America’s peace plans for Ukraine will be at the top of the agenda when Europe’s leaders meet members of Donald Trump’s team in Munich this week, but just as important will be how the region can boost its defences amid repeated warnings from the US president that it has been underpaying for its security.
Three years after Russia invaded Ukraine, European countries are spending more on defence, but industry executives warn the scale of the challenge to rearm and be ready for future wars remains stark.
“There can no longer be this disparity at a Nato level where one leg is much stronger than the other, and this was true even before Trump’s [return],” said Roberto Cingolani, chief executive of Italy’s Leonardo, referring to the leading role the US has played within the security alliance. “It is not wrong for [the US] to say it is not their job to defend us,” he added.
European companies have increased their output of military equipment, from ammunition and tanks to air defence missiles and rockets. Yet decades of under-investment and long-term reliance on American hardware for certain expertise mean the continent’s capacity to produce on an industrial scale remains limited.
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Share prices and order books of many of Europe’s leading defence contractors, including Sweden’s Saab and Germany’s Rheinmetall, have soared in the past three years but their turnovers remain small compared with those of US rivals. Only one European company — UK’s BAE Systems — ranked among the world’s top-10 defence companies by turnover in 2023.
Executives identified several actions they said were key towards helping the continent’s industry to gain scale: long-term orders from governments to provide visibility for investment; greater collaboration between companies including through pan-European programmes; a focus by governments to buy from domestic manufacturers and invest in supply chains; and more investment in research and development to foster innovation.
Europe, said Armin Papperger, Rheinmetall chief executive, needed large “champions with a turnover of around €40bn”. This, he added, also required “corresponding major orders — only in this way [is] defence production on an industrial scale possible, and only in this way can large investments be made”.
Morten Brandtzæg, chief executive of Nammo, one of Europe’s largest producers of ammunition, said the industry was hampered by the absence of long-term orders to help build up supplies for Ukraine as well as refill national stockpiles.
Although the company, which is part-owned by the Norwegian and Finnish governments, was investing “20 times more in production equipment” compared with before the war broke out, there was still a “huge [production] gap to build enough capacity to support Ukraine and at the same time to refill [national] ammunition stockpiles”, he said.
To achieve significant scale, said executives, it was critical for companies and national governments to collaborate as the industry’s fragmented nature also hindered its ability to deliver at scale.
“What Europe needs to do is first come together and create programmes at scale, second spend more money, and third buy from Europe,” said Guillaume Faury, chief executive of Airbus, the aerospace and defence group, last month.
Cingolani said it was necessary to “create a second leg to the Nato platform that is strong, reliable and safe”. This, he said, could only be done “at an EU [level] by reducing the current fragmentation, rationalising investments and increasing the average [countries’] investment”. It was important to create “industrial alliances”, he added.
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A test of Europe’s willingness to consolidate will come in the next few months in the space sector. Executives from Airbus, Leonardo and France’s Thales have held talks about potential tie-ups of their space activities to compete with large rivals such as Elon Musk’s Starlink.
One template for a pan-European space alliance is that of MBDA, the region’s missile champion, whose cross-border manufacturing and one-company ethos is seen as a model for the type of collaboration needed.
Success, however, is not assured. Previous attempts to team up in space between Airbus and Thales have foundered. Other pan-European programmes to forge cross-border alliances have been dogged by both political and industrial divisions.
Joint projects can “spread the financial burden and ensure lower unit costs than a solely national effort securing larger production orders,” said Tom Waldwyn, research fellow at the International Institute for Strategic Studies think-tank. Past efforts, however, had “suffered from inefficiencies, protracted negotiations regarding workshare or technical specifications”.
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Forming standalone European champions focused on key defence domains would also help to address problems. French President Emmanuel Macron recently called for Europe to create regional champions in various weapon categories to address what he cast as severe fragmentation. He pointed out that Europe had “62 different land platforms”, referring to tanks and other fighting vehicles, compared with “eight in the US”, while in the naval sector “the ratio is six in the US to 47 in Europe”.
But such mergers are arguably even harder to do than joint development projects given the resistance of countries to lose control over their domestic companies and concerns over job losses.
Consolidation in Europe’s defence sector had become more difficult to imagine than a decade ago, said one industry executive. European countries tended to look at how to “grow their own national champions, rather than look at how to do cross-border collaboration or mergers among different European countries today”, the executive said.
A more pragmatic approach towards greater collaboration and pooling of resources would be group purchases of defence equipment. Guntram Wolff, senior fellow at Brussels’ economic think-tank Bruegel, said bundling procurement — either through a centralised agency at the EU level or a joint initiative from several companies — would be one way. Companies, he added, would have to bid for the procurement proposals, enabling a “more market-driven approach”.
Another funding idea, pushed by France in particular, but rejected by Germany and others, would be to undertake joint borrowing at the EU level to use on defence spending.
Europe also needed to step up investment in innovation. While “significant uplifts in spending on defence investment have been evident over the past decade, particularly since 2022, the vast majority of this uplift was directed towards acquisitions and procurement rather than R&D,” said Fenella McGerty, senior fellow at the IISS.
Most executives argued that Europe needed to take responsibility for its own security.
“When European nations opt to buy European capabilities, this supports the industry in getting a return on its investments — this is needed in order for Europe to strengthen its own production capacity, resilience and freedom of action,” said Micael Johansson, chief executive of Sweden’s Saab.
With Trump back in the White House, executives stressed the time to act was now.
“We owe this to Nato,” said Cingolani, “but we [also] owe it to ourselves, considering we have taken peace for granted for 70 years and we can no longer take it for granted.”