In June, European members of the North Atlantic Treaty Organization (NATO) committed to a historic expansion of the region's defense investment — raising contributions to 5% of respective national gross domestic products. Of the total allocation, 3.5% is expected to go into core defense and 1.5% into national security and infrastructure.
With most nations currently contributing between 1.5% and 3.5%, this represents a near doubling of the European contribution to NATO’s defense over the next five years, increasing from €400 billion annually to over €800 billion by 2030. That level puts Europe nearly on a par in purchase power with the United States’ current annual budget of around $850 billion, and ahead of both Russia and China, which each spend about $400 billion per annum.
The hike in spending acknowledges that geopolitical threats are a new norm and underscores the significant gap in defense capacity and capabilities between Europe — including the United Kingdom — and its global peers, a gap that has grown since the Cold War.
Despite different available defense capacity and capabilities, there is no single European country that could hold sway at a global negotiation table. To achieve relevance in the geopolitical global defense and security redesign — de facto unfolding at this historic moment — Europe must develop a unified regional defense strategy communicated in a single voice.
To translate the higher defense budget commitment into a strategic power lever, each nation in Europe needs to address the sociopolitical concerns of prioritizing defense and security versus other equally relevant national priorities and, accordingly, redesign its industrial capacity. Building a significantly larger industrial and engineering footprint for aerospace and defense (A&D) and pursuing a national industrial strategy that nurtures regional industry champions in technology and defense will create a differential and long-term competitive advantage.
Why Europe must invest in new defense equipment and emerging technologies
Europe’s historical spending pattern in defense shows that less than 30% of the total budget has been invested in new equipment and technology, while the majority has been spent on sustaining standing armies, managing infrastructure and operations, training and logistics. That spending pattern looks to be upended with the new budget commitments, more than 40% of which are slated to buy hardware and new technological advances for the region’s military services.
This new priority is of paramount importance for Europe not only for a level-up of the national and European capabilities, but also to get the full economic value out of the investment. According to our study on the prosperity impact of the A&D sector, defense spending had a historical multiplier effect of 1:2 — meaning every dollar or euro spent on defense generates two for the economy. With the new technology driven priorities, the multiplier will be almost double (1:4) for investments in new equipment, which in turn will enable long-term economic, industrial, social, and security prosperity for the countries.
Part of that additional bounce from European defense spending could be achieved through another anticipated change in the procurement strategies of European nations. With the exception of France, European countries have historically acquired from US-based defense prime contractors a significant portion of their equipment (more than 65% of the outsourced equipment is from the US), obtaining in exchange a partial offset via Tier 1 and 2 suppliers. Our analysis on European defense trends projects that the new European defense pledge and commitment to invest in national production capacity will gradually cut the US share of new equipment purchases to less than 30% by 2035.
Independent from the ramp-up curve required to secure “Made in Europe” defense equipment and technology, the region will continue to buy a disproportionate amount of defense technology from the United States for the next five years at least. A significant component of the most strategic capabilities — including those in cyber, unmanned vehicles and weaponry, electronic warfare, air defense, space surveillance, and underwater applications — are currently based on strategic partnerships between North American and European players. No doubt, these partnerships will continue to grow and broaden over the next several years to ensure quick capability growth for the region. They are also part of the tariff agreements that the European Union and United States have been discussing in recent months.
These discussions and technological alliances underline the diplomatic and geopolitical role the industry has always played, irrevocably organized around strategic transatlantic and western alliances and largely irrespective of the sovereignty ambitions of the governments.
That said, European governments are increasingly securing a larger share of these western joint ventures, especially for next-generation equipment. This will help ensure long-term prosperity impact — including security independence — for the continent. Multinational collaborations on next-generation airborne and ground domain platforms, mostly driven by government, aim to secure technological know-how and long-term stability across Europe. Also, government-to-government agreements are becoming more common as a mechanism to facilitate cross-country collaboration and technology proliferation.
The military’s role in driving commercial aerospace innovation
To understand the complexity and impact of the global defense budget increase, one must also consider its effect on commercial aviation, which has been growing at more than 3% per annum since the COVID-19 pandemic. This rate of growth is expected to continue over the next decade, regardless of increases in worldwide geopolitical tensions.
To support the jump in air travel demand, the global commercial fleet is also expected to expand over the next decade based on projections in our Global Fleet and MRO Market Forecast 2025-2035. The report projects the fleet increasing to more than 33,000 aircraft by 2030 and more than 38,000 by 2035 from just over 29,000 at the start of 2025, requiring global production to grow at more than 7% per year over the next decade to satisfy the demand.
This could pose a problem for the European defense ambitions, given the extensive overlap between the industrial supply chains of commercial aerospace, other manufacturing industries, and defense. This amplifies the challenge to upgrade European capacity and technology. In fact, key suppliers are already facing significantly higher demand and are struggling to fulfill it, while also dealing with instability in tariffs and exchange rates due to heightened trade tensions between Western allies. In this context, access to traditional credit has been threatened. Government funding and private capital — despite their complexities — have remained the more direct financing methods supporting corporate growth, and are expected to increase in prominence over the next decade.
Four strategic priorities Europe must address to modernize defense
To rapidly activate the defense ramp-up to which Europe has committed, we have identified four strategic issues which must be addressed by governments, industry, and investors:
1. Build defense and industrial capabilities for strategic readiness
While the ambition of the Readiness 2030 European plan — a strategic roadmap for strengthening the EU’s collective defense and technological autonomy — is to fill all the region's capability and technology gaps as rapidly as possible, setting priorities is required to achieve this efficiently and strategically. Based on the expected mission requirements and current sourcing patterns, the European Commission has identified several priority sectors. These include air and space defense systems, tactical unmanned aircraft systems and mechanized combat capabilities, information and spectrum dominance in areas like electronic warfare, integration software C4 and secured communications, and cybersecurity.
In practical terms, every nation is working with industry leaders to identify specific, urgent needs and opportunities to shape the technology and manufacturing blueprint of the sector for the future —with potentially some specific domain focus and specialization.
This is a significant step up for several European Ministries of Defense that will need to evolve their industrial and forecasting capabilities to play a dual role: being the orchestrator of international partnership and guiding the national industry ramp-up in terms of capacity and technology. Organizing industrial discussion tables, hiring senior industrial advisors, and investing in forecasting capabilities are key steps that European governments must consider for the near future.
2. Expand manufacturing capacity through scalable innovation
Our global military fleet forecast estimates annual deliveries of military aircraft are to skyrocket from around 800 to 1,400 over the next decade. A similar surge in demand is projected for land (the highest growing domain), naval, and space-based capabilities. This kind of growth generates significant pressure on capacity and will require major infrastructural investments and acquisition of the necessary engineering and manufacturing resources.
Our study on the defense market in Europe indicates that the sector will require more than 250,000 additional engineers and skilled technicians (more than 25% of the current total) across the continent within the next five years to cope with the current industry backlog and the increasing market demand. Not surprisingly, aerospace industry leaders are looking at ways to increase productivity and capacity at existing facilities as well as selective acquisitions from adjacent industries.
Converting a heavy industry plant into defense is not a simple challenge, especially in electronics and precision mechanics, but assembly lines and several subsystems could be easier and faster to adapt.
3. Advance defense growth in Europe through international partnerships
Given current market conditions and short-term requirements, multinational ventures represent the most reliable source of technological innovation and deployment. The model of those cooperations is being rapidly revamped. In recent years, larger and more integrated alliances have been developed around land systems, fighter jets, underwater capabilities, and unmanned technologies. Strategic alliances are the future of the industry, particularly when effective measures are established to protect intellectual property rights and ensure their benefits at the alliance level. We estimate that larger programs run by multinational western alliances of companies and countries will jump from 20% of total equipment produced in the last decade to more than 40% over the next five years.
4. Strengthen the underlining aerospace and defense supply chain
Making investments in growth requires a dimensional shift that not all strategic suppliers are ready to make, given their size, financial structure, and fragmentation as well as the uncertainty created by tariffs, trade wars, and fluctuating exchange rates.
Additionally, the sector is subject to national golden power rules — regulations that allow governments to control foreign investments in critical industries to protect national security and strategic interests. As a consequence, not all international investors can participate.
To ensure the structural shift needed to support the 2030 Readiness European vision, it is essential to extend the long-term aspirations of governments and agencies to prime contractors as well as the entire supply chain. Long-term co-development contracts and reviewed commercial terms and conditions, such as those regarding pre-payment schemes, will be required to nurture supply chain evolution and increase the appeal for external investors.
At the same time, more flexible investment and governance mechanisms would likely be necessary to balance the interests of investors on the long-term financial return, with the sovereignty limitations on sharing of intellectual property and strategic capabilities.
Strategic roles and expectations for key defense stakeholders
For these visions to come to fruition, many stakeholders need to step up and adapt to the needs of the sector. Governments need to lead the industrial strategy for the sector and support and foster international cooperation. One of their biggest contributions could be the simplification of regulations around investment and the removal of some risk in corporate investment in capacity expansions through long-term agreements.
Industry prime contractors need to begin expanding capacity immediately to satisfy new demand. They also must pursue innovation and digitalization so that this long wave of new investments will result in a more agile industry able to cope with future challenges more dynamically.
For supply chain leaders, the challenge will be in extending and enhancing collaboration with prime contractors and scaling up capacity and capabilities by leveraging strategic and financial partners. But to do this effectively, they must recognize and hedge exogenous risks.
Investors may be one of the most important stakeholders as they provide the fuel to make most of this possible. They will need to balance carefully private and public investments as well as returns and governance with national interests and sovereignty requirements.