The EU’s €800 billion rearmament marks a historic shift, aiming to reduce U.S. reliance and unify European defence. It will reshape capital markets, supply chains, and investment flows - benefiting defence firms and adjacent sectors, while signalling a long-term transformation in EU strategic and economic policy
The Rise of Geopolitical Tensions in Recent Years
Geopolitical tensions, in recent years, have reached levels not seen in decades, with the wars in Ukraine and Gaza being the most notable conflicts and causes of tension. Three years after Russia’s invasion of Ukraine, the war remains ongoing, with hundreds of thousands of soldiers killed and hundreds of billions spent in foreign aid. It continues to have profound implications on European and U.S. policy. On March 4, U.S. President Donald Trump announced a temporary pause on the delivery of all U.S. military aid to Ukraine in an effort to pressure Ukraine into accepting a peace deal with Russia, following a contentious Oval Office meeting with President Zelenskyy on February 28. Trump’s move to pause aid and pressure Ukraine to come to the negotiating table was successful, as Ukraine agreed to a 30-day ceasefire on March 11, prompting the U.S. to resume its military assistance. A week later, Trump spoke with Russian President Vladimir Putin, who agreed only to a partial ceasefire on energy infrastructure attacks while rejecting broader peace terms. Although peace has yet to be achieved, the partial ceasefire is seen as a step in the right direction and has sparked cautious optimism, with President Zelensky stating that “lasting peace can be achieved this year”.
On October 7th, 2023, Hamas launched a devastating surprise attack on Israel, killing nearly 1200 people. On January 19th, 2025, hopes for peace were restored, with an announcement of a multistage ceasefire agreement between Israel and Hamas. However, following 2 months of peace, Israel broke the ceasefire launching an air strike on the Gaza Strip killing nearly 400 people. The attacks came after Netanyahu’s accusations of Hamas rejecting proposals Israel put forward during ceasefire talks. Following the attacks, Israel announced renewed ground operations. Since the beginning of the war, nearly 50,000 people have been killed and a resolution appears unlikely in the near term, given Netanyahu’s remarks that negotiations would now be conducted “under fire”.
The war in Ukraine has had profound impacts on Europe, causing a humanitarian crisis, adverse economic events, and long-term geopolitical consequences. Nearly 7 million Ukrainians have fled since the war began, making it one of the most significant humanitarian crises on the continent in modern history, with most seeking refuge in neighbouring countries. At the outset of the war, Russia weaponized Europe’s heavy reliance on Russian energy sources by cutting off the supply of gas from its pipelines, notably through the Nord Stream pipeline. Russia’s move to restrict the supply of gas to Europe sent shockwaves through the economy raising serious concerns over energy security and a potential dark winter. However, swift policy responses - including energy conservation measures, a shift to renewables, and an unexpectedly mild winter - helped avoid a much more dire outcome. By contrast, the Israel-Palestine conflict has not had nearly as direct an impact on Europe as the war in Ukraine has, however, many EU countries have experienced significant social unrest, primarily through student-led protests on university campuses. The conflict has also raised security concerns, with many intelligence organizations warning of increased risks of terrorism and radicalization. The war in Ukraine has made clear Europe’s heavy reliance on U.S. military support and the urgent need to take greater responsibility for its military and energy security. As the U.S. reevaluates its commitments to Europe, it has become apparent to EU leaders that long-term security must come from within, reducing dependence on foreign countries.
Geopolitical tensions, in recent years, have reached levels not seen in decades, with the wars in Ukraine and Gaza being the most notable conflicts and causes of tension. Three years after Russia’s invasion of Ukraine, the war remains ongoing, with hundreds of thousands of soldiers killed and hundreds of billions spent in foreign aid. It continues to have profound implications on European and U.S. policy. On March 4, U.S. President Donald Trump announced a temporary pause on the delivery of all U.S. military aid to Ukraine in an effort to pressure Ukraine into accepting a peace deal with Russia, following a contentious Oval Office meeting with President Zelenskyy on February 28. Trump’s move to pause aid and pressure Ukraine to come to the negotiating table was successful, as Ukraine agreed to a 30-day ceasefire on March 11, prompting the U.S. to resume its military assistance. A week later, Trump spoke with Russian President Vladimir Putin, who agreed only to a partial ceasefire on energy infrastructure attacks while rejecting broader peace terms. Although peace has yet to be achieved, the partial ceasefire is seen as a step in the right direction and has sparked cautious optimism, with President Zelensky stating that “lasting peace can be achieved this year”.
On October 7th, 2023, Hamas launched a devastating surprise attack on Israel, killing nearly 1200 people. On January 19th, 2025, hopes for peace were restored, with an announcement of a multistage ceasefire agreement between Israel and Hamas. However, following 2 months of peace, Israel broke the ceasefire launching an air strike on the Gaza Strip killing nearly 400 people. The attacks came after Netanyahu’s accusations of Hamas rejecting proposals Israel put forward during ceasefire talks. Following the attacks, Israel announced renewed ground operations. Since the beginning of the war, nearly 50,000 people have been killed and a resolution appears unlikely in the near term, given Netanyahu’s remarks that negotiations would now be conducted “under fire”.
The war in Ukraine has had profound impacts on Europe, causing a humanitarian crisis, adverse economic events, and long-term geopolitical consequences. Nearly 7 million Ukrainians have fled since the war began, making it one of the most significant humanitarian crises on the continent in modern history, with most seeking refuge in neighbouring countries. At the outset of the war, Russia weaponized Europe’s heavy reliance on Russian energy sources by cutting off the supply of gas from its pipelines, notably through the Nord Stream pipeline. Russia’s move to restrict the supply of gas to Europe sent shockwaves through the economy raising serious concerns over energy security and a potential dark winter. However, swift policy responses - including energy conservation measures, a shift to renewables, and an unexpectedly mild winter - helped avoid a much more dire outcome. By contrast, the Israel-Palestine conflict has not had nearly as direct an impact on Europe as the war in Ukraine has, however, many EU countries have experienced significant social unrest, primarily through student-led protests on university campuses. The conflict has also raised security concerns, with many intelligence organizations warning of increased risks of terrorism and radicalization. The war in Ukraine has made clear Europe’s heavy reliance on U.S. military support and the urgent need to take greater responsibility for its military and energy security. As the U.S. reevaluates its commitments to Europe, it has become apparent to EU leaders that long-term security must come from within, reducing dependence on foreign countries.
U.S. - Europe Long-Term Love-Hate Relationship
The European Union and the United States have a longstanding security partnership, primarily through NATO, where the U.S. plays a dominant role in Europe's defence. According to Reuters, the U.S. contributes 15.8% of NATO’s annual $3.5 billion budget and deploys 80,000 to 100,000 troops across Europe, underscoring its strategic importance to European security.
However, the relationship between the U.S. and its European peers in NATO has constantly been threatened by President Donald Trump ever since his first term. Mr. Trump frequently criticizes Europe for not abiding by a 2014 target to spend at least 2% of GDP on defence every year. His threats peaked in 2018 as only 6 members of NATO reached the 2% threshold. As a result, Europe has been ramping up military spending, and NATO estimates that 23 members will reach the 2% target in 2024.
The European Union and the United States have a longstanding security partnership, primarily through NATO, where the U.S. plays a dominant role in Europe's defence. According to Reuters, the U.S. contributes 15.8% of NATO’s annual $3.5 billion budget and deploys 80,000 to 100,000 troops across Europe, underscoring its strategic importance to European security.
However, the relationship between the U.S. and its European peers in NATO has constantly been threatened by President Donald Trump ever since his first term. Mr. Trump frequently criticizes Europe for not abiding by a 2014 target to spend at least 2% of GDP on defence every year. His threats peaked in 2018 as only 6 members of NATO reached the 2% threshold. As a result, Europe has been ramping up military spending, and NATO estimates that 23 members will reach the 2% target in 2024.
Exhibit 1: Number of Allies meeting 2% of GDP
Yet, this progress still does not satisfy Trump. In January, he proposed that the target rate should be raised to 5% of GDP spending on defence. As of now, no country has surpassed the targeted rate, not even the U.S. under Biden’s administration.
ReArm Europe Plan/Readiness 2030
The recent push for European rearmament has gained significant momentum following growing uncertainty over U.S. security commitments. Washington’s meandering support for Ukraine and the potential withdrawal from its role as NATO’s Supreme Allied Commander Europe (SACEUR) have forced the EU to reconsider its long-standing reliance on the U.S. for defence.
Amid NATO’s uncertainty and the ongoing war in Ukraine, European leaders have unveiled a defence strategy aimed at strengthening Europe’s military capabilities, leveraging the European Union as a key platform for this initiative. On March 4th, European Commission President Ursula von der Leyen introduced ReArm Europe, later renamed ReArm Europe Plan/Readiness 2030 following backlash from Italian and Spanish leaders.
The plan aims to mobilize up to €800 billion for defence investments through three key pillars. The detailed policies below are taken from the European Commission’s website and have been modified for the readability of the subject.
1) Unleash the use of public funding in defence at national level
EU Member States are encouraged to activate the national escape clause of the Stability and Growth Pact, allowing more budgetary space for defence spending while staying within EU fiscal rules.
Key limits to ensure fiscal sustainability:
The Commission expects to generate €650 billion following a 1.5% GDP increase in defence budgets of all countries.
2) A new dedicated instrument for Security Action for Europe - SAFE: €150 billion for defence procurement
The SAFE initiative is a new EU financial instrument that will raise €150 billion through capital markets to help Member States boost defence capabilities via common procurement.
Seven priority areas of investment: air and missile defence; artillery systems; missiles and ammunition; drones and anti-drone systems; strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare.
How SAFE Works:
3) Leveraging on the EIB Group and mobilising private capital by accelerating the Savings and Investments Union
The ReArm Europe Plan/Readiness 2030 incorporates the European Investment Bank Group to expand its lending to defence and security initiatives while preserving its financial capacity. This approach not only unlocks significant funding but also sends a strong, positive signal to financial markets.
However, public investment alone cannot meet the defence industry's diverse investment demands, spanning start-ups to well-established companies. To address this, the Savings and Investments Union Strategy, introduced by the Commission today, aims to facilitate the mobilisation of private savings into more efficient capital markets, directing investments into vital sectors like defence for interested investors.
Criticism: “ReArm Europe” or “Enrich USA?”
George Marinescu warns that the ReArm Europe Plan may inadvertently deepen Europe's reliance on U.S. defence suppliers rather than fostering self-sufficiency. While the EU plans to invest €800 billion in defence, matching U.S. spending and making up 40% of global military budgets, 64% of Europe’s equipment already comes from the U.S., a figure that continues to rise. Additionally, 48 of the top 100 arms producers are American, reinforcing U.S. dominance. Fragmentation among European armed forces and dependence on U.S. technical expertise further limit autonomy - even European-made aircraft like the Mirage 2000 and Eurofighter require U.S. technology for full operation.
The recent push for European rearmament has gained significant momentum following growing uncertainty over U.S. security commitments. Washington’s meandering support for Ukraine and the potential withdrawal from its role as NATO’s Supreme Allied Commander Europe (SACEUR) have forced the EU to reconsider its long-standing reliance on the U.S. for defence.
Amid NATO’s uncertainty and the ongoing war in Ukraine, European leaders have unveiled a defence strategy aimed at strengthening Europe’s military capabilities, leveraging the European Union as a key platform for this initiative. On March 4th, European Commission President Ursula von der Leyen introduced ReArm Europe, later renamed ReArm Europe Plan/Readiness 2030 following backlash from Italian and Spanish leaders.
The plan aims to mobilize up to €800 billion for defence investments through three key pillars. The detailed policies below are taken from the European Commission’s website and have been modified for the readability of the subject.
1) Unleash the use of public funding in defence at national level
EU Member States are encouraged to activate the national escape clause of the Stability and Growth Pact, allowing more budgetary space for defence spending while staying within EU fiscal rules.
Key limits to ensure fiscal sustainability:
- Increase in defence expenditure only, taking as a starting point the statistical category ‘defence' in the classification of the functions of government (COFOGs);
- Maximum increase capped at 1.5% of GDP per year;
- Timeframe limited to four years.
The Commission expects to generate €650 billion following a 1.5% GDP increase in defence budgets of all countries.
2) A new dedicated instrument for Security Action for Europe - SAFE: €150 billion for defence procurement
The SAFE initiative is a new EU financial instrument that will raise €150 billion through capital markets to help Member States boost defence capabilities via common procurement.
Seven priority areas of investment: air and missile defence; artillery systems; missiles and ammunition; drones and anti-drone systems; strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare.
How SAFE Works:
- These funds will be disbursed to interested Member States upon demand, on the basis of national plans.
- The disbursements will take the form of competitively priced and attractively structured long-maturity loans, to be repaid by the beneficiary Member States.
- The loans will be backed by the EU budget's headroom.
- Ukraine, EFTA/EEA countries, and EU candidate countries can join joint procurements and involve their defence industries.
3) Leveraging on the EIB Group and mobilising private capital by accelerating the Savings and Investments Union
The ReArm Europe Plan/Readiness 2030 incorporates the European Investment Bank Group to expand its lending to defence and security initiatives while preserving its financial capacity. This approach not only unlocks significant funding but also sends a strong, positive signal to financial markets.
However, public investment alone cannot meet the defence industry's diverse investment demands, spanning start-ups to well-established companies. To address this, the Savings and Investments Union Strategy, introduced by the Commission today, aims to facilitate the mobilisation of private savings into more efficient capital markets, directing investments into vital sectors like defence for interested investors.
Criticism: “ReArm Europe” or “Enrich USA?”
George Marinescu warns that the ReArm Europe Plan may inadvertently deepen Europe's reliance on U.S. defence suppliers rather than fostering self-sufficiency. While the EU plans to invest €800 billion in defence, matching U.S. spending and making up 40% of global military budgets, 64% of Europe’s equipment already comes from the U.S., a figure that continues to rise. Additionally, 48 of the top 100 arms producers are American, reinforcing U.S. dominance. Fragmentation among European armed forces and dependence on U.S. technical expertise further limit autonomy - even European-made aircraft like the Mirage 2000 and Eurofighter require U.S. technology for full operation.
Implications for Capital Markets and Financial Assets
European financial markets have already seen notable changes as a result of the launch of ReArm Europe, with military equities reporting notable gains. The planned issuance of €150 billion in EU bonds will create a new class of European sovereign debt instruments, strengthening the euro's position in global financial markets. Bond markets will need to absorb this significant new supply, which will likely attract both European and international investors seeking exposure to these securities. This said, this debt issuance will marginally increase the euro's share in global reserve holdings if these bonds become attractive to foreign central banks and sovereign wealth funds.
In addition to defence stocks, the rearmament plan will help neighbouring industries that supply the defence sector. Businesses that manufacture specialized manufacturing processes, electronics, novel materials, and communications equipment will become more in demand as defence contractors increase output. This ripple effect could extend to other technological areas as investments in dual-use technologies with both military and civilian applications rise.
Increased Demand for Defence Production Inputs
Demand for raw resources necessary for the defence industry will inevitably grow as a result of Europe's large rearmament program. The pledge to "buy more European" will therefore change regional commodity supply networks, resulting in higher prices for materials that come from Europe. But this spike in demand could also lead to supply chain bottlenecks and possibly raise the cost of some essential supplies.
Specifically, the plan's focus on advanced weapons systems (drones, missile defence, cyber warfare) and conventional arms production will drive demand for three key elements. First, industrial metals such as steel (12-15% projected EU demand growth), aluminium (8-10%), titanium (20-25%), and copper (15-18%) for military hardware production. Second, rare earth elements, including neodymium, dysprosium, and terbium for guidance systems and electronics (30% EU import requirements projected). Third, energy commodities such as uranium for nuclear-powered naval vessels (18% demand growth) and aviation fuel (7-9% consumption growth). This comes as global base metal inventories remain tight, with London Metal Exchange (LME) warehouse stocks at 15-year lows for copper and aluminium. The EU's planned 140% expansion of artillery shell production capacity alone will require 450,000 tons of additional steel annually.
European financial markets have already seen notable changes as a result of the launch of ReArm Europe, with military equities reporting notable gains. The planned issuance of €150 billion in EU bonds will create a new class of European sovereign debt instruments, strengthening the euro's position in global financial markets. Bond markets will need to absorb this significant new supply, which will likely attract both European and international investors seeking exposure to these securities. This said, this debt issuance will marginally increase the euro's share in global reserve holdings if these bonds become attractive to foreign central banks and sovereign wealth funds.
In addition to defence stocks, the rearmament plan will help neighbouring industries that supply the defence sector. Businesses that manufacture specialized manufacturing processes, electronics, novel materials, and communications equipment will become more in demand as defence contractors increase output. This ripple effect could extend to other technological areas as investments in dual-use technologies with both military and civilian applications rise.
Increased Demand for Defence Production Inputs
Demand for raw resources necessary for the defence industry will inevitably grow as a result of Europe's large rearmament program. The pledge to "buy more European" will therefore change regional commodity supply networks, resulting in higher prices for materials that come from Europe. But this spike in demand could also lead to supply chain bottlenecks and possibly raise the cost of some essential supplies.
Specifically, the plan's focus on advanced weapons systems (drones, missile defence, cyber warfare) and conventional arms production will drive demand for three key elements. First, industrial metals such as steel (12-15% projected EU demand growth), aluminium (8-10%), titanium (20-25%), and copper (15-18%) for military hardware production. Second, rare earth elements, including neodymium, dysprosium, and terbium for guidance systems and electronics (30% EU import requirements projected). Third, energy commodities such as uranium for nuclear-powered naval vessels (18% demand growth) and aviation fuel (7-9% consumption growth). This comes as global base metal inventories remain tight, with London Metal Exchange (LME) warehouse stocks at 15-year lows for copper and aluminium. The EU's planned 140% expansion of artillery shell production capacity alone will require 450,000 tons of additional steel annually.
Exhibit 2: Supply Chain Reconfiguration
One of the main challenges in current European defence procurement is market fragmentation, with different countries maintaining their own standards for military equipment. The ReArm plan seeks to address this by encouraging standardization of parts to speed up production and reduce costs. Commission President von der Leyen emphasized that the rearmament plan will "reduce costs, reduce fragmentation, increase interoperability and strengthen our defence industrial base".
Currency Implications and De-Dollarization Trends
The EU rearmament initiative emerges against a status quo of growing international interest in reducing dollar dependence. The European Union's rearmament plan has initiated discussions about potential shifts in currency dynamics, though direct evidence of a dollar decline remains highly speculative.
The EU plans to issue €150 billion in joint bonds (off-budget) to fund defence projects. While these loans are euro-denominated, the scale of borrowing could theoretically pressure the euro’s value if markets perceive increased debt risks. Nevertheless, analysts note this is a short-term measure, and not necessarily a structural shift. A higher EUR/USD forecast might depend on a negative reassessment of the dollar rather than a direct rearmament-driven euro surge. Currency shifts would likely stem from broader geopolitical dynamics, such as the U.S.-EU relations and trade policies, rather than the rearmament itself.
Reallocation of Capital Due to Defence Spending
Goldman Sachs Research estimates that the ReArm Europe plan will gradually increase its annual defence spending by around €80 billion by 2027, equivalent to around 0.5% of GDP. This would raise defence expenditures in the euro area from 1.8% of GDP in 2024 to 2.4% by 2027. This shift will necessarily divert resources from other sectors of the economy.
The economic impact of this capital reallocation will depend primarily on the type of expenditure and whether defence goods are imported or produced locally. Additional spending on defence will have a fiscal multiplier of 0.5 over two years, meaning that every €100 spent on defence would boost GDP by around €50. This comparatively low multiplier implies that compared to some other types of government expenditures, defence spending may be less effective at producing overall economic growth.
According to the European Parliament, the application of the "national escape clause" for defence spending represents a relevant shift in EU fiscal policy, creating a protected category of public expenditure exempt from normal budget constraints. This special treatment could potentially lead to reduced spending in other areas as governments prioritize defence while still attempting to manage overall debt levels. The European Parliament has demanded large and urgent investments in defence, with some countries already spending over 4% of GDP and others setting targets of 5%.
Private Capital Mobilization and Investment Frameworks
The ReArm Europe proposal specifically aims to raise private finance through a number of channels in addition to direct government spending. According to one proposal, a public guarantee of about €16.7 billion could leverage up to €200 billion in private investment over a period of three to five years, resulting in an estimated multiplier of almost 12x. This ambitious target reflects the understanding that the complete financing needs of European rearmament cannot be met by public resources alone. The plan defines strict criteria for what qualifies as defence spending under the special fiscal provisions. Only capital expenditures qualify as "government investment in defence", including procurement of military equipment, infrastructure, and R&D. Regular operational expenditures like personnel costs, maintenance, and operations generally do not qualify. This stricter definition creates a framework that prioritizes long-term capability development over day-to-day operational expenses.
Market Outlook
While the ReArm Europe plan promises significant security benefits, it also creates economic challenges and opportunities. Although there is a modest fiscal multiplier of defence, investing in dual-use technologies could result in spillover benefits for civilian sectors, raising overall economic impact.
The plan faces political challenges as well. Hungary has reportedly expressed opposition, arguing that continued financial support for Ukraine could bankrupt the EU. This emphasizes the potential tensions between immediate security priorities and long-term fiscal sustainability that will need to be handled as the plan is implemented. For European defence contractors, the plan represents a unique opportunity for growth and technological development.
Capital markets will continue to adjust to this new reality as European defence spending rises from its current average of about 2% of GDP toward the 3.5% target envisioned in the ReArm plan. Defence equities will likely outperform, supply chains for critical inputs will be strained and then expanded, and new patterns of capital allocation will emerge across the European economy. In general terms, the success of this massive rearmament initiative will depend not just on the military capabilities it produces, but also on whether it can deliver sustainable economic benefits while maintaining fiscal stability.
Currency Implications and De-Dollarization Trends
The EU rearmament initiative emerges against a status quo of growing international interest in reducing dollar dependence. The European Union's rearmament plan has initiated discussions about potential shifts in currency dynamics, though direct evidence of a dollar decline remains highly speculative.
The EU plans to issue €150 billion in joint bonds (off-budget) to fund defence projects. While these loans are euro-denominated, the scale of borrowing could theoretically pressure the euro’s value if markets perceive increased debt risks. Nevertheless, analysts note this is a short-term measure, and not necessarily a structural shift. A higher EUR/USD forecast might depend on a negative reassessment of the dollar rather than a direct rearmament-driven euro surge. Currency shifts would likely stem from broader geopolitical dynamics, such as the U.S.-EU relations and trade policies, rather than the rearmament itself.
Reallocation of Capital Due to Defence Spending
Goldman Sachs Research estimates that the ReArm Europe plan will gradually increase its annual defence spending by around €80 billion by 2027, equivalent to around 0.5% of GDP. This would raise defence expenditures in the euro area from 1.8% of GDP in 2024 to 2.4% by 2027. This shift will necessarily divert resources from other sectors of the economy.
The economic impact of this capital reallocation will depend primarily on the type of expenditure and whether defence goods are imported or produced locally. Additional spending on defence will have a fiscal multiplier of 0.5 over two years, meaning that every €100 spent on defence would boost GDP by around €50. This comparatively low multiplier implies that compared to some other types of government expenditures, defence spending may be less effective at producing overall economic growth.
According to the European Parliament, the application of the "national escape clause" for defence spending represents a relevant shift in EU fiscal policy, creating a protected category of public expenditure exempt from normal budget constraints. This special treatment could potentially lead to reduced spending in other areas as governments prioritize defence while still attempting to manage overall debt levels. The European Parliament has demanded large and urgent investments in defence, with some countries already spending over 4% of GDP and others setting targets of 5%.
Private Capital Mobilization and Investment Frameworks
The ReArm Europe proposal specifically aims to raise private finance through a number of channels in addition to direct government spending. According to one proposal, a public guarantee of about €16.7 billion could leverage up to €200 billion in private investment over a period of three to five years, resulting in an estimated multiplier of almost 12x. This ambitious target reflects the understanding that the complete financing needs of European rearmament cannot be met by public resources alone. The plan defines strict criteria for what qualifies as defence spending under the special fiscal provisions. Only capital expenditures qualify as "government investment in defence", including procurement of military equipment, infrastructure, and R&D. Regular operational expenditures like personnel costs, maintenance, and operations generally do not qualify. This stricter definition creates a framework that prioritizes long-term capability development over day-to-day operational expenses.
Market Outlook
While the ReArm Europe plan promises significant security benefits, it also creates economic challenges and opportunities. Although there is a modest fiscal multiplier of defence, investing in dual-use technologies could result in spillover benefits for civilian sectors, raising overall economic impact.
The plan faces political challenges as well. Hungary has reportedly expressed opposition, arguing that continued financial support for Ukraine could bankrupt the EU. This emphasizes the potential tensions between immediate security priorities and long-term fiscal sustainability that will need to be handled as the plan is implemented. For European defence contractors, the plan represents a unique opportunity for growth and technological development.
Capital markets will continue to adjust to this new reality as European defence spending rises from its current average of about 2% of GDP toward the 3.5% target envisioned in the ReArm plan. Defence equities will likely outperform, supply chains for critical inputs will be strained and then expanded, and new patterns of capital allocation will emerge across the European economy. In general terms, the success of this massive rearmament initiative will depend not just on the military capabilities it produces, but also on whether it can deliver sustainable economic benefits while maintaining fiscal stability.
How ReArm Europe is ReShaping the European Defence Industry
We now shift our attention towards the corporate implications of ReArm Europe, by assessing its impact on firms. The EU has declared that member states shall purchase eligible products from entities whose headquarters reside in the EU, EEA/EFTA States or Ukraine to avoid new dependencies on outside markets.
Particularly, contractors must assure that components representing 65% of the costs of war consumables (ammunition, fuel, provisions for soldiers, clothing and gear, spare and maintenance parts, batteries and power sources) originate from the Union/EEA EFTA countries/Ukraine. With the same applying to complex systems (tanks, jets, drones and radars), again reinforcing the avoidance of foreign design dependency. This suggests that a minimum of €520 billion (if the full budget of €800 billion is expended) will flow into the supply chain of European defence companies.
The national defence industry encompasses multiple subdivisions with the plan outlining that the loans must be spent on one of the seven priority areas (air and missile defence; artillery systems; missiles and ammunition; drones and anti-drone systems; strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare).
With 2,764 businesses involved in the arms and defence sector, Josep Borrell, former VP of the European commission, described the EU defence market as “too fragmented”. In fact, the top seven companies (excluding the Russian ROSTEKH, GK which would not benefit from the ReArm Europe plan) comprise only 47% of the market share of the European Arms and Defence Industry. Interestingly, the rankings of European countries by defence industry sales differ from their defence expenditure rankings. Specifically, the United Kingdom leads in defence industry sales (25% of European sales), followed by France (25%), Italy (11%), and Germany (7%). Conversely, in terms of defence spending, Germany ranks highest (18.9% of EU spending), followed by the United Kingdom (17.8%), France (14%), and Italy (7.7%). Additionally, from 2021 to 2024, there has been a 30% rise in member states’ defence expenditure. The market impact of this increase has been reflected by the 201.3% surge of the STOXX Europe Total Market Aerospace & Defence Index, from its 3-year bottom, to its 3Y high on March 18th 2025.
A Deep Dive into Europe’s Defence Leaders
We are now going to analyse three select companies: Bae Systems PLC the biggest player in Europe – with a 17% market-share; Leonardo S.p.A, second biggest – with an 8% market share; and Rheinmetall AG, the greatest stock performer year-to-date.
Bae Systems PLC
British Aerospace systems operates in more than 40 countries and develops, engineers, manufactures and supports military systems and capabilities Globally, it ranks as the seventh largest defence contractor with key customers being the U.S. (44% of sales), the UK (26%), and Saudi Arabia (10%). BAE’s operations span five sectors: air (30% of revenues), electronics systems (25%), maritime (22%), platforms and services (15%), and cyber & intelligence (8%).
Sales and underlying EBIT rose 14% year-over-year, driven largely by a 32% revenue jump in Electronic Systems. This is likely due to improved efficiency or delivery of previously booked contracts. Order intake has decreased c.11%; while this would usually raise concerns, the ReArm Europe initiative may offset this drop. Operating margins fell by 1% (due to a 15% increase in inventory expense and 14% increase in staff costs). The increase in costs might be linked to higher raw material or component costs and strategic stockpiling to prevent supply chain risks. The increased staff costs may be linked to an increased shortage in talent, and rising competitiveness amongst firms.
Leonardo S.p.A
The 77-year-old mid-sized defence company provides a plethora of technologies, systems and solutions used across land, air, sea, space and cyber domains. It consists of eight business units, subdivided into two segments: Advanced Sensing and Computing and Integrated Mission Systems. Leonardo holds an estimated 8% market share. Its largest market is the U.S., accounting for 79% of 2024 revenues (down from 84% in 2022). Additionally, 37% of the company’s revenues were linked to the Navy, followed by the Army (32%), Air Force (3%) and other DoD agencies (7%).
Revenue rose 14.4% year-over-year, accelerating from 4.9% the previous year. Gross profit increased by 0.9%, reaching 13.6%, while gross margin fell slightly by 0.1%. Leonardo typically enters into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts. The increase in critical materials like germanium, essential for optics and infrared programs in the ASC (Advanced Sensing and Computing) segment, combined with its high proportion of fixed-price contracts caused a 14.7% rise in cost of revenue (vs. 2.8% the prior year).
Rheinmetall AG
Rheinmetall AG, parent of Rheinmetall Group, operates in five divisions: vehicle systems (Europe and International), weapon and ammunition, electronic solutions and power systems. The vehicle systems make up 39% of revenue, followed by weapons and ammunitions (29%) and power systems (21%). An impressive 77% of revenues stem from European countries (30% of which from Germany alone). This is a major difference compared to the two previously analysed players.
Margins continue to improve, with an operating margin of 15.2% and EBIT margin of 13%. Return on capital employed is strong at 26.4%. Materials make up 57% of costs, while R&D spending surged 34%. The weapons and ammunition division are also the most profitable of the five with an operating result margin of 28.4%.
European aerospace and defence stocks have rallied. This begs the question of whether companies in the industry are overvalued. The table below shows different metrics to assess the 8 largest European equities, excluding the non-publicly traded Naval Group and MBDA (in ascending market share ascending order) in the space.
We now shift our attention towards the corporate implications of ReArm Europe, by assessing its impact on firms. The EU has declared that member states shall purchase eligible products from entities whose headquarters reside in the EU, EEA/EFTA States or Ukraine to avoid new dependencies on outside markets.
Particularly, contractors must assure that components representing 65% of the costs of war consumables (ammunition, fuel, provisions for soldiers, clothing and gear, spare and maintenance parts, batteries and power sources) originate from the Union/EEA EFTA countries/Ukraine. With the same applying to complex systems (tanks, jets, drones and radars), again reinforcing the avoidance of foreign design dependency. This suggests that a minimum of €520 billion (if the full budget of €800 billion is expended) will flow into the supply chain of European defence companies.
The national defence industry encompasses multiple subdivisions with the plan outlining that the loans must be spent on one of the seven priority areas (air and missile defence; artillery systems; missiles and ammunition; drones and anti-drone systems; strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare).
With 2,764 businesses involved in the arms and defence sector, Josep Borrell, former VP of the European commission, described the EU defence market as “too fragmented”. In fact, the top seven companies (excluding the Russian ROSTEKH, GK which would not benefit from the ReArm Europe plan) comprise only 47% of the market share of the European Arms and Defence Industry. Interestingly, the rankings of European countries by defence industry sales differ from their defence expenditure rankings. Specifically, the United Kingdom leads in defence industry sales (25% of European sales), followed by France (25%), Italy (11%), and Germany (7%). Conversely, in terms of defence spending, Germany ranks highest (18.9% of EU spending), followed by the United Kingdom (17.8%), France (14%), and Italy (7.7%). Additionally, from 2021 to 2024, there has been a 30% rise in member states’ defence expenditure. The market impact of this increase has been reflected by the 201.3% surge of the STOXX Europe Total Market Aerospace & Defence Index, from its 3-year bottom, to its 3Y high on March 18th 2025.
A Deep Dive into Europe’s Defence Leaders
We are now going to analyse three select companies: Bae Systems PLC the biggest player in Europe – with a 17% market-share; Leonardo S.p.A, second biggest – with an 8% market share; and Rheinmetall AG, the greatest stock performer year-to-date.
Bae Systems PLC
British Aerospace systems operates in more than 40 countries and develops, engineers, manufactures and supports military systems and capabilities Globally, it ranks as the seventh largest defence contractor with key customers being the U.S. (44% of sales), the UK (26%), and Saudi Arabia (10%). BAE’s operations span five sectors: air (30% of revenues), electronics systems (25%), maritime (22%), platforms and services (15%), and cyber & intelligence (8%).
Sales and underlying EBIT rose 14% year-over-year, driven largely by a 32% revenue jump in Electronic Systems. This is likely due to improved efficiency or delivery of previously booked contracts. Order intake has decreased c.11%; while this would usually raise concerns, the ReArm Europe initiative may offset this drop. Operating margins fell by 1% (due to a 15% increase in inventory expense and 14% increase in staff costs). The increase in costs might be linked to higher raw material or component costs and strategic stockpiling to prevent supply chain risks. The increased staff costs may be linked to an increased shortage in talent, and rising competitiveness amongst firms.
Leonardo S.p.A
The 77-year-old mid-sized defence company provides a plethora of technologies, systems and solutions used across land, air, sea, space and cyber domains. It consists of eight business units, subdivided into two segments: Advanced Sensing and Computing and Integrated Mission Systems. Leonardo holds an estimated 8% market share. Its largest market is the U.S., accounting for 79% of 2024 revenues (down from 84% in 2022). Additionally, 37% of the company’s revenues were linked to the Navy, followed by the Army (32%), Air Force (3%) and other DoD agencies (7%).
Revenue rose 14.4% year-over-year, accelerating from 4.9% the previous year. Gross profit increased by 0.9%, reaching 13.6%, while gross margin fell slightly by 0.1%. Leonardo typically enters into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts. The increase in critical materials like germanium, essential for optics and infrared programs in the ASC (Advanced Sensing and Computing) segment, combined with its high proportion of fixed-price contracts caused a 14.7% rise in cost of revenue (vs. 2.8% the prior year).
Rheinmetall AG
Rheinmetall AG, parent of Rheinmetall Group, operates in five divisions: vehicle systems (Europe and International), weapon and ammunition, electronic solutions and power systems. The vehicle systems make up 39% of revenue, followed by weapons and ammunitions (29%) and power systems (21%). An impressive 77% of revenues stem from European countries (30% of which from Germany alone). This is a major difference compared to the two previously analysed players.
Margins continue to improve, with an operating margin of 15.2% and EBIT margin of 13%. Return on capital employed is strong at 26.4%. Materials make up 57% of costs, while R&D spending surged 34%. The weapons and ammunition division are also the most profitable of the five with an operating result margin of 28.4%.
European aerospace and defence stocks have rallied. This begs the question of whether companies in the industry are overvalued. The table below shows different metrics to assess the 8 largest European equities, excluding the non-publicly traded Naval Group and MBDA (in ascending market share ascending order) in the space.
Exhibit 3: EU Defence Sector Multiples and Stock Price Growth
The companies are predominantly in the maturity stage of their business lifecycle – established market positions, consistent revenue streams, and a focus on sustaining market share rather than rapid expansion. Hence why an EV/EBITDA multiple is deemed as most appropriate. The P/E valuation multiple has been chosen because P/E provides a snapshot of how the market valued their earnings relative to price; useful for comparing peers in a mature industry.
Through the table we notice that Rheinmetall AG stands out with the highest valuation. Airbus has relatively moderate multiples and low YTD growth (7.66%), suggesting it may be viewed more as an industrial/aerospace hybrid rather than pure defence. Finally, Leonardo and Thales are trading at mid-to-high multiples but have very strong YTD growth which reflects a positive sentiment and strong outlook. The median for the industry for EV/EBITDA and P/E is 21.44x and 45.36 respectively.
Nevertheless, companies in the space are undergoing consolidation and collaboration efforts. For instance, Rheinmetall and Leonardo have formed a joint venture to develop next-generation military vehicles, aiming to strengthen their positions in the European defence market. Most notably, Leonardo has indulged in multiple other expansionary efforts including the three-way UK-Japan-Italy joint venture to deliver a new fighter jet, a discussion with Tales Group and Airbus over an alliance in the satellite industry, and most recently a drone joint-venture with the Turkish company Bayka.
Through the table we notice that Rheinmetall AG stands out with the highest valuation. Airbus has relatively moderate multiples and low YTD growth (7.66%), suggesting it may be viewed more as an industrial/aerospace hybrid rather than pure defence. Finally, Leonardo and Thales are trading at mid-to-high multiples but have very strong YTD growth which reflects a positive sentiment and strong outlook. The median for the industry for EV/EBITDA and P/E is 21.44x and 45.36 respectively.
Nevertheless, companies in the space are undergoing consolidation and collaboration efforts. For instance, Rheinmetall and Leonardo have formed a joint venture to develop next-generation military vehicles, aiming to strengthen their positions in the European defence market. Most notably, Leonardo has indulged in multiple other expansionary efforts including the three-way UK-Japan-Italy joint venture to deliver a new fighter jet, a discussion with Tales Group and Airbus over an alliance in the satellite industry, and most recently a drone joint-venture with the Turkish company Bayka.
The Future of European Defence: Unity or Fragmentation?
EU’s rearmament marks a historic turning point driven by geopolitical uncertainty. The industry that today employs roughly 1.2 million workers is set for further growth with established players likely to benefit due to the sector’s high barriers to entry and capital-intensive nature. Its far-reaching implications are already reflected through shifting markets, redirected capital and a new dynamic commodity, industrial and corporate transformation. To assess the long-term sustainability, it is important to understand if going forward ReArm Europe will lead to a common EU strategy. Without alignment among member states, there is a real risk that efforts could backfire. As Federico Santopinto, Senior Research Fellow at IRIS, warns “In such a scenario, each country would finance its own defence industry in isolation, exacerbating fragmentation and duplication of efforts, rather than strengthening Europe’s collective military capabilities”.
EU’s rearmament marks a historic turning point driven by geopolitical uncertainty. The industry that today employs roughly 1.2 million workers is set for further growth with established players likely to benefit due to the sector’s high barriers to entry and capital-intensive nature. Its far-reaching implications are already reflected through shifting markets, redirected capital and a new dynamic commodity, industrial and corporate transformation. To assess the long-term sustainability, it is important to understand if going forward ReArm Europe will lead to a common EU strategy. Without alignment among member states, there is a real risk that efforts could backfire. As Federico Santopinto, Senior Research Fellow at IRIS, warns “In such a scenario, each country would finance its own defence industry in isolation, exacerbating fragmentation and duplication of efforts, rather than strengthening Europe’s collective military capabilities”.
Written by: Nicolò Giuliani, Andrea Botero Herrera, Alexander Lockhart, Anh Tho Vu
Bibliography:
- European Commission
- NATO
- Bloomberg
- Reuters
- Goldman Sachs
- Deloitte
- European Parliament
- Voice of America
- JP Morgan
- Euronews
- Financial Times
- Bruegel
- Hithorizons
- IISS
- Bae Systems
- Leonardo
- Rheinmetall