Europe Rearms: Racing to Build a War Machine

Executive Summary: The Future of EU Defense Spending

• Defense Austerity Ends: The EU has entered a new era of rearmament, nearly doubling defense budgets since 2014—reaching €326B in 2024—with accelerating investment in equipment, R&D, and domestic production spurred by the Ukraine war and fears of U.S. NATO withdrawal.
• Seismic Shift in Strategy: France, Germany, and Eastern European nations are leading the charge, surpassing NATO’s 2% GDP spending target and modernizing forces with F-35s, drones, cyber defense, and long-range munitions to close capability gaps.
• Industrial Awakening: EU-based defense giants like Rheinmetall, Thales, and Airbus are seeing explosive growth in capital investment, backlogs, and share prices, while venture capital is surging into defense tech startups specializing in AI, ISR, and robotics.
• Fiscal and Political Friction: Expansion faces headwinds from debt-constrained member states and a fragmented procurement system—only 22% of 2023 EU defense spending stayed within the bloc, raising alarms over strategic dependence and supply chain risk.
• From NATO Reliance to EU Readiness: With the specter of reduced U.S. support under Trump 2.0, the EU is racing to become a credible autonomous force—potentially spending €500–600B annually by 2030—to project power, secure its borders, and safeguard its sovereignty.

Introduction: The End of European Defense Austerity

Since the onset of the war in Ukraine, Europe has embarked on an unprecedented military buildup, with defense spending surging at a pace unseen since the Cold War. As geopolitical tensions heighten, the EU faces a pivotal moment in shaping its security strategy. Traditionally dependent on North Atlantic Treaty Organization (NATO) protection – largely enabled by high U.S. spending and military backing – the EU member states now face the threat of U.S. withdrawal. This puts the bloc under immense pressure to strengthen its own defense capabilities, through better EU-wide collaboration and increased defense spending.

Over the past decade, EU member states have nearly doubled their defense budgets, reaching €326 billion in 2024, with a growing share allocated to defense investment, particularly in equipment procurement and research and development (R&D). The war in Ukraine has further accelerated this trend, driving dramatic spending increases in recent years. However, these efforts still fall short of meeting the EU’s defense needs.

Despite recent progress, the EU barely meets NATO’s 2% GDP defense spending target. Nonetheless, the bloc has witnessed an unprecedented rise in defense budgets and more collaborative initiatives aimed at strengthening its military capabilities. While these efforts predate the Ukraine war, the conflict – combined with the prospect of a shifting U.S. stance on NATO under a Trump administration – has heightened urgency and reinforced the need for greater defense self-sufficiency. As the EU undergoes this major transformation, both its military strategy and the role of European defense companies are evolving significantly.

The growing importance of defense autonomy has also led to intensified discussions regarding a unified European defense policy. Some EU leaders advocate for a deeper integration of military forces, envisioning an EU army that could operate independently of NATO in certain scenarios. This ambition, however, remains controversial due to historical sovereignty concerns and logistical challenges associated with interoperability among national armed forces. Additionally, efforts to ramp up domestic defense production have gained momentum, with several European nations investing heavily in indigenous arms manufacturing to reduce reliance on U.S. and non-EU suppliers.

This article examines the historical trends and recent shifts in EU defense spending that are reshaping its military strategy, the emerging role of European defense companies, and the key challenges to further expanding the bloc’s defense capabilities.

The Current State of EU Defense Spending

From Decades of Underinvestment to Gradual Defense Revitalization

Over the past decade, EU member states nearly doubled their defense expenditure, rising from €147 billion in 2014 to €326 billion in 2024. Growth particularly picked up in 2017, averaging around 7% annually over 2017-2021, compared to an average of 2.7% between 2014 and 2016, and an average decline of -1.3% following the global financial crisis up to 2014. The conflict in Ukraine further spurred EU defense spending, with increases of 12% in 2022, and 16-17% in both 2023 and 2024. Defense investment, including equipment procurement and research and development (R&D) drove this surge, growing at an average of 14% between 2017 and 2022, before jumping by 24% in 2023 and an exceptional 42% in 2024. Consequently, the share of defense investment nearly doubled, rising from 16% of total defense expenditure in 2015 to over 30% in 2024 (Figure 1).

Figure 1 – Total EU Defense Expenditure and Investment, 2005-2024

Source: European Council

Nevertheless, despite such growth, EU defense spending as a share of GDP still lags behind the world’s major military powers. In 2023, the EU’s defense expenditure stood at 1.7% of GDP, placing it at the lower end among leading defense-spending nations (Figure 2).

Figure 2 – EU Defense Spending to GDP Compared to Other Nations, 2023

Source: Global X

Despite NATO’s 2014 commitment for members to allocate at least 2% of their GDP to defense spending, the EU consistently fell short of this target. It was only in 2024 that the 23 EU NATO countries came close, reaching 1.99% of their collective GDP (Figure 3).

Figure 3 – U.S. and NATO EU Defense Spending to GDP, 2014-2024

Source: NATO and European Council

Between 2014 and 2024, only two European countries succeeded in annually meeting their 2% of GDP NATO target – Greece and the United Kingdom (the latter no longer an EU member). In 2024, following a growth rate of almost 19% in spending, 16 NATO EU allies met or surpassed the 2% of GDP target. The top spenders were Poland (4.1%) and Estonia (3.4%), both surpassing even the United States (3.38%), followed closely by Latvia (3.2%), Greece (3.1%), and Lithuania (2.9%). On the other hand, countries including Spain, Slovenia, Luxembourg, Belgium, Italy, Portugal, and Croatia had the lowest defense budgets, all failing to meet the 2% NATO target (Figure 4).

Figure 4 – NATO EU Member States’ Defense Spending to GDP, 2024

Source: NATO

Before the collapse of the Soviet Union, European NATO members collectively spent around 3-4% of their GDP on defense. However, after the Cold War ended, defense budgets dropped significantly as many European nations prioritized economic growth, redirecting resources to more productive economic sectors and social welfare – a privilege that was known as the “peace dividend”.

This decline was largely enabled by their NATO membership and increasing U.S. defense spending, which averaged 3.4% of GDP between 2014 and 2023. Moreover, the U.S. is a large contributor to Europe’s defense, providing troops, equipment, and infrastructure investments. With over 100,000 troops stationed across Europe, the U.S. maintains a strong presence, particularly in Germany, Italy, Spain and Belgium, which ranked among the top 10 countries with US overseas troop deployments in 2024 (Figure 5).

Figure 5 – Top 10 Countries with US Troop Deployments, 2024

Source: World Population Review

Recent Increases in Military Budgets

In response to growing security challenges, several EU nations are reassessing their budgets to increase defense spending, with France, Germany, and Poland at the forefront.

France: Expanding Commitments Under the Military Programming Act

President Emmanuel Macron has placed France at the center of the EU’s defense spending ambitions, with the 2024-2030 Military Programming Act (LPM) allocating €413.3 billion for military budgets and investments – representing a 40% increase from the €295 billion allocated in the 2019-2025 LPM. This substantial investment will add €25 billion to France’s defense budget by 2030, raising it to approximately €70 billion. This increase will enable France to meet its NATO 2% of GDP target between 2025 and 2027.

Moreover, the new LPM will enable nearly €400 billion of military investments, including:

• €49 billion: for maintenance and conditional operations
• €16 billion: for munitions (e.g., modernizing long-range anti-ship missiles, F321 heavy torpedoes, new surface-to-air and air-to-air interceptors)
• €13 billion: for overseas capabilities and initiatives
• €10 billion: for innovative technology investments (e.g., swarming drones, robotic capabilities, directed energy technology)
• €6 billion: space domain
• €5 billion each: for (1) surface-to-air defense capabilities; (2) intelligence and counterintelligence; in addition to (3) drones, unmanned systems, and remotely operated munitions
• €4 billion: for cyber defense.

France’s approach also emphasizes strengthening its domestic defense industry, reducing reliance on external suppliers, and fostering European collaboration. With major defense companies like Dassault Aviation, MBDA, and Thales playing a critical role, France is leading the development of next-generation fighter jets and missile defense systems. Additionally, France’s nuclear deterrent remains a key strategic priority, with investments allocated to modernizing its submarine and airborne nuclear forces.

Germany: “Zeitenwende” Special Fund and Increasing Budgetary Allocations

In response to Russia’s 2022 invasion of Ukraine, German Chancellor Olaf Scholz announced the “Zeitenwende” policy – meaning “turning point” – In 2022, marking a historic shift in Germany’s defense strategy. This initiative included a €100 billion special fund dedicated to modernizing and upgrading the Bundeswehr (German military). Additionally, Scholz committed to meeting NATO’s 2% of GDP defense spending target, which Germany achieved for the first time in 2024 since the 2014 agreement.

Although in 2024, the Bundeswehr was allocated only €51.8 billion in defense budget, which fell short of the 2% NATO target, the support from the Zeitenwende special fund bridged the gap, bringing total defense spending to 2.1% of its GDP. TheZeitenwende special fund is expected to enable Germany to achieve NATO’s target until 2028. Beyond that, unless a new fund is introduced, the defense budget needs to increase to at least €80 billion for Germany to maintain its 2% commitment.

Looking ahead, Friedrich Merz, the projected German Chancellor for 2025, has asserted that he could meet NATO’s target through the regular budgetary allocations, without relying on new special funds. In March 2025, Merz secured a parliamentary vote that allowed for a significant increase in state borrowing to boost military spending, bringing him a step closer to fulfilling his claims. This vote would exempt security expenditures exceeding 1% of GDP from the debt brake, effectively enabling a potentially unlimited defense budget.

Germany has also prioritized enhancing its military logistics and rapid deployment capabilities. With its central location in Europe, Berlin is investing in expanding transport infrastructure to facilitate NATO troop movements, reinforcing its role as a key logistics hub for European security. Furthermore, Germany is increasing collaboration with partners like the Netherlands and Norway in developing advanced missile defense systems and maritime security strategies.

Eastern Europe: Leading on Exceeding the 2% NATO Target

EU countries closest to Russia and Ukraine have responded to the war with sharp increases in defense spending, surpassing their Western counterparts and, in some cases, even outpacing U.S. expenditures. Notable examples include Poland, Estonia, Latvia, and Lithuania, which all increased their defense budgets to over 2% of GDP in 2024 (Figure 6).

Figure 6 – EU Countries with Highest Defense Spending to GDP in 2024

Source: NATO

Poland, in particular, has led this surge, doubling its defense budget in real terms between 2022 and 2024 to reach 4.1% of its GDP – amounting to €27 billion – with plans to raise it further to 4.7% by 2025. As a country that shares borders with both Russia and Ukraine, Poland is making massive investments to modernize its military through the Homeland Defense Act, which aims to double its armed forces to 250,000 professional soldiers and 50,000 territorials. The country is also upgrading its aging F-16 fleet and modernizing its air force with new F-35 jets and FA-50 light fighters. By 2024, Poland had the largest military in Europe and the third largest in NATO, following the U.S. and Turkey (Figure 7).

Figure 7 – Military Personnel in NATO Countries, 2024 (in thousands)

Source: Notes from Poland, based on NATO Estimates

The Czech Republic has also seen a remarkable 58% real increase in its defense budget over the past two years, reaching €4.5 billion – or 2.1% of GDP – in 2024, surpassing the NATO target for the first time, with plans to reach 2.3% of GDP in 2024. This surge in spending is part of the country’s broader military modernization efforts, which include major purchases of F-35 fighter jets and Leopard 2 tanks.

Two other notable cases are Estonia and Latvia, which saw defense budget increases of over 50% during the same period, despite their small economies. In 2024, they allocated 3.4% and 3.2% of their GDP, respectively, to defense – ranking among the top four NATO countries by defense spending as a share of GDP. While Estonia has been investing heavily in cyber defense, Latvia has been using the money to train its troops and upgrade its military hardware.

Key Forces Driving the EU’s Defense Strategy and Spending Surge: From the Ukraine War to Trump’s NATO Stance

It is becoming undeniable that the EU’s peace dividend – which enabled member states to underinvest in defense for years – is rapidly diminishing. Several key factors are driving this shift, including:

• The shifting global landscape and the emergence of long-term security concerns. These include Russia’s continued aggression in Europe, the possibility of a wide-spread war in the Middle East, the increasing US-China conflict, and the heightened cybersecurity threats.
• The EU’s inability to produce basic military equipment at the necessary scale and speed has prompted a reassessment of its defense industry. Struggling with, among others, limited ammunition supplies and intelligence, surveillance, and reconnaissance (ISR) capabilities.
• The push for European defense independence: With growing concerns over a potential U.S. troop withdrawal, the urgency for strategic autonomy had intensified. France, Germany, and Poland are expected to play key roles in bolstering Europe’s defense capabilities.
• Growing pressure to meet – and even exceed – the long-neglected 2% of GDP NATO defense spending target. This urgency is driven by escalating security threats, the push for greater strategic autonomy, and the need to bolster the EU’s military capabilities, in addition to criticism from the U.S. administration and calls to even raise the target to nearly 5% of GDP.

In particular, the war in Ukraine served as a wake-up call for Europe, exposing critical weaknesses in its defense capabilities, revealing significant gaps in military readiness, weapons production, and strategic coordination across the continent. This was evident, for example, in its failure to meet the commitment to supply one million 155mm ammunition rounds to Ukraine between March 2023 and 2024, delivering only half the promised amount by the agreed date, and reaching the target six months late. Additionally, the EU has faced delays in producing critical strategic capabilities, such as battle tanks, forcing it to rely on external suppliers like South Korea for rapid delivery.

At the same time, the EU has had to contend with the new U.S. administration and the potential for a reduced U.S. military commitment to NATO, or even a possible withdrawal. Since taking office, President Donald Trump has repeatedly criticized the EU for its low contributions to NATO’s burden-sharing, warning that the U.S. may withhold protection from allies that fail to meet their financial commitments.

All these factors have driven the EU to prioritize greater defense self-sufficiency and to seek more collaborative action. As stated by Josep Borrell, the former High Representative of the European Union for Foreign Affairs and Security Policy, “This crisis made it even clearer that we live in a world shaped by raw power politics, where everything is weaponized and where we face a fierce battle of narratives. All these trends were already happening before the Ukraine war; now they are accelerating. This means that our response must accelerate too – and it has.” 

With these realities in mind, the European Council has begun reassessing its long-term security doctrine, emphasizing the importance of resilience in both conventional and hybrid warfare. This includes fortifying critical infrastructure against cyber threats, expanding energy security initiatives to reduce reliance on foreign adversaries, and developing rapid-response mechanisms to counter emerging threats. Moving forward, the EU’s defense trajectory will likely be defined by a combination of increased spending, industrial coordination, and a more assertive geopolitical stance to safeguard its interests in an increasingly volatile world.

The Growing Focus on Collaborative European Defense Spending

The shift in political sentiment led to greater emphasis on defense investments and capacity building. In 2022, the EU adopted the “Strategic Compass” for security and defense, providing a shared assessment of the strategic landscape and outlining concrete actions across four key areas: (1) Acting more quickly and decisively when facing crises, (2) Securing citizens against fast-changing threats; (3) Investing in the capabilities and technologies needed; and (4) Partnering with others to achieve common goals. The plan aimed to enhance crisis response by developing a 5000-troop rapid deployment capacity, increasing force readiness through live training, improving command and decision-making, countering cyber threats and disinformation, and advancing next-generation defense capabilities.

Moreover, In 2023, the European Commission launched the Act in Support of Ammunition Production (ASAP) to accelerate ammunition production, replenish stocks across EU member states, and supply Ukraine amid anticipated supply chain shortages. In 2024, the program was awarded €500 million, targeting five key areas: explosives (€124 million), powder (€248 million), shells (€90 million), missiles (€50 million), and testing (€2 million).

Despite these efforts, some defense analysts argue that the funding allocated to ASAP falls significantly short of the actual needs of European militaries, particularly given the protracted nature of the Ukraine conflict. As a result, policymakers are exploring additional funding mechanisms, such as public-private partnerships and defense bonds, to further expand ammunition stockpiles and secure supply chains against future disruptions.

More recently, the European Commission unveiled a proposed plan – the “ReArm Europe Plan” – that could mobilize an additional €800 billion to accelerate defense spending across the EU member states, over the period of four years.

• First, the plan proposes establishing a new financial instrument – the Security and Action for Europe (SAFE) – to raise €150 billion in capital markets. This pan-European fund would provide loans to EU member states to strengthen their defense capabilities, with funding contingent on at least 65% of total costs being sourced from within the EU or Ukraine, ensuring support for the European defense industry while enhancing military readiness.
• Second, the proposal would grant EU member states greater flexibility in using public funds to boost national defense spending, by triggering an emergency “escape clause” to bypass these EU’s limiting fiscal rules (which cap public deficit and debt at 3% and 60% of GDP, respectively). It is estimated that if EU countries were to increase defense expenditure by an average of 1.5% of GDP annually, this could create fiscal space for an additional €650 billion in defense funding over a period of four years. However, several EU states, including France and Italy, have rejected the plan, arguing that it could further strain their already high debt burdens.

Beyond financial mechanisms, the ReArm Europe Plan also emphasizes the need to reform EU procurement processes to ensure greater efficiency and transparency. Defense analysts have long criticized the fragmented nature of European procurement, which often results in duplication of efforts and inefficient allocation of resources. The new plan proposes streamlining the acquisition process and prioritizing joint procurement initiatives to maximize economies of scale.

In 2024, the EU published its first-ever European Defense Industrial Strategy (EDIS), outlining a long-term vision to boost industrial readiness across the bloc by encouraging member states to invest more collectively and with a European focus. The strategy seeks to enhance the EU’s defense readiness by fostering collaborative, EU-based investment, R&D, production, and procurement. The strategy builds on existing initiatives, such as: the Capability Development Plan (CDP), which identifies strategic defense priorities and gaps; the Coordinated Annual Review on Defense (CARD), which facilitates the annual coordination of national defense spending; and the Permanent Structured Cooperation (PESCO), which provides a framework for collaborative defense projects and military integration. By 2030, EDIS aims for 50% of the EU’s defense procurement budget to be spent within Europe, at least 40% of defense equipment to be purchased collaboratively, and at least 35% of defense goods to be traded within the bloc.

Additionally, the EU has worked on expanding past initiatives that were enacted prior to the start of the Ukraine war. Those include:

• The European Defense Fund (EDF), which was established in 2021 to support R&D in defense, boost defense capabilities and help EU companies to develop cutting-edge and interoperable defense technologies and equipment. Following the recent geopolitical shifts, the EDF has refocused its priorities in the wake of the war in Ukraine to strengthen military capabilities by advancing defense technologies, including air defense capabilities, missile systems, tanks, and ammunition. Notable awarded initiatives include projects for space-based early warning systems to detect missiles, adaptive camouflage systems for soldiers and vehicles, enhanced naval surveillance, and the development of semi-autonomous surface vessels.
• The Common Security and Defense Policy (CSDP), which was established in 2003 to strengthen the EU’s collective defense capabilities and deployment of military or civilian operations across Europe. The CSDP has expanded its operations significantly since the start of the war. Notably, since 2022, it has undertaken a mission to train over 70,000 Ukrainian military personnel.

Projected Future EU Defense Spending

Budget Projections for 2025-2030

According to the European Council, defense expenditure by the 23 NATO EU member states is expected to reach 2.04% of their collective GDP in 2025, slightly above the committed target. The Council expects defense expenditure to further increase by over €100 billion in real terms by 2027. In addition, a recent analysis by Goldman Sachs projects that the EU’s annual expenditure on defense will gradually increase, to reach an additional €80 billion by 2027. If we use those estimates and work from the 2024 published figures, we can project that by 2027, EU defense spending will be in the range of roughly €400-430 billion, exceeding 2.4% of its GDP.

Fitch Ratings predicts that, of the €800 billion proposed by the EU Commission under the ReArm Europe Plan, member states will likely spend around €500 billion on defense through 2030. Additionally, according to an analysis by the Kiel Institute for the World Economy, if the U.S. were to withdraw its defense support from Europe, the EU would need to substantially increase its military spending. Replacing U.S. contributions would require an additional 0.12% of GDP annually, a feasible adjustment; however, true self-sufficiency would demand major investments in Europe’s military-industrial base. To offset the absence of U.S. forces, Europe would need to expand its fighting capacity by the equivalent of 300,000 U.S. troops, prioritizing mechanized and armored units to replace U.S. heavy forces. Additionally, ensuring long-term protection for Ukraine and deterring Russia’s military buildup would require a €250 billion annual increase in defense spending, bringing total EU defense expenditure to 3.5% of GDP.

Based on all the above assumptions, Figure 8 below provides a rough approximation of the projected value of EU defense expenditure. Putting all those estimates together and building up from the €326 defense spending value in 2024, it is projected that spending will reach €400-430 billion by 2027 and €500-600 by 2030.

Figure 8 – Projected EU Defense Spending Up to 2030

Source: Author’s calculations, based on estimates from European Council, Goldman Sachs, Fitch, and Kiel Institute for the World Economy

How Will the Additional Funds Be Spent?

The EU faces significant capability gaps in several areas, including air and missile defense, artillery, ammunition and missiles, drone and counter-drone systems, military mobility, and advanced technologies like AI, quantum computing, and electronic warfare, as well as strategic enablers. In a recent white paper on the EU’s defense readiness by 2030, the European Commission identified seven priority investment areas to address capability gaps of member states:

1. Integrated Air and missile defense: to counter a broad range of aerial threats, including cruise missiles, ballistic and hypersonic missiles, aircraft, and unmanned systems.
2. Modern Artillery systems: for deep precision strike.
3. Ammunition and missiles: to establish a strategic reserve of ammunition, missiles, and components, and ensure strong defense production capacity for rapid replenishment.
4. Drones and counter-drone systems: to enhance capabilities such as situation awareness and surveillance
5. An EU-Wide Network for Military Mobility: including land corridors, airports, seaports and support elements and services, to enable the efficient transport of troops and military equipment throughout the EU and partner countries.
6. EU-wide advanced electronic systems through AI, Quantum, Cyber & Electronic Warfare: to secure unrestricted use of the electromagnetic spectrum for all military domains and to deny its use to adversaries, while also ensuring freedom of operation in cyberspace.
7. Strategic enablers and critical infrastructure protection: including strategic airlift and air-to-air refueling aircraft, intelligence and surveillance assets, maritime domain awareness systems, secure space and communications capabilities, and robust military fuel infrastructure.

Implications of the Transformation for European Defense Companies

Key Beneficiaries of Increased Defense Budgets

As EU member states expand their defense budgets, industry players are poised to benefit, with major companies at the forefront of sectors such as ammunition, air defenses, aerospace, cybersecurity, next generation AI solutions, drones, heavy armor, and long-range strike munitions. Since 2021, the top 10 European defense firms have increased their capital investments by nearly two-thirds, reaching $5.5 billion in 2024, which is projected to hit $6.4 billion by 2027 (Figure 9). Order backlogs at those companies have grown over 1.5 times from $222 billion in 2021 to $362 billion in 2024, with their total workforce expanding by nearly 25%.

Figure 9 – Top 10 Defense Companies’ Capital Expenditure, $billion

Source: The Economist

Rheinmetall, the German defense and automotive company, is expected to be at the center of this transformation as the company’s defense division drives its growth. Rheinmetall produces tanks, autonomous military vehicles, air defense systems, and is the top NATO supplier of 155mm artillery shells. In 2023, Rheinmetall led the FEDERATES consortium – or the “Federated Ecosystem of European Simulation Assets for Training and Decision Support” – a coordinated initiative, which also brought together other European companies in the field: Thales (France), Leonardo (Italy), Indra Sistemas (Spain), and HM EI (Hungary). FEDERATES received a €30 million fund from the EU to build a next generation distributed synthetic simulation environment for the preparation and qualification of member state troops.

With its growing contribution to next-generation defense solutions,  including in the fields of robotics, drones, and AI solutions, Rheinmetall has been referred to as the “Nivida of defense”. With the surge in EU defense spending, catering to increasing demand, Rheinmetall is expected to expand its ammunition production (predicted to increase by 50% by 2027, to reach 1.1 million rounds) and expand its facilities within Germany and across other EU countries (Lithuania, Romania, and Ukraine). Moreover, the company is expected to significantly develop its product mix beyond traditional hardware, with investments already channeled into AI-powered battlefield software, mobile air defense, and drone and counter drone systems. In 2025, the company signed its largest-ever framework deal with the German Armed Forces to digitize infantry systems, worth up to €3.1 billion, which will run until 2030.

Market trends already forecast robust growth for European defense companies, with statistics showing that even before Trump’s election, European firms were outpacing their U.S. counterparts. Rheinmetall is one company that has exhibited significant market gains, with its shares rising from just over €1,000 to €1,150 on February 28, 2025, following the clash between Trump and Ukrainian President Volodymyr Zelensky – an indicator of its anticipated expansion (Figure 10).

Figure 10 – Rheinmetall’s Share Value Jump on February 28, 2025 (Google Finance Screenshot)

Source: Radio France International (FRI)

Thales, a French giant and leading defense electronics firm that specializes in aerospace, missile systems and military technology,is expected to witness a significant surge in deals by 2026-2027, on the back of the EU’s expanded defense spending. The planned enhancement of military capabilities is projected to be a major “growth driver” for the company, mentioned its CEO Patrice Caine. The EU transformation will necessitate enhancement in electronic warfare systems, air defense, cyber warfare and missile defense technologies, which will create massive opportunities for the company.

In 2023, Thales acquired Imperva, becoming a global leader in cybersecurity. In 2025, the company’s UK subsidiary was awarded a £250 million contract from the UK Ministry of Defense to upgrade, maintain, and support the communications systems of the Royal Navy fleet. Moreover, it recently signed a contract with the Dutch government to supply a high-performance sonar and acoustics suite for the Royal Netherlands Navy fleet.

As an indicator of its projected business growth, the company’s share price rose by approximately 50% from the start of the Russian invasion through 2024 (Figure 11).

Figure 11 – Thales SA’s Share Value Growth Over the Past 5 Years (Google Finance Screenshot)

Source: Radio France International (FRI)

Airbus Defense and Space, the military arm of the European (of German origin) Aerospace company, is in discussions with various EU nations on new defense and space deals, to build the readiness of the European military. The company is an R&D pioneer in the sector, with growing satellite-based ISR and AI-powered defense applications. Airbus has been leading the EU’s initiative to coordinatefour defense R&D projects, worth a total funding of €40.7 million. The projects are intended to advance next-generation technologies and drive innovation in key defense areas, including ground, naval, air combat, space-based early warning, and cyber. The company is also leading the French-Spanish-German “Future Combat Air System (FCAS)” to develop a next-generation fighter jet weapon system, with new-generation fighters and drones. Airbus has also partnered with NeuralAgent, a startup, to include cutting-edge AI technology. Very recently, Airbus has signed a four-year contract with the Dutch Ministry of Defense, to benefit from the company’s OneAtlas Satellite data platform, allowing access to optical, radar, and elevation data.

Eutelsat, the French satellite operator and the world’s third largest by revenue, is positioning itself for significant business growth as it leads efforts to replace the U.S. Starlink network in Ukraine. Since the onset of the war, the Ukrainian military has depended on Elon Musk’s Starlink satellite network for battlefield communications. Following the change in the U.S. policy stance and talks around cutting Ukraine’s access to Starlink, Eutelsat’s share prices more than tripled in just two days, boosting its market capitalization by over €1 billion, according to CEO Eva Berneke. “Strong communications capabilities are a key element of modern warfare,” stated Berneke, noting that talks to replace Starlink with Eutelsat’s OneWeb satellite network “have intensified.”

Implications for Venture Capital and Defense Startups

Amid growing geopolitical instability, private investment in defense has surged in recent years. In 2024, European private investment in defense, security, and resilience increased by 24% year-on-year, with venture capital (VC) funding reaching $5.2 billion (Figure 12).

Figure 12 – VC Investment in European Deep Tech Defense, Security, & Resilience Startups, 2024

Source: NATO Innovation Fund and dealroom.co

The growth of VC in the defense, security, and resilience sector was particularly notable, as it grew faster than most other segments in Europe. Defense emerged as a top investor priority, ranking the third fastest growing over the past year and the fastest over the last two years, defying a broader decline in VC funding across most other industries (Figure 13).

Figure 13 – Comparison of VC Funding Growth by Selected Sectors in Europe

Source: NATO Innovation Fund and dealroom.co

Startups had a big role to play in this increase. While traditionally governments and large corporations used to dominate the military technology sector, we are now witnessing the introduction of new revolutionary innovations provided by a growing wave of young startups. According to McKinsey, European defense tech startups have increased more than five times between 2021 to 2024, compared to the previous 3 years. Moreover, the number of venture capital investments is growing. The conflict in Ukraine has demonstrated the strategic value of technological innovations in building defense readiness, with drones, cybersecurity, high-speed information dissemination, and electronic warfare playing crucial roles. Major superstars in the field of Defense Teck are expanding in the areas of:

• AI, Software Solutions, and military analytics: including companies such as Helsing (Germany and France) and Comand (France), which specialize in the integration of AI into drones, real-time analysis of sensor data, enhancing capabilities (e.g., target detection and resistance to electronic jamming), and improving the efficiency of military planning.
• Robotics and Unmanned Aerial Vehicles (UAVs, aka drones): including companies such as Tekever (Portugal), ARX Robotics (Ukraine), and Quantum Systems GmbH (Germany), which manufacture military-grade UAVs that focus on real-time threat detection and ISR.
• Geospatial Intelligence and Simulation: Blackshark.ai (Austria) is one notable startup that excels in high-speed, low-computational-cost change detection and creates highly accurate, scalable 3D digital twins of the planet by processing satellite and aerial imagery.
• Advanced Materials and Supply Chain Resilience: For example, ICOMAT (UK), which designs and manufactures ultra-light composite structures, mostly using carbon fiber, for lighter, lower-cost, and more sustainable components for aerospace and automotive industries.
• Quantum Technologies: For example, eleQtron GmbH (Germany), which develops and operates quantum computing solutions for military logistics.
• Cybersecurity startups: One example is Zynap (Spain), which leverages next-generation AI to simulate cyber threat tactics, proactively fighting cybercrime.

Challenges to EU Defense Expansion

Europe’s efforts to expand its defense capabilities are hampered by several challenges, including on the political, economic, and industrial fronts.

Politically, the major barrier to faster European defense expansion is the limited level of cooperation within the bloc. To a degree, the lack of cooperation has been driven by the EU’s strategic divergences. According to the European Defense Agency (EDA), military collaboration in the EU has notably declined over the past decade. Despite rising national defense expenditures, efforts to boost overall capabilities remain fragmented as member states are focusing on their individual security needs rather than collective objectives. In 2020, cooperative equipment spending accounted for only 11% of total equipment procurement expenditure – well below the EU’s 35% target – and collaborative R&D investment dropped to 6% of total R&D spending – short of the EU’s 20% target (Figure 14). While recent figures have shown an increase, these improvements were mostly attributed to better reporting by countries rather than enhanced collaboration.

Figure 14 – Shares of EU Collaborative Defense Equipment Procurement and R&D

Source: EDA Defense Data 2022 and Center for Strategic & International Studies

According to the European Parliament, defense equipment procurement and sourcing are largely shaped by each Member State’s unique needs and strategic objectives, rather than through a coordinated EU-wide approach. Between 2005 and 2022, around 29% of the EU’s defense equipment spending was sourced domestically, one-third came from other EU member states, and 37% was sourced from non-EU countries. This trend has even worsened in recent years. Between 2022 and 2023, nearly 78% of EU defense acquisitions came from outside the bloc, with the U.S. alone accounting for 63%.

The reliance on external suppliers has not only raised concerns about strategic autonomy but also exposed the EU to potential supply chain disruptions and geopolitical leverage by non-EU suppliers. The need to shift towards greater self-reliance is increasingly being recognized, prompting discussions on creating joint European defense production facilities, standardizing procurement procedures, and implementing long-term investment plans for indigenous defense capabilities.

This fragmentation has led to efficiency losses, as the lack of harmonization results in multiple, significant price variability for identical equipment across member states and non-interoperable systems – such as the 19 different types of main battle tanks or the 28 152/155mm howitzers, compared to only one and two, respectively, in the U.S. (Figure 15).

Figure 15 – Europe’s Fragmented Landscape of In-Service Weapons Systems

Source: McKinsey

On the Economic side, strained public finances have been a key constraint to expanding defense budgets. To maintain economic stability and fiscal discipline, the EU requires its member states to maintain an annual fiscal deficit below 3% of GDP and public debt below 60% of GDP. Nevertheless, as of 2023, 10 EU countries had fiscal deficits above the 3% mandate, and 13 countries breached their debt rule, with five countries having debt-to-GDP ratios of over 100%. Italy, Hungary, Romania, France, and Poland were among the countries with the highest fiscal deficits, while Greece, Italy, France, Spain, and Belgium held the highest debt values in proportion to their GDP (Figure 16).

Figure 16 – EU Countries Breaching the 3% Deficit and 60% Debt Fiscal Rules, 2023

Source: Eurostat

According to Fitch Ratings, achieving the 3% deficit target across all EU nations in the medium term remains highly unlikely, with rising defense spending further exacerbating fiscal pressures. While a significant increase in defense budgets could potentially stimulate economic growth, its impact remains uncertain, particularly given the EU’s limited defense industry capacity and heavy reliance on imported military equipment.

This brings us to another key challenge, which is the European industrial and supply chain constraints. Today, on its own, the EU defense industry is still incapable of producing the necessary defense systems and equipment at the speed and quantities that are needed by member states. Collectively, the U.S. and Europe have the capacity to produce no more than 1.2 million artillery munitions for Ukraine per year, less than half the 3 million produced by Russia. Moreover, since the onset of the Ukraine war through June 2023, over three quarters of the EU’s defense procurement came from non-EU sources, with almost two thirds from the U.S.

Additionally, despite increased political rhetoric supporting a stronger defense posture, many EU governments are constrained by domestic economic concerns, such as inflationary pressures, social welfare obligations, and aging populations. The need to balance national security with economic stability has led some member states to adopt more cautious approaches to defense spending, prioritizing short-term fiscal sustainability over long-term military preparedness. This trade-off continues to shape policy debates across the EU, as governments seek innovative ways to fund their defense ambitions without jeopardizing broader economic objectives.

Also, securing the raw materials essential for Europe’s military production – such as semiconductors and critical metals like titanium, tungsten, and rare earth elements – relies heavily on external suppliers from regions including China, Russia, and Africa (Figure 17). Geopolitical tensions in regions such as the Democratic Republic of Congo and Mozambique, Russia, and China threaten the efficiency of supply chains and pose significant risks.

To mitigate these risks, the EU has begun exploring strategic stockpiling initiatives and diversification of supply sources. This includes forming new trade agreements with resource-rich nations, investing in domestic mining and refining capabilities, and fostering partnerships with allied nations outside traditional supply chains. However, the transition toward greater raw material self-sufficiency is a long-term endeavor that requires coordinated policy action, substantial capital investment, and technological advancements in resource extraction and recycling processes.

Figure 17 – EU Imports of Metals for Defense Production, 2024

The Future: A More Militarized and Self-Sufficient Europe

In recent years, the European Union has significantly ramped up its defense spending after decades of underinvestment. However, these efforts remain inadequate in the face of escalating geopolitical tensions, particularly the ongoing war in Ukraine and a potential shift in the U.S. stance on NATO. The urgency for stronger and more responsive defense capabilities has never been greater, as Europe seeks to reinforce its security amid growing external threats.

Expanding defense spending, however, comes with significant challenges. Europe’s defense industry faces critical production and supply chain constraints that limit both the speed and scale of military system manufacturing. Many EU countries continue to rely heavily on non-EU sources for defense procurement and essential raw materials, increasing their vulnerability to external disruptions. Moreover, several EU countries struggle with strained public finances and high public debts, limiting their fiscal space to expand defense spending.

Given these realities, policymakers are now emphasizing a dual approach: enhancing short-term defense capabilities while simultaneously laying the groundwork for long-term self-sufficiency. This includes increasing domestic production capacity, fostering technological innovation, and improving workforce readiness in defense-related industries. Additionally, there is a growing recognition that sustainable defense expansion must be accompanied by broader economic resilience measures, such as strengthening public-private partnerships, incentivizing investment in military R&D, and developing new financial instruments to support defense initiatives.

Amid all these obstacles, there is an urgent need for greater defense collaboration across the EU. Deeper integration among member states would enhance collective bargaining power, reduce inefficiencies caused by fragmented procurement strategies, and ensure interoperability among national armed forces. A unified approach is essential, particularly given the current limitations of Europe’s defense industry and the pressing need to scale up production capacity. Strengthening EU-wide cooperation could also reduce duplication in military spending and promote the joint development of advanced defense technologies.

Looking ahead, increasing defense expenditure is not just about responding to the immediate crisis in Ukraine, but rather a long-term strategic imperative to safeguard Europe’s security and autonomy in an increasingly volatile world. A more militarized and self-sufficient Europe will be better positioned to deter external threats, reduce dependence on foreign allies, and assert greater control over its defense future. As the EU navigates this complex transformation, balancing fiscal discipline with security priorities will be critical in building defense readiness.

Ultimately, the reshaping of Europe’s defense posture will depend on the ability of its leaders to reconcile security imperatives with economic realities. This means not only boosting defense budgets but also ensuring that resources are allocated efficiently, technological advancements are prioritized, and industrial partnerships are strengthened. The next decade will be pivotal in determining whether Europe emerges as a strategically autonomous force—or continues to rely on external actors for its security.