Low Pound Could Constrain British Defense Spending

By Jenny Gross and Stephen Fidler Features Dow Jones Newswires

The sharp slide in the British pound's value against the dollar since the U.K. voted to leave the European Union could pose difficulties for Britain's defense budget, British Defense Secretary Michael Fallon said.

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"If that lower rate persists, then obviously that is a challenge," Mr. Fallon said in an interview.

"I don't know how permanent that is, but that is clearly a change" since Britain last reset its defense strategy in 2015, he added.

His comments came ahead of a trip to Washington in which he will meet with Defense Secretary Jim Mattis to discuss improving collaboration between the U.S. and the U.K. and to promote Britain as America's most dependable and highest-spending defense partner in Europe.

As the U.K. prepares to leave the EU, it has sought to strengthen ties with the U.S. in areas including defense, security and trade. While the slump in sterling since June 2016 has boosted exporters, it has also increased the cost of imports, such as dollar-denominated arms purchases from the U.S.

Britain has bought billions of dollars of equipment from U.S. manufacturers, including F-35 Joint Strike Fighters from Lockheed Martin Corp. and P-8 maritime patrol planes and AH-64E Apache attack helicopters from Boeing Co.

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The pound has slumped 14% against the dollar since June 2016, when the U.K. voted to leave the EU amid uncertainty about the effect of Brexit on trade and investment. The U.K. defense ministry has in the past said it hedged in the short term against the weakness in sterling ahead of the vote, but the currency's decline in sterling has put new projects in question.

A report published this week by the Royal United Services Institute, an independent think tank on defense and security, said the British military is facing an estimated GBP20 billion ($26 billion) "black hole" to plug, or about 5% of projected spending commitments over the next 10 years. The defense ministry will need more cash from the Treasury or will have to significantly curtail spending programs or forces, the report said.

Underscoring the close ties the U.K. government is seeking to foster with the Trump administration, Mr. Fallon defended Washington's decision to add troops in Afghanistan. He said former President Barack Obama's plan to cut troops there was wrong and praised the approach of President Donald Trump's administration.

Secretary of State Rex Tillerson's plans for Afghanistan came under criticism this week after a group of U.S. senators visiting Kabul, including Republican John McCain, said the lack of a clear strategy could undermine the expected surge of U.S. troops there.

Mr. Fallon said local forces needed the support of troops from the U.S. and the U.K., which will boost its troop numbers in Afghanistan to 550 troops over the summer. The U.S. currently has more than 8,500 troops in the country.

"It would've been a mistake to cut numbers as Obama was threatening last summer," Mr. Fallon said. "We've increased last summer, and we've increased again. We think what's important -- the lesson of Iraq -- is you support local forces and you supply the enablers that they simply don't have."

Mr. Fallon also said the West need to do more to cut North Korea off from the international finance system, after Pyongyang launched a ballistic missile with the capacity to reach the U.S.

"We need to make sure North Koreans are not accessing any part of the financial system that might contribute to the missile program," he said, adding the EU and other international organizations should consider putting new sanctions on North Korean individuals and entities and enforce current ones. "Clearly the sanctions are not yet biting sufficiently hard," he said.

The U.K. remains committed to the defense of Europe and won't try to use security as a bargaining chip in Brexit negotiations with the EU, Mr. Fallon said.

The defense secretary also announced the U.K. would host a summit with France in London in the fall to discuss security cooperation.

"This is our continent. We're going to go on defending it," Mr. Fallon said. "It just won't be in the EU context."

--Robert Wall contributed to this article.

(END) Dow Jones Newswires

July 05, 2017 15:09 ET (19:09 GMT)