) Even if the MOD will be able to receive the anticipated 
out-year increases in defense spending in the 2007 fiscal plan, it 
will remain hard for the MOD to balance the books:  First, 
large-ticket procurement items will eat up large chunks of the MOD's 
investment budget, leaving little room to maneuver.  Second, an 
internal report by Inspector General Schneiderhan indicates that the 
MOD's projections of future operational expenditure might have to be 
corrected upwards.  Third, the MOD is already behind schedule in 
implementing its ambitious plan to reduce its civilian workforce in 
order to reflect cuts in military staff during the 1990s. Fourth, 
demands for increased Bundeswehr support in the fight against 
terrorism inside Germany could amount to an "unfunded mandate," 
since the MOD is unlikely to be compensated for its efforts.  All in 
all, Germany still faces considerable challenges in funding a modern 
military ready to take on the challenges of the 21st century.  End 
Comment 
 
TIMKEN, JR