The European Defence Moment

Overview

Executive Summary

EU Member States’ combined defence budgets have risen from €218 billion in 2021 to an expected €381 billion in 2025 — a 75% increase in four years.
The June 2025 NATO summit in The Hague set a new target of 5% of GDP by 2035 (3.5% core defence + 1.5% wider security). This replaces the 2% target that most members only recently reached.
The Commission’s Readiness 2030 plan aims to leverage €800 billion in defence spending through 2029, via the SAFE instrument, fiscal escape clauses, EIB financing, and private capital.
Europe has crossed the political threshold on spending, but not the industrial one. Demand is growing 5–6x faster than production output. Converting budgets into fielded capability is the defining challenge.
Global defence spending reached $2.63 trillion in 2025, with Europe and the Middle East driving the uplift.

Scale

Defence Spending at a Glance

€381B

EU Defence Budgets 2025

Up from €218B in 2021

€106B

Defence Investment 2024

Record high, +42% year-on-year

€88B

Equipment Procurement 2024

+39% year-on-year

€800B

Readiness 2030 Target

Total leverage through 2029

5% GDP

New NATO Target by 2035

3.5% core + 1.5% wider security

633K

Defence Industry Jobs 2024

Turnover €183.4B (+13.8% YoY)

By Country

Key National Commitments

Country	2026 Budget / Target	Key Developments
Germany	€117.2B, rising to €162B by 2029 (3.2% GDP)	Debt brake reformed. Procurement acceleration law. Demand growing 5–6x faster than output.
France	€68.5B (2.25% GDP)	New aircraft carrier confirmed (€10.25B, operational 2038). Growth despite deficit pressures.
Poland	4.7% GDP (2025), targeting 5% in 2026	Highest NATO spender by GDP share. Major equipment modernisation.
Netherlands	€25.8B (~2.2% GDP)	Budget more than doubled since 2021.
Denmark	2.65% GDP	DKK 50B acceleration fund established.
Estonia	€10B+ for 2026–2029	Air defence, deep-strike capabilities, ammunition stocks.
Finland	Above 2% GDP, targeting 3% by 2029	Sustained high levels post-NATO accession.
Italy	€2.4B frigate programme (15 yrs)	Naval sustainment built into medium-term planning.

Constraint

Demand Is Outpacing Output

German defence demand has more than doubled since 2019

↓

Production has risen by only ~25% over the same period

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Demand growing 5–6x faster than output

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Industry built to manage post-Cold War decline, not surge

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Short contracts + political reversibility = irrational to invest in capacity

The Core Problem

5–6x

Demand vs output growth gap

€60B+

Cumulative military aid to Ukraine since 2022

€60B

European military exports 2024

+20%

Employment growth: weapons & ammunition since 2021

EU Policy

EU-Level Instruments & Financing

SAFE

€150B EU-backed loan facility for common procurement.
Adopted May 2025. First batch of plans approved for 8 member states (Jan 2026).
Designed to reduce procurement duplication and scale industrial production.

EDIP

European Defence Industry Programme: €1.5B in grants 2025–2027.
€300M earmarked for Ukraine defence industry modernisation.
Final Council approval December 2025.

EIB

Security & defence lending quadrupled to €4B in 2025.
Now funds pure military investments: bases, ports, R&D, SME financing.
Projects: Lithuanian military campus, Danish port expansion for warships.

Sectors

Who Benefits from the Spending Surge

Defence Winners

Aerospace & transport equipment: largest share of procurement spend. Production set to increase considerably.
Electronics: sensors, communications, guidance systems.
Basic metals & metal products: upstream supply chain benefits.
Computer systems design & engineering: service sector spillovers.
Ammunition producers: Rheinmetall receiving advance payments and fast-tracked approvals.

Still Struggling

Chemicals, rubber, plastics: no meaningful uplift from defence spending.
Wood, non-metallic minerals: continue underperforming under Chinese competition and high energy costs.
Widening divergence: gap between defence winners and structural underperformers growing over next 5 years.
Capacity constraint: EU acknowledges industry will struggle to scale quickly enough to meet demand.

Macro

Macroeconomic & Fiscal Dynamics

Growth Effects

If allocated to investment and R&D, defence spending can improve productivity and long-term growth.
Consumption-based spending (historically ~70% of total) has only temporary demand effects.
Evidence of positive R&D spillovers from public defence spending to private sector innovation.
Activation of the fiscal escape clause adds ~0.37% GDP per year to defence budgets through 2028.

Fiscal Trade-offs

Broadly neutral euro area fiscal stance in 2025, turning slightly expansionary in 2026.
After escape clause expires, member states face additional fiscal adjustment of ~0.4 ppt GDP from 2029.
Higher public debt unless offset by growth effects or fiscal consolidation elsewhere.
Inflation impact expected to remain moderate if domestic production scales.

Monitoring

What to Watch: Key Indicators

German Production Data

Domestic defence orders vs. sales vs. industrial production. The 5–6x demand-output gap is the leading indicator.

SAFE Disbursements

Pace of common procurement contracts. Whether fragmented national buying persists or consolidates.

Capacity Expansion

Rheinmetall, Airbus, Leonardo, BAE capex announcements. New production lines for ammunition and air defence.

Contract Structures

Whether governments shift to multi-year, volume-committed contracts that de-risk industrial investment.

Ukraine Consumption Rates

Artillery shell, drone, and interceptor usage as proxy for stockpile depletion and replenishment demand.

Transatlantic Dynamics

US-Europe burden-sharing negotiations. European strategic autonomy rhetoric vs. procurement reality.

Conclusion

Conclusion & Takeaways

Europe’s defence spending surge is real, sustained, and structurally different from previous cycles. The political consensus is broader and deeper than at any point since the Cold War.
The binding constraint is industrial capacity, not political will or funding. Defence companies need credible, multi-year demand signals to justify the irreversible capital expenditure required for surge production.
Investment opportunity is concentrated in a narrow set of capital-intensive subsectors: aerospace, ammunition, air defence, electronics, and naval systems.
EU instruments (SAFE, EDIP, EIB) are designed to reduce fragmentation and drive common procurement, but execution risk is high and the track record is thin.
The macro effects depend on allocation: R&D-heavy spending boosts long-term growth; consumption-heavy spending creates temporary demand. The mix is shifting toward investment, but slowly.