As the continent gets ready to increase its defense spending, investors may find it advantageous to be exposed to European defense companies
European defense spending is soaring, which opens up new avenues for investors to support the continent's most creative and seasoned companies.
The defense budget grew by 11.7 percent between 2023 and 2024. Germany has the fourth-largest defense budget in the world, with spending up 23.2 percent. Poland moved up from 20th place in 2022 to 15th place in the world for defense spending. Growing vulnerability in the wake of Russia's 2022 invasion of Ukraine has been the main driver of this growth. Many nations corrected their historical underspending on defense after the war's outbreak jolted European leaders out of their complacency with regard to their defense capabilities.
By 2024, 23 NATO countries had defense budgets at or above the 2 percent GDP threshold, compared to just six in 2021.
Nevertheless, given the possible dangers to the continent, there is increasing agreement that this 2 percent figure is still too low. US President Donald Trump has insisted that European NATO members increase their GDP by 5%; however, NATO Chief Executive Mark Rutte has proposed a goal of more like 4%.
No. NATO allies are spending the 2% GDP target.
The effect of Trump.
Therefore, the increase in defense spending may only be beginning. The suspension of US military aid to Ukraine by Donald Trump, which also halted intelligence sharing and prevented Kyiv from using some American weapons, rocked Europe's defense establishment. European leaders were given a clear warning by this: the US is no longer the steadfast security guarantor that Europe once believed it to be. European leaders now feel a renewed sense of urgency as a result.
The government of the United Kingdom recently pledged an additional 20.2 billion to defense, paving the way for defense expenditures to reach 2.5 percent of GDP by 2027. By the next parliament, the government hopes to increase GDP by 3%.
German changes have been among the most important. A comprehensive defense spending package has been announced by Friedrich Merz, the country's next chancellor, who has also changed Germany's debt regulations to partially exempt military spending. Political reluctance and stringent laws governing government borrowing have long hampered Germany's arms industry. The Merz reforms alter that. Now, it is anticipated that German producers like Rheinmetall, Hensoldt, and Renk will increase output to keep up with the growing demand. Germany, which has long been criticized for underfunding defense, is now establishing itself as a key participant in European rearmament.
To improve the continent's security and lessen reliance on non-European suppliers, the EU will implement the ReArm Europe initiative, a defense program worth 800 billion. The plan will secure long-term investment in European military capabilities by directing European defense spending towards domestic manufacturers. For companies like Saab, Leonardo, and Thales, this is especially important.
Following years of discussion about "strategic autonomy," the EU is investing in the idea.
The path to 5 percent.
In order to estimate how much more NATO membersaside from the USmay spend on defense equipment in the upcoming years, HANetf recently modelled a number of scenarios. According to our "bull case" scenario, NATO (previously US) defense budgets would increase to 5% of GDP by 2029, equipment spending would increase by 1% annually as a percentage of those budgets, and the gross national product would grow by 2% annually.
This would lead to an extra £350 billion being spent on defense gear. In 2023, that amounts to over half of the revenue generated by the global defense sector. Defense equipment spending will increase significantly, even in our "bear case" scenario. Assuming that NATO (ex-US) defense budgets reach 3% of GDP by 2029, equipment spending stays at 31.6 percent of total budgets, and the GDP grows by 1% annually, we make this assumption. This would lead to a £92 billion increase in defense equipment spending, which is still a sizable amount of global defense revenue.
NATO, formerly the United States.
European defense in the future.
This could be a huge opportunity for investors and a multi-decade tailwind for European military technology innovators and defense firms. Both the significant increase in defense spending and its reallocation to European businesses will be the main drivers of this. Investors thinking about this theme might want to look into an exchange-traded fund (ETF) that offers exposure to more than just traditional hardware; it also includes the future of defense. As dependency on US businesses decreases over time, this industry will continue to expand, with European suppliers taking center stage. In keeping with Europe's larger drive for strategic autonomy in the energy, capital, and defense sectors, investors might also want to take into account a European defense fund issued by a European company.
Notice: Only for experienced investors. Money at risk. To learn more about European Defense ETFs, speak with a qualified financial advisor.
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