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By Howard Wheeldon, Senior Strategist at BGC Partners

06 Jan 12. Smart defense with a new set of 21st century priorities may be the best way to describe the revamping of US defense strategy announced by President Obama yesterday. We may regard what came out of the Pentagon walls yesterday as a ground changing event that has implications not only for the US military establishment, the defense industry and the NATO alliance but for European politicians too. The enduring commitment of the US to NATO and European defence may be secure but Asia Pacific will soon come top of the list of priorities. Having policed the world for two generations America it seems is no longer prepared to take on a burden of responsibly that it believes should be better shared amongst its allies. The central message from yesterday will be interpreted as no more blank cheques, no more attempting to fight wars on two fronts at the same time unless absolutely necessary and no more policy based on outdated, outmoded ‘cold war’ strategy. A smaller US Army will emerge with far more effort and precious resources placed on the countering of terrorism, intelligence, surveillance, reconnaissance and of course, countering weapons of mass destruction. This is similar in many respects to recent UK policy in respect of defence except that for some reason we have chosen to leave the Army rather alone placing too much emphasis in cutting back on airpower and marine capability.

Future US defence strategy as outlined yesterday does make great sense. Of course there will inevitably be huge consequences of this ten year plan for those engaged in defense procurement and supply, for many individual States that will be hit by change and for those within the military who find themselves no longer required. Flanked by Defense Secretary Leon Panetta, the chief of defense plus glum faced leaders of each of the four military services President Obama laid out a future defense strategy that the majority would probably agree was long overdue.

In the US there are still votes in defense and President Obama took great care to tread the most perfect of lines possible – one that he hoped would correctly address future defense requirements and capability matched against reduced budgets, the current macro and deficit environment and overall economic outlook. Important too was the need to convince those who might so easily believe that this signal of change in military policy would mean that America was weakening its geo-political resolve. No, so and the Obama message was loud and clear not only in appeasing most concerns on Europe but also that internationally Asia Pacific combined with maintaining the power to deter the perceived nuclear ambitions of Iran, North Korea will remain the highest priorities.

With $500 billion of Pentagon cuts to be made over the next decade already mandated plus, because of failure of the Congressional Supercommittee to reach a deficit deal last November, automatic imposition expected for another $500bn of cuts that will we assume be due to come into force next January (unless something else emerges in terms of deficit plan agreement) there will be seen to be a $1 trillion cut in defence spending over a ten year period. As with all announced policy and spending changes the devil will be in the detail. Sadly there was no specific detail to be found within the Obama Pentagon speech to show where the proposed cuts will hit. What we do know however is what Defense Secretary Panetta had already said – Army personnel numbers are likely to be cut by 80,000 to 490,000 over the next decade. Because of this the expectation is that many military establishments will be closed.

Arguably the process of cuts in defense has already begun. For instance within the now agreed FY12 base budget of $531bn one notes that Army Procurement was 15% below what had been requested albeit some 3% above the agreed FY11 budget. A

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