By Eric Vandenbroeck and co-workers

Fixing Europe’s Firepower

European leaders know by now that they need to invest more in security. They know that the continent needs bigger defense budgets to fund more military capabilities and larger armies. Some of their motivation comes from Washington, which this year pushed European NATO members to commit to military spending targets of five percent of GDP (including 3.5 percent for outlays on core defense needs such as hardware). But Europe needs to spend for its own sake, too, to ensure the continent’s safety in a world in which it can rely less and less on the protection of the United States.

The challenge is executing an effective military buildup. Many European countries carry large debt burdens and struggle to bring spending on welfare and pensions under control, limiting their room for fiscal maneuvering. Increased budgets, moreover, do not translate automatically into greater capabilities.

Simply purchasing more U.S. defense systems, for instance, might please Washington but would be an inefficient and perhaps imprudent way to bolster European security. The U.S. defense industry suffers from significant backlogs: the wait time for a new Patriot missile defense system is seven years, for example. Relying on a foreign industrial base is also risky: if the United States were embroiled in a conflict elsewhere, it would be unlikely to prioritize maintenance for U.S.-made systems in Europe.

A serious buildup therefore requires investment in European defense production, but this presents obstacles, too. Europe’s defense industry is fragmented and ridden with wasteful redundancy. With multiple firms in different countries producing different types of the same equipment, the continent has ended up fielding roughly six times as many major weapons systems—such as fighter jets, battle tanks, and attack helicopters—as the United States. Many governments have nurtured defense companies as national champions, and joint production across borders is rare. As a result, few European firms are among the largest defense companies in the world—a list that is dominated by American and, to a lesser extent, Chinese manufacturers. Even the large European defense players, such as France’s Thales, Italy’s Leonardo, and Germany’s Rheinmetall, look like modest operations compared with their U.S. counterparts.                                 

A large and coordinated increase in defense budgets, combined with expanded access to capital across European borders, is necessary to expand and to reduce fragmentation in the European defense industry. The U.S. Department of Defense spends more than $800 billion every year, including close to $300 billion on acquisitions. Meanwhile, the European Union’s Readiness 2030 defense initiative, unveiled in March, is seeking to leverage around $175 billion in EU-facilitated borrowing by member states to mobilize up to $940 billion in investment, most of it private, in Europe’s defense industry. The European Commission’s next budget proposal allocates an additional $150 billion for defense over seven years. These pledges are still not big enough, and they do not address the underlying obstacles to industrial consolidation. Without resolving both problems, Europe stands little chance of making up for its decades of underspending on defense.

ended up fielding roughly six times as many major weapons systems—such as fighter jets, battle tanks, and attack helicopters—as the United States. Many governments have nurtured defense companies as national champions, and joint production across borders is rare. As a result, few European firms are among the largest defense companies in the world—a list that is dominated by American and, to a lesser extent, Chinese manufacturers. Even the large European defense players, such as France’s Thales, Italy’s Leonardo, and Germany’s Rheinmetall, look like modest operations compared with their U.S. counterparts.

To give European industry the boost it needs, the continent’s leaders must unlock its vast capacity for investment. The EU is home to $39 trillion in private savings—more than three times as much as in the United States—predominantly held in currency and deposits. Turning these resources into defense capacity will require European leaders to remove barriers to investment, establish a common regulatory framework for a European capital market, and provide joint financing for military projects. There is no quick solution to the continent’s defense deficit. But the right reforms can help make European security something Europe can afford.

Polish soldiers taking part in military exercises near Orzysz, Poland, September 2025

 

Shoulder to Shoulder

European rules that require investors to factor environmental, social, and governance considerations into their business decisions do not explicitly ban investment in defense companies, but many investors are wary of doing so anyway. The defense industry carries a reputational stigma among European bankers, financial institutions, and their clients, who may choose to exclude these companies from their portfolios to avoid public scrutiny. Europe does have more outright restrictions than the United States, too. According to the Brussels-based think tank Bruegel, 14 percent of professionally managed assets in Europe were subject to restrictions on weapons-related investment as of 2021, compared with less than one percent in the United States.

Private investment in European defense firms should be encouraged, not discouraged. A private investor cannot be mandated to spend on security but might be more inclined to do so if influential public institutions such as the European Investment Bank lead the way. For more than two decades, the bank has banned defense- and security-related investment. It relaxed that restriction in March to allow investment in projects that qualify as dual-use, but it still prohibits direct investment in weapons and ammunition production. Many of these restrictions are self-imposed, in coordination with the European Commission, and can be changed with sufficient political will. If the bank, which has a balance sheet of more than $640 billion, were to prioritize spending on EU-wide defense projects such as the Eurofighter combat aircraft or the Main Armoured Tank of Europe, it could show private investors that putting money into European defense is nothing to be ashamed of.

Scaling up defense spending will also require an integrated European financial market. The continent already has a common currency, but member countries regulate their own banking systems and retirement funds. As a result, savings accumulated in a given European country tend to stay there rather than flowing organically to places with higher rates of return. This stagnation limits the size and depth of Europe’s capital market. In the United States, private companies are mostly funded through the capital market (around 75 percent) rather than bank loans (around 25 percent), providing a quicker way to raise cash while limiting exposure. In the EU, that balance is reversed, and European startups and defense firms struggle to secure financing to grow their businesses as a result.

A lack of access to capital also hampers European startups’ potential. As Ukraine has shown with its drone industry, a flexible and decentralized procurement system and rapid innovation cycle are essential to producing the weapons of modern war. Those structural conditions are not present in Europe. Nor does Europe have a large enough venture capital industry to support this type of innovative market. Startups have similar early success rates in the EU and the United States, but because the U.S. venture capital industry is six times as large as the European sector, European startups have more difficulty accessing significant, reliable financing and thus have lower chances of long-term survival.              

Establishing the EU Savings and Investment Union, which would create a single regulatory regime in Europe, would make it easier to finance both legacy and startup defense companies. This project was originally proposed in 2015 and was reanimated by a 2024 report on the state of European competitiveness by the former Italian prime minister Mario Draghi. The European Commission introduced a plan in March to make it a reality. Although it is not a silver bullet that will turn Europeans into risk-taking venture capitalists, the union would remove obstacles to investment by European citizens, funds, and banks to invest in projects beyond their national borders, and allow them to range continent-wide. There is now political momentum to realize the union, fueled by Draghi’s report and a 2024 report by another former Italian prime minister, Enrico Letta, both of which identified underinvestment as the main factor contributing to the EU’s sluggish growth. The European Central Bank has pushed for the union, too. Now, the EU’s principal institutions must work together with the finance industry to deliver the Savings and Investment Union in the next year.

Finally, the EU should fund joint defense spending with joint financing. Together, the European Commission, the European Central Bank, the European Defense Fund, and national central banks and ministries of defense could seek to raise around $950 billion, the amount Draghi recommended (800 billion euros) to revive European growth. Joint borrowing has long been controversial in Europe; member states have varying risk tolerance when it comes to debt, which led to clashes among Germany, Greece, the Netherlands, and Spain during the eurozone crisis. But it is the best way for the continent to raise money quickly without assuming the same financial risks that individual countries would shoulder in borrowing the same amount themselves. Previous EU-level debt instruments, such as the eurozone bailout fund established in 2012 or the EU’s post-pandemic recovery fund, have historically received the highest possible credit rating, and there is no reason to think a European defense bond would be any different. The interest from this bond could be kept at a manageable level, too, given that many investors are looking for safe assets amid a period of global economic uncertainty.

Introducing such a bond would add to the newly available capital and private-sector investment enabled by the creation of the Savings and Investment Union. Together, these steps would help defense companies scale up production and help innovators commercialize their products. Defense companies across Europe would even have incentives to join forces to attract more investment, reducing the fragmentation in the sector.

Together, a common defense bond and reforms in Europe’s banking and financial industries would allow for a rebuilding of the continent’s defenses. For years, limited EU-level coordination of defense policy and member states’ reluctance to increase defense budgets have held the continent back. Now, European leaders must recognize that bold action is the only way to keep Europe safe and united in the dangerous times that lie ahead.

 

 

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