By Adrian Croft and David Brunnstrom
LONDON/WASHINGTON (Reuters) - Defense spending cuts are putting an increasing strain on relations between the United States and its European allies in NATO, sharpening transatlantic battles over issues ranging from financing Afghan security forces to missile defense.
European governments have slashed defense budgets in response to the economic crisis. Coupled with U.S. plans to cut $487 billion of its own projected defense spending over the next decade and shift its focus toward Asia, this will limit NATO's capabilities and force it to scale back its ambitions.
With NATO leaders preparing to meet in Chicago on May 20-21 amid questions about the 63-year-old alliance's focus after Afghanistan, money - and the shortage of it - will be the thread running through the summit discussions.
The fact that the United States spends more than 4 percent of gross domestic product on defense while Europe spends less than 2 percent "is certainly a cause of considerable discord within the transatlantic alliance," said Michael O'Hanlon, a defense expert at Washington's Brookings Institution think tank.
The U.S. government is pressing reluctant European allies to offer up roughly one third of the estimated $4 billion annual cost of financing Afghan security forces after 2014, when most foreign combat troops will have left and the Afghan forces will be the main stabilizing factor in Afghanistan.
European countries are also facing pressure to contribute more to a system to protect NATO states from missile attack.
President Barack Obama, hosting the summit in his hometown in an election year, will stress the unity of the 28-nation alliance. But Washington's long-standing frustration at what it sees as Europeans shirking their duty to contribute more to their own defense is sure to grow.
Failure to get $1.3 billion in European funding for Afghan security forces could embarrass Obama at a summit expected to generate few concrete announcements.
To mitigate the effects of austerity, NATO leaders have been seeking to make progress on "smart defense" - making resources go further by encouraging NATO allies to share key capabilities.
In Chicago, the alliance will announce more than 20 cooperative initiatives ranging from sharing of maritime patrol aircraft, to logistics and helicopter maintenance.
Analysts say this will be little more than window dressing, focusing on projects that have been in the pipeline for years, or are already underway, and which deliver only modest savings given the continued reluctance of allies to divert work and jobs from their domestic defense industries.
"There is definitely going to be an effort to present things in the best light possible, but the fact remains that as soon as we are talking about more ambitious forms of defense cooperation, which require large budgetary investments, it's really hard to progress and it's going to remain so for the foreseeable future," said Clara O'Donnell, a visiting scholar at Brookings.
'COLLECTIVE MILITARY IRRELEVANCE'
U.S. frustration with European attitudes memorably boiled over last June when former Defense Secretary Robert Gates, in a parting shot at European allies, said NATO risked "collective military irrelevance" unless alliance members took action to reverse declining capabilities.
His successor as Pentagon chief, Leon Panetta, has been less openly critical.
However, with many European governments under pressure to rein in runaway budget deficits, cutting defense is often seen as a relatively easy option.
"Any government facing fiscal difficulties is more inclined to look at the defense budget rather than the welfare budget," said Adam Ward, director of studies at the International Institute for Strategic Studies think tank in London.
Countries hit by the euro crisis, such as Spain and Greece, are slashing spending while debt-laden Britain is cutting its defense budget by 8 percent in real terms over four years.
Germany is also cutting back. And defense experts expect France's new Socialist president, Francois Hollande, to implement significant cuts in a sector that had been shielded in recent years under his predecessor Nicolas Sarkozy.
O'Donnell said that, given its own budget woes, Washington wants to rely more on allies to take responsibility for their regions so the United States can reduce its involvement.
"What they are seeing instead is European capabilities dwindling even further," she said.
Europe's military shortcomings were laid bare during last year's war in Libya. The bombing campaign led by France and Britain depended on the United States for intelligence, surveillance, reconnaissance and aerial refueling, despite the U.S. wish to take a back seat in the operation.
"In theory, NATO's scale of ambitions hasn't changed but in practice it has," said Tomas Valasek, director of foreign policy and defense at the Centre for European Reform think tank in London. "I suspect we would not be willing and able to do the operations we conducted over the last 15 years because we have cut too much from our defense budgets."
Some NATO members are also reluctant to rely on others for critical capabilities or to share resources for fear they could lose access to vital equipment in times of crisis, a worry not eased when Germany refused to allow use of its air-surveillance aircraft over Libya last year.
NATO countries hope their gradual withdrawal from Afghanistan will ease pressure on defense budgets. But, given Afghanistan's precarious finances, NATO members will still be expected to help fund Afghan security forces after 2014.
The United States is hoping other NATO allies and partners will contribute one billion euros ($1.3 billion) a year, but so far only Britain has publicly pledged a specific amount of cash - 70 million pounds ($110 million) a year.
While NATO Secretary-General Anders Fogh Rasmussen is confident NATO allies will cough up their "fair share," he has also had to appeal to China and Russia to contribute.
Another potential area of friction between the United States and Europe is over the financing of an anti-missile shield.
A U.S. congressional panel demanded last month that European allies foot more of the bill for the multibillion-dollar shield being built to guard NATO members from missiles that might someday be able to carry nuclear warheads, notably from Iran.
Two years ago, Rasmussen put the cost of linking up NATO's missile defense systems at less than 200 million euros, a pittance compared with the billions of dollars the United States is investing in the system.
"If the major European contribution is that 200 million euros over 10 years, some congressmen are going to begin to ask, 'Where is the burden-sharing in missile defense?'" said Leo Michel of the Institute for National Strategic Studies at the U.S. National Defense University. "I don't think we've heard the last of the costs of missile defense."
(Editing by Warren Strobel and Will Dunham)