Investing.com -- European military budgets are undergoing a dramatic shift as governments ramp up spending in response to geopolitical tensions and growing security concerns.
With NATO members aiming to raise defense expenditure from 2% to as high as 3% of GDP, this shift represents an additional $220 billion in European defense spending, nearly half of which is expected to be allocated to new equipment purchases.
The implications of this spending surge are far-reaching, particularly for European and U.S. defense contractors.
The biggest winners in this environment are European defense firms, which have historically captured a smaller portion of the overall defense budget but are now positioned to benefit from localization efforts.
Companies such as Leonardo, Dassault Aviation, Rheinmetall (ETR: RHMG ), SAAB, Kongsberg, and Thales (EPA: TCFP ) are expected to gain the most from increased procurement within Europe.
Bernstein estimates that European contractors could see an additional $40 billion in annual revenue under the new spending scenario.
For U.S. contractors, the outlook is more complex. While American firms have traditionally dominated European defense procurement—controlling two-thirds of the continent’s defense expenditures in 2023—the trend toward localization could reduce their market share.
European nations have expressed a strong desire to develop domestic manufacturing capabilities, shifting spending away from imports.
However, U.S. firms are unlikely to be sidelined entirely. Europe continues to lag behind in high-end defense technologies such as space-based systems, hypersonics, missile defense, and stealth capabilities, areas where American contractors maintain a significant advantage.
The European market will remain an important, albeit evolving, revenue stream for major U.S. defense firms.
Market reactions to the increased defense budgets have been substantial. European defense stocks have skyrocketed, posting a 550% return since 2022.
Defense order backlogs have increased by 70%, yet sales growth has been more modest at 17%.
Valuations have surged as a result, with EV/EBITDA multiples nearly tripling. These figures suggest that markets have already priced in a major portion of the expected budget increases.
The key challenge now is for European governments to translate their commitments into actual contracts and spending.
Germany is leading the charge with plans to increase its defense budget to 3% of GDP, in part through a newly announced €500 billion fund dedicated to military and infrastructure spending.
France has expressed support for raising its military budget to 3.5% of GDP, emphasizing the need for nuclear deterrence.
The UK has committed to increasing its defense spending from 2.3% to 2.5% of GDP by 2027. Other nations, including Denmark, Italy, Poland, and Norway, have also signaled their commitment to significant defense spending increases.
If European defense spending reaches 3.5% of GDP, the total increase in military expenditures could exceed $330 billion.
Such a scenario would create a $60 billion opportunity for European contractors, with further upside potential if localization efforts gain more traction.
Growth forecasts suggest that European defense expenditures could rise at an 8% compound annual growth rate through 2030, with equipment spending growing at an even faster pace.
For contractors on both sides of the Atlantic, the evolving landscape presents both opportunities and challenges.
European firms must scale up capacity and invest in technological advancements to capture a larger share of the market.
Meanwhile, U.S. contractors must navigate shifting procurement policies while leveraging their expertise in advanced defense technologies to maintain a foothold in Europe.
The long-term impact of these spending increases will hinge on how effectively European governments implement their budgetary commitments and whether localization efforts can match the technological edge long held by American firms.