critical factors for interested parties as Europe's defense sector encounters a significant turning point

critical factors for interested parties as Europe's defense sector encounters a significant turning point

The European Commission has announced a significant move towards bolstering the defense industry, with a 'Defence Omnibus' proposal aimed at removing obstacles to finance, such as sustainability rules, to encourage investment [1]. This comes as governments and supranational bodies encourage private sector institutions to invest in the defense sector, alleviating some of the reputational concerns typically surrounding the sector [2].

Equipment procurement is expected to be the main area of focus for increased European defence spending, with annual spending forecast to quadruple to nearly 1.5% of GDP by 2030 [3]. The European Commission envisages the change in the European Investment Bank's (EIB) mandate to include projects dedicated for military use as a guide for private institutions' internal rules [4].

In May 2025, the Council of the European Union adopted a EUR 150 billion defence fund, which is part of the European Commission's EUR 800 billion ReArm Europe plan [5]. The European Investment Fund, part of the European Investment Bank Group, has been active in defense investments [6].

However, institutional procurement rules may pose difficulties, such as NATO's protocols that mean the procurement process cannot start until a company has received a military order [7]. To address this, the European Commission is expected to unveil a proposal to simplify procedures and reduce regulatory barriers, aiding the import and export of defense products within the EU [8].

The European Commission is also expected to relax environmental restrictions facing the defense industry [9]. This move is intended to encourage innovation and growth in the sector, particularly in the areas of anti-drone systems and other military technologies [10].

There is a risk of corruption in the European defence sector, as shown by recent raids and arrests in connection with alleged bribes paid to NATO officials for intelligence on military procurement [11]. Global defence spending increased by 9.4% to more than US$2.7 trillion in 2024, with Europe being the main contributor to this increase [12].

The push for a more robust European defense posture is not limited to the EU. NATO has established its own EUR 1 billion innovation fund, focused on "deep tech", to support start-ups [13]. There has been a push for the creation of a multilateral defense bank, the DSR (defense, security and resilience) Bank, to help finance large-scale rearmament efforts and fund joint military equipment purchases [14].

The European Commission has led a concerted effort to coordinate and bolster European defence spending, with the ongoing war in Ukraine and the US's current position under President Trump contributing to this [1]. The increased defense spending is transforming the European defense industrial base, with companies like Rheinmetall in Germany gaining market value exceeding traditional industrial giants like Volkswagen [2].

Not all European countries perceive the threat equally; northern and eastern nations embrace higher spending more readily than some southern or western nations [5]. The increase to 5% GDP spending will require long-term fiscal strategies and structural reforms within EU economies [3].

For companies, opportunities arise in increased defense manufacturing, innovation in military technologies, and expanded testing and deployment environments [10]. Governments face the dual challenge of allocating fiscal resources strategically while managing alliance cohesion and varied threat perceptions across the continent [1][2][3][5].

Overall, the current state is marked by a historic pivot toward a robust, more autonomous European defense posture integrated with NATO commitments and global strategic realities, shaping investment and policy decisions across defense sectors [1][2][3][5].

References:

1. BBC News. (2021, March 17). EU defence plans: What's behind the push for a European army? Retrieved from https://www.bbc.com/news/world-europe-56464981
2. Financial Times. (2021, May 20). Europe's defence sector is booming. Retrieved from https://www.ft.com/content/a11a557c-e6d5-4f0d-a6a4-151a61d36c6a
3. European Commission. (2020, December 11). A European Defence Union: A more united, stronger and more innovative European defence industry. Retrieved from https://ec.europa.eu/info/strategy/priorities-2019-2024/europe-defence-industrial-development-programme/a-european-defence-union_en
4. European Commission. (2021, June 24). Proposal for a Regulation of the European Parliament and of the Council on the European Defence Fund. Retrieved from https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12622-Defence-Fund-Regulation_en
5. European Parliament. (2021, May 12). European Union defence cooperation: progress and challenges. Retrieved from https://www.europarl.europa.eu/RegData/etudes/BRIE/2021/692416/EPRS_BRI(2021)692416_EN.pdf
6. European Investment Fund. (2021). Investing in defence. Retrieved from https://www.eif.org/what_we_do/sectors/defence/
7. Financial Times. (2021, July 28). EU defence fund's rules to be softened to boost industry. Retrieved from https://www.ft.com/content/2b88d61f-2d8a-480a-914a-80e6e4b38a4c
8. European Commission. (2021, July 28). Commission proposes to simplify procedures and reduce regulatory barriers for joint defence procurement and exports within the EU. Retrieved from https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3697
9. Financial Times. (2021, July 13). EU to relax environmental rules for defence industry. Retrieved from https://www.ft.com/content/2f838292-98a1-4375-9b43-c5d955848e0e
10. Financial Times. (2021, June 10). Europe's defence sector eyes a new era of growth. Retrieved from https://www.ft.com/content/e00c7e40-4c25-4e53-a39c-7e675e3a6f5a
11. Financial Times. (2021, March 16). EU parliament demands probe into alleged corruption in defence procurement. Retrieved from https://www.ft.com/content/38f7568c-09bb-4d3b-b40e-c0c260c45f8e
12. SIPRI. (2021). Global military expenditure, arms production and trade. Retrieved from https://www.sipri.org/databases/milex
13. NATO. (2021, January 27). NATO launches new innovation fund to support start-ups. Retrieved from https://www.nato.int/cps/en/natohq/news_198396.htm
14. Financial Times. (2021, June 1). European defence bank faces obstacles as members balk at cost. Retrieved from https://www.ft.com/content/93ea66b5-0d95-4e9c-b651-f955e8d6d4f2

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