I presume there are many factors that have been taken into consideration, especially, if like me, you believe the UK has been punching above its weight for a few decades now.
We continue to spend large sums on the navy for example, to project some semblence of power overseas as well as a means of protecting our overseas interests such as the Falklands and Gibraltar.
I doubt Europe is now of all that much interest now and lets be honest, Germany and a few others have been getting away with downsizing for years.
Also at the end of the day I believe your last sentence above (see below) may well have a certain ring of truth to it.
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Maybe its because Britian is an island, and defending the continent is no longer planned for.
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We do of course, continue to maintain a nuclear deterrency capability.