From dependence to deterrence

If you have been eyeing the markets lately, you might have observed a double-digit surge in European defence stocks. Germany’s largest defence company, Rheinmetall, has seen its stock price more than double since the year began, with other defence manufacturers seeing similar results. Moreover, Europe’s broader aerospace and defence index has jumped over 30% during the same time period.

This boom isn’t a product of regional stability but is instead due to a shift in the United States’ stance on Europe.

Europe’s wake-up call

President Trump’s abrupt pivot towards Russia has left European states worried. On account of his public row with Ukrainian President, Volodymyr Zelenskyy, the CEO of a Swedish defence AI company, Mikael Grev, remarked: “He is throwing him under the bus. The Nordic and Baltic states need to think: will he do the same to us?” The sudden realignment in Washington’s policy has forced Europe to reassess its defence strategy. Investors have been quick to catch on. This is apparent from the sell-off of European government bonds, driven by expectations of higher spending.

Historically, while European nations have relied on the United States for military support, this is something they have now come to regret. Recent moves to re-arm are a case in point. Prime Minister Starmer, for instance, has pledged to raise UK defence spending to 3% of its GDP during the next parliament. Similarly, Germany is set to revamp its debt rules to enable higher defence spending – a move that Chief Economist at Deutsche Bank Research, Robin Winkler, labelled “one of the most historic paradigm shifts in German postwar history”.

Europe has little choice but to buckle up its seatbelt on a one-way flight to self-sufficiency, with turbulence guaranteed and no smooth landing in sight

The renewed commitment at the national level has been mirrored by a larger European effort. President of the European Commission, Ursula von der Leyen, has set ambitious targets through the ReArm Europe plan, aiming to mobilise around €800bn in order to ramp up defence. The plan has been complemented by proposals to allow states to increase their defence spending by up to 1.5% of GDP while still adhering to debt and deficit rules. This could lead to additional spending of about €650bn across the EU. However, not everyone is on the same page regarding how funding should be allocated. Paris insists it should be primarily devoted towards weapons licensed by the EU, while Germany prefers flexibility to pursue partnerships with countries like the UK.

The road ahead

Europe finds itself at a crossroads, torn between the urgency of self-reliance and the reality of American dependence. Over the last half-decade, nearly 2/3 of European NATO members’ arms have been produced by the US. Furthermore, since the beginning of the Russian invasion,  63% of EU procurement has gone to the US. Analysts estimate that Europe must spend at least €250bn annually on defence to establish a credible deterrent against Russia, though the target’s sustainability remains uncertain. While the recent push for higher spending shows promising intent, fragmented national policies threaten to undermine execution.

Regardless of these obstacles, Europe has little choice but to buckle up its seatbelt on a one-way flight to self-sufficiency, with turbulence guaranteed and no smooth landing in sight. The price of security is reckoned to be steep, as Western officials warn that Ukraine – with its levels of weaponry – can only sustain its current intensity of fighting until mid-2025.

With war shaping priorities, opportunities for economic growth abound. As one French businessman put it: “The Germans can’t sell their cars, so they will make tanks.”  Ultimately, the question is not if the continent will break free from its dependence on the States but when.