Key Points
The United States expects its European allies to take on a much greater burden of conventional deterrence in Europe as the continent faces a threat from a belligerent and revanchist Russia. If Europe is to succeed, it must dramatically scale up its own defense industry and reduce its dependence on the US industrial base.
A sustainable European defense buildup thus involves reducing purchases of US military systems. To facilitate it, Washington must pivot away from prioritizing US arms sales to Europe and lend its support to European initiatives that result in greater defense industrial capacity in Europe.
To succeed, European nations must do more than just sustain the increased levels of defense spending. They must acutely deepen the EU’s financial integration and mobilize EU savings to invest in new industrial capacities.
Short of debt mutualization, a dedicated multilateral financial institution, the European Rearmament Bank, could be set up by a European coalition of the willing. The bank would both provide a financial injection into the European defense industry and accelerate the integration of European financial markets in the defense sector.
Introduction
It has become an almost axiomatic feature of the transatlantic relationship that the United States expects its European allies to assume a larger portion of the burden of conventional deterrence in Europe. As a result, it is clearly in the US interest that Europe acquire the means to achieve that end. In this pursuit, successive US administrations have put increasing pressure on European countries to ramp up their defense spending. Since NATO members collectively committed at the Wales Summit in 2014 to spending 2 percent of GDP on defense, the alliance has moved to a target of spending 3.5 percent, or 5 percent if one includes the additional 1.5 percent of GDP to be spent on defense infrastructure.1
Yet spending more does not automatically translate into additional military capabilities. It would do Europe’s defense, and the credibility of its alliance with the US, a disservice if the decision to increase spending were translated into accounting games or spending for spending’s sake. Nor should higher European defense spending be seen as a program for reducing the US trade deficit or an engine for generating additional employment in the US defense industry.
Few Europeans dispute the sizable contributions US taxpayers and service members have made to the continent’s security. But a sustainable form of burden sharing will require that Europeans make their own independent choices about weapon systems and rebuild an industrial base that will allow them to operate autonomously of the United States—even if they are embedded in a common transatlantic alliance, NATO.
In practice, there are often no good alternatives to US systems. On many occasions, Europeans may choose US manufacturers on their merits, including interoperability. Yet for the new balance of responsibilities within NATO to endure politically and strategically, Europe must invest in its own industrial capacities, even if doing so means reducing its purchases of US-made systems.
The main reason is baked in the very rationale for a stronger European role in NATO. Since the United States may need to prioritize other theaters in times of conflict, Europe’s overwhelming reliance on US systems is a vulnerability. The US defense industry might need to prioritize providing spare parts, ammunition, and other support to the US military rather than to European customers. And that consideration leaves aside the pressing practical issue of existing backlogs in critical systems such as Patriot and F-35. Most contracts concluded with US manufacturers today will provide additional capabilities only many years down the road.
Investment in domestic industrial capacity operates with lags too. Yet other things being equal, if the choice is between two comparable wait times, it is preferable to choose the path that provides permanent industrial capacity to those who will rely on it down the road. As European governments scrambled to build up their defenses in the first year of Russia’s full-scale invasion of Ukraine, almost two-thirds of European weapon purchases were from US companies and another 15 percent from other non-EU suppliers.2
To be sure, foreign defense purchases are appropriate to rapidly address gaps, especially gaps resulting from transfers of vital military systems to Ukraine. Poland, for example, donated its entire Soviet-era main battle tank fleet to Ukraine, replacing it with Korean-manufactured tanks. But the gradual rebuilding of European militaries must go hand in hand with the rebuilding of the European industrial base needed to support the continent’s defense in times of war.
US companies can play a role in rebuilding Europe’s defense industrial base. In fact, it may offer ample opportunities for US firms to invest in Europe—bankrolling promising startups, setting up coproduction with European partners, or otherwise benefiting from the ongoing increase in European defense spending. Anduril’s partnership with Rheinmetall, allowing it to produce European versions of Anduril’s drones and cruise missiles, is one example—as is Raytheon’s joint work with Norway’s Kongsberg in producing the National Advanced Surface-to-Air Missile System.3 Because the inflow of foreign capital to the United States is a flip side of America’s persistent trade deficit, the Trump administration should welcome joint ventures and US investment in the European defense industry not only as a way of strengthening the alliance but as a contribution to its own efforts at reducing the US trade deficit.
American approval for Europe’s own industrial policy to build up the defense sector is only a small piece of the overall puzzle. A much bigger challenge involves using additional public funds and private capital to consolidate and scale up what remains a small and excessively fragmented sector. One key to success, furthermore, lies far from defense procurement itself. It involves building a European banking and capital markets union that would enable European private savings to flow freely into forms of investment that not only generate high private returns but contribute to European security. This is also where the current efforts differ from earlier institutional structures such as the European Defense Agency and the European Defense Fund, which assumed away the challenges involved in scaled-up capital investment—focusing instead on acting as new conduits for public spending.
This report starts with a stylized overview of the state of Europe’s defense industry and the pitfalls of the procurement system. It then discusses the existing European-level policy initiatives, their potential, and their limitations. Finally, it outlines a constructive path forward and the obstacles standing in the way.
The State of the Industry
At the request of the European Commission, Mario Draghi authored a report investigating pathways to accelerate economic growth in Europe as a precondition for the EU regaining its geopolitical relevance and delivering on its ambitious social and environmental goals. The result, The Future of European Competitiveness, notes that “the EU’s defense industry is still highly competitive at the global level in specific domains,” citing high export volumes as evidence. (Emphasis removed.) “Some EU products and technologies,” Draghi writes, “are superior or at least equivalent in quality to those produced by the US in multiple areas, such as main battle tanks and related sub-systems, conventional submarines and naval shipyard technology, rotorcraft and transport aircraft.”4 However, Draghi is also upfront about the EU defense industry’s two main weaknesses: its smallness and continuing fragmentation. These features result from not only decades of underinvestment in defense but the fundamentally national character of defense budgets, defense procurement, and defense industrial policies.
Although NATO membership has imposed some interoperability structure on EU states, the alliance has had a characteristically light touch in shaping national choices about weapon systems and other decisions concerning investment and technology. The same is even truer of the EU itself, which, until recently, played a negligible role in defense. While many European governments turn routinely to US industry for some of their systems—F-35 fighters are an obvious example, reflecting the absence of a European fifth-generation fighter—the purchases’ incoordination has resulted in the proliferation of different systems and manufacturers across the continent. According to one oft-cited statistic from 2018, Europe features as many as 178 different major weapon systems, compared to just 30 in the United States.5
The problem has not disappeared. A 2021 report published by the Swedish Defence Research Agency counts 12 European tank systems (compared with one in the United States), 25 types of frigates and destroyers (compared with two in the United States), and 14 fighter planes (compared with five in the United States).6 Certainly, the market shares are sometimes uneven—as in the case of main battle tanks, where Leopard systems dominate. The persistence of legacy, Soviet-era systems in Eastern Europe also contributes to the existing fragmentation, which is nonetheless self-correcting as such systems are progressively replaced by newer Western systems.
Unsurprisingly, however, Table 1 shows that European defense firms count among the smaller players in the global market. Only five of them make the list of the world’s 20 largest defense firms by defense revenue, otherwise dominated by US and Chinese players—the latter under direct or indirect state control. Table 2, furthermore, presents a selection of major European-made weapon systems and their manufacturers. With some exceptions, the companies involved are small and often parochially national. That has consequences. Economies of scale, for example, enable defense companies to invest more in research and development (R&D). In the EU, Draghi notes, defense R&D amounted to just over €10 billion in 2022—less than one-tenth of R&D spending by US defense manufacturers in the same year.7 Research and development spending itself is a function of scale. Assuming the same margins, companies with larger sales and more global reach will be able to invest more into research, making their products more advanced and competitive.
Table 1. World’s 20 Largest Defense Firms by 2024 Defense Revenue (US Dollars, Billions)
CompanyCountryTotal RevenueTotal Defense Revenue Percentage of Revenue from DefenseLockheed MartinUS$71.0$68.496%RTXUS$80.7$43.554%China Aerospace Science and Industry CorporationChina$121.0$38.732%Northrop GrummanUS$41.0$36.689%General DynamicsUS$47.7$36.576%BAE SystemsUK$33.6$32.396%Boeing CompanyUS$66.5$31.848%China State Shipbuilding CorporationChina$112.0$22.420%L3Harris TechnologiesUS$21.3$17.080%Thales GroupFrance$22.2$15.972%China North Industries Group CorporationChina$68.7$14.9 22%China South Industries Group CorporationChina$45.5$14.131%LeonardoItaly$19.2$13.872%AirbusNetherlands and France$74.7$12.717%LeidosUS$16.6$11.669%HIIUS$11.5$11.5100%AmentumUS$13.9$8.561%RheinmetallGermany$10.6$8.278%Booz Allen HamiltonUS$12.0$7.865%CACI InternationalUS$8.1$7.389%Source: DefenseNews, “Top 100 for 2025,” https://people.defensenews.com/top-100.
Note: Rows in bold highlight the five European companies in the world’s 20 largest defense firms.
Table 2. European Manufacturers of Major Weapon Systems by 2024 Revenue (US Dollars, Billions)
SystemManufacturerCountryRevenueRevenue from DefenseGround SystemsLeopard 2 Main Battle TankKNDS GroupNetherlands$4.1$4.1Rheinmetall (Components)Germany$10.6$8.2Challenger 3 Main Battle TankRheinmetallGermany$10.6$8.2BAE SystemsUK$33.6$32.3Leclerc XLR Main Battle TankKNDS GroupNetherlands$4.1$4.1Truck Equipped with an Artillery System (CAESAR) HowitzerKNDS GroupNetherlands$4.1$4.1Panzerhaubitze 2000 HowitzerRheinmetallGermany$10.6$8.2Bradley Fighting VehicleBAE SystemsUK$33.6$32.3M109A6 Paladin Self-Propelled HowitzerBAE SystemsUK$33.6$32.3Missile Defense ProgramsNational Advanced Surface-to-Air Missile SystemKongsberg GruppenNorway$4.5$2.1Surface-to-Air Medium-Range or Land-Based Air Defense Missile Launch Platform and Aster Missile FamilyMBDAFrance$5.3$5.3Thales GroupFrance$22.2$15.9Medium Extended Air Defense SystemMBDAFrance$5.3$5.3 Lockheed MartinUS$71.0$68.39Missiles and MunitionsCommon Anti-Air Modular MissileMBDAFrance$5.3$5.3Taurus KEPD 350SaabSweden$6.0$6.0 MBDAFrance$5.3$5.3Shipbuilding and Maritime SystemsBarracuda- and Scorpène-Class SubmarinesNaval GroupFrance$4.8$4.8UK SubmarinesBAE SystemsUK$33.6$32.3ShipsRolls–Royce (Reactors)UK$22.5$5.7FincantieriItaly$8.8$2.2BAE SystemsUK$33.6$32.3Naval GroupFrance$4.8$4.8NavantiaSpain$1.7$1.2Aircraft and Related SystemsEurofighter Typhoon Fighter JetAirbusNetherlands and France$74.7$12.7BAE SystemsUK$33.6$32.3LeonardoItaly$19.2$13.8Fighter HelicoptersLeonardoItaly$19.2$13.8Rafale Fighter JetDassault AviationFrance$6.7$4.2Source: DefenseNews, “Top 100 for 2025,” https://people.defensenews.com/top-100.
In general, the more expensive and complex the weapon system, the larger the potential downsides of a fragmented industrial base. Not only does Europe lack its own fifth-generation fighter aircraft, but the plans to develop a sixth-generation one are currently uncoordinated—and thus likely doomed from the start. On one hand, there is the Future Combat Air System (FCAS), a collaboration among France, Germany, and Spain—currently in peril over questions of Dassault’s future participation.8 FCAS not only involves the development of the Next Generation Fighter but encompasses work on autonomous drones and AI.
On the other hand, Italy, the UK, and Japan are working on the Global Combat Air Programme to build yet another stealth fighter. Saab, the successful maker of the Swedish Gripen platform, is staying out of both efforts. Again, the question is not whether a variety of European companies could develop a next-generation fighter but whether such future platforms will be viable. The competition between the Rafale and the Eurofighter Typhoon has resulted in each playing a marginal role—and the American F-16 dominating European skies.
A version of this observation applies to European defense procurement in general. The Draghi report notes that between mid-2022 and mid-2023, 63 percent of all EU defense orders were placed with US companies and a further 15 percent with other non-EU suppliers.9 Of course, there are good reasons for international trade, including in defense, especially with allies and like-minded countries. Yet the absence of a viable and scalable domestic defense industry is a major vulnerability that Europe must address if it is to grow its role on the world stage—or, at a minimum, police its own neighborhood effectively.
The Policy Status Quo
The central policy factor behind the inadequacy of European militaries and the industrial base that underpins them is the decades of underinvestment in defense. In 2024, two years into Russia’s full-scale invasion of Ukraine and a decade since NATO’s Wales Summit, where the 2 percent target was first set, defense expenditures by EU countries stood at 1.9 percent of GDP.10 In 2025, defense spending across EU countries is expected to reach merely 2.1 percent of GDP, or €381 billion.
In comparison, the US Department of Defense is spending $908 billion in fiscal year 2025, or 3 percent of projected US GDP.11 Chinese defense spending has also been growing rapidly. Despite the recent increases in European defense budgets, Europe is facing a real risk of being left behind and defenseless in a worsening international environment. To be sure, investments have been growing at an exceptional rate, increasing in 2024 by 42 percent compared with 2023 and reaching a record high of €106 billion—yet that growth is happening from a low base, and its effect on productive capabilities will be only cumulative.12
There are several reasons European governments are not spending more—some political and others perhaps related to uneven threat perceptions across the continent. The most important factor by far, however, is the adverse fiscal outlook that many European economies share as their sizable welfare states confront aging populations and sluggish economic growth. The average debt burden in the euro area is 88 percent of GDP; across the EU, it is over 82 percent—far above the benchmark of 60 percent that the EU once set for itself.13 While the average figures hide much variation (Bulgaria’s and Estonia’s debt-to-GDP ratios are in the low 20s, while Greece’s, Italy’s, and France’s are far above 100 percent), they suggest that the fiscal space to increase defense (or other) spending, without major overhauls to public finances, is limited.14
Outside the EU, the United Kingdom (with a debt-to-GDP ratio of 96 percent) has had recent experience with bond vigilantes responding quickly to the 2022 “mini-budget” proposed by the short-lived Liz Truss cabinet. This suggests that the onset of debt crises can be sudden and unpredictable—and that numerous EU countries with similar economic characteristics may be at risk of prompting the same bond market dynamics.
Barring a sudden improvement in Europe’s growth prospects or effective fiscal reforms—both of which have proved elusive—one possible remedy to this predicament is using the EU as a platform for issuing common debt and generating additional revenue that could be invested in defense. In response to the pandemic, the EU took the unprecedented step of issuing common debt of around €800 billion to be disbursed to member states as loans and grants under the auspices of the Recovery and Resilience Facility.15 It is not unthinkable that significant resources could be raised again with shared EU bonds to fund European defenses.
Numerous considerations complicate the picture, however. First and foremost, the EU is not a conventional federation with coercive powers—it lacks, among other constitutional prerogatives, the power to tax. Moreover, there is considerable political resistance to issuing common debt in several influential member states, not least in Germany. Given the EU’s design, member states’ consent and collective willingness to honor the EU’s commitments are key to the bloc’s credibility, including its ability to secure favorable financing terms. A one-off pandemic facility, limited in size and mostly weighted against loans that the EU extended to member states, might be a different proposition from a larger instance of debt issuance, especially if it goes directly toward procuring weapon systems and building military capability.
It is a mistake to think of the EU as a deus ex machina, capable of mobilizing resources at will within its current constitutional setup. Adding a layer of EU-level debt on top of national debt burdens might seem convenient, but it has risks. As long as member states are liable for servicing EU debt and managing their own public finances, there is no reason financial markets should treat EU bonds any differently from some linear combination of national bonds—and make judgments about debt sustainability by looking at overall debt burdens and their evolution.
To navigate these challenges, EU institutions decided to set up a one-off facility, Security Action for Europe (SAFE), to finance urgent military purchases by member states, including big-ticket items such air and missile defense systems, maritime capabilities, and strategic enablers, through favorably priced long-term loans. SAFE, which is already oversubscribed, offers €150 billion in loan financing to national governments, funded by EU borrowing, in the hope of unlocking a total of €800 billion in extra defense spending. The scheme explicitly prioritizes European production by allowing no more than 35 percent of the component cost to originate outside the EU, European Economic Area, or Ukraine.16
Alas, while a major improvement over earlier initiatives such as the European Defense Fund, the facility is too small to change the picture dramatically. It might be expanded, but it will be constrained by the amount of additional debt countries are willing to take on. In addition, the European Commission is planning to allocate €131 billion for defense under its new Multiannual Financial Framework (MFF)—five times as much as under the current MFF—to finance investment in dual-use AI, cyberwarfare, military mobility, and so on in 2028–34. Disbursed over seven years, such spending boosts hardly scratch the surface of what Europe needs to build up its defenses.
If Europe is to succeed in rebuilding its hard power to keep revisionist adversaries at bay and enable the EU to throw around its geopolitical weight in its interactions with China and the United States, it must make different fiscal and economic choices. The existing social safety nets, pensions, and related programs must be revised to respond to the demographic and economic realities of the 21st century. Only then can European countries increase defense spending in a sustained fashion, which is necessary for growing the European defense industry and priming European militaries for a major war.
Complementarily, the growth of defense budgets alongside entitlement schemes could be made sustainable by significantly improving the continent’s productivity and growth prospects. This could be achieved by bringing down energy costs, cutting red tape, and aligning the single European market in key areas that continue to be subject to regulatory fragmentation.
Unsurprisingly, reducing regulatory and policy fragmentation is central to improving the health of Europe’s defense industry writ large. Even if the industry could suddenly work under the expectation of large and sustained purchases from European governments in the coming years, building up adequate production capacity is impossible without mobilizing private capital. There, the defense industry is facing the same challenge that is plaguing the European economy as a whole: Europe’s inability to channel private savings toward their most productive uses. Because of the EU bank industry’s continuing fragmentation, investment decisions display a strong domestic bias.
This phenomenon was identified initially by economists Martin Feldstein and Charles Horioka, who demonstrated that under complete capital mobility, there should not be a link between domestic savings and investment in individual countries over time.17 Yet in reality, savings—particularly within the EU, which theoretically should act as a space of full capital mobility—display a substantial home bias. The introduction of the EU’s common currency, the euro, reduced the link somewhat, but it resurfaced in the wake of the financial crisis of 2008, when banks and investors decided to reduce their exposure to foreign, albeit European, markets.18
Relatedly, European reliance on bank financing, as opposed to equity, acts as a constraint on entrepreneurship, the scalability of promising firms, and, in particular, the growth of defense firms—especially smaller ones. Whereas the US corporate sector is funded mostly through the capital market as opposed to bank loans (three-fourths external funding and one-fourth loans is a good first approximation), in the EU, it is the other way around.19 Yet bank financing, with the risk aversion it entails, is particularly unhelpful to innovative and smaller players. As a result, Draghi notes,
Besides public funding, access to private financing remains a key challenge for the EU’s defence industry. This is true in particular for SMEs [small and midsize enterprises] and mid-caps, which form the backbone of supply chains and are key innovation actors. A 2024 study on access to equity finance for defence SMEs estimates the equity financing gap at EUR 2 billion and a debt financing gap of up to EUR 2 billion for SMEs in the defence sector. These estimates are conservative, as they account only in part for companies engaged in developing dual-use technologies.20
What Europe Needs
Assuming Europe can reverse its decades of hollowed-out defense budgeting and set itself on a trajectory to seriously rebuild military capabilities—while helping Ukraine defeat Russia—it still must address the challenge of adapting its industrial capacity to the new era. This requires innovation, eliminating unhelpful redundancies and fragmentation, scaling up production volumes while encouraging competition, and an entrepreneurial spirit.
The aim is not consolidation for consolidation’s sake. The US example of deliberately reducing the number of key firms from dozens to just five has had its cost. In particular, many programs—including, famously, the F-35—were designed from the outset as make-work schemes, creating employment across the United States and passing on the cost to the taxpayer. In shipbuilding, programs such as the Littoral Combat Ship have been major disasters.21 An intimate connection between industry and its main customer has thus created pathologies that Europe would be well-advised to avoid, including by modeling its incentives for future defense industrial champions on the Asian approach of export promotion.22
Environmental, Social, and Governance Goals
While EU rules around environmental, social, and governance considerations do not explicitly ban investment in defense companies, the defense industry seems to carry a stigma among European bankers, financial institutions, and their clients. “The penetration of investment restrictions targeting the defence sector,” a study published by the Brussels-based think tank Bruegel notes, “increased massively across European investment funds between 2015 and 2021. . . . As of 2021, 14 percent of all retail assets under management in Europe were subject to some restriction on weapons-related investments—a trend not seen in the United States.”23
Obviously, private actors cannot be mandated to invest in defense. Yet they can be encouraged to do so by public policy, including by signals from influential public actors. The European Investment Bank has a balance sheet of €547 billion, which it could decide to prioritize in EU-wide defense projects.24 Yet while it has lifted recently its outright ban on defense and security projects if they qualify as dual use, it still refuses to invest directly in weapons and ammunition production.25
Savings and Investment Union
A necessary condition for mobilizing private savings to fund a fast defense industry buildup is to facilitate capital mobility across the union. This should be done in a way that counteracts the strong domestic investment bias and ends the status quo, under which savings that accumulated in one European country stay there instead of flowing organically to places with the highest return rates. The key reason for the continuing lack of investment mobility is the fragmentation of banking and retirement fund regulation across EU countries. That limits the size and depth of Europe’s capital market and its ability to fund ambitious investment projects, whether defense-related or not. Ultimately, this continuing regulatory fragmentation is holding back Europe’s economic growth writ large.
The solution that Enrico Letta proposes in his report on the single market is for the EU to work toward one simple regulatory rule book for banks and the financial industry.26 Letta rules out the possibility of establishing a single EU-level regulator at this stage but argues for a common, standardized framework and tight coordination between national actors, especially when overseeing financial institutions with potential. He states,
The system must evolve similarly to the banking sector’s single supervisory mechanism, where the ECB’s [European Central Bank’s] Single Supervisory Mechanism (SSM) directly oversees significant banks, while national supervisors manage less significant ones. Concurrently, a strengthened European Securities and Markets Authority (ESMA), in collaboration with National Competent Authorities, could assume more supervisory responsibilities for major entities based on criteria such as size, cross-border activities, and their systemic importance, encompassing trading venues, issuers, asset managers, and other financial market participants.27 (Emphasis in original.)
Complementarily, the proposed 28th regulatory regime can provide opportunities to create new ecosystems of venture capital and innovative startups, including in defense. Ukraine’s drone production is a testament to the importance of a competitive, decentralized landscape with fast innovation cycles in modern warfare. The structural conditions in Europe are not exactly favorable. Although the EU and United States have similar startup success rates (around 20 percent in the first year and 50 percent after three years), the US venture capital industry is six times larger than Europe’s ($270 billion vs. $44 billion).28 A more market-friendly and pan-European regulatory and tax regime for venture capital could bring the scale necessary for the EU to become a real player in this area—in a way the current overwhelming reliance on bank financing does not allow.
Coordinated Defense Industrial Policy, Avoiding Duplication
Clearly, the dreams of a “European army” are utopian. Similarly, the prospect of using the EU as the exclusive vehicle for weapons procurement is distant. However, there is no question that the fragmentation of military procurement is a serious driver of the fragility and smallness of Europe’s industrial base. Common initiatives, whether directed by the EU through SAFE or the MFF or pursued through coalitions of the willing, must introduce coherence to procurement decisions and industrial policy.
The EU has gone a long way toward limiting state aid to industry, especially under its single-market rules, but it has done relatively little to advance a coherent industrial policy agenda, especially in defense. The current push to spend more must therefore be deliberately channeled toward common procurement and joint programs. The goal should not be to arrive at US-style consolidation between five or so main players, which presents its own challenges, but simply to weed out the blatant inefficiencies in the current European industrial landscape.
Where Does the Money Come From?
Even if the barriers to capital mobility across the EU miraculously disappear and financial institutions shed their aversion to the defense industry, the continent will continue to face the challenge of how to finance a military buildup in an age of massive debt burdens and sluggish growth. The best “solution,” of course, consists of stipulating that Europeans revive growth, adapt their social safety nets to demographic realities, and create the fiscal space necessary to sustain a prolonged expansion of military budgets. That would create incentives for private actors to invest, innovate, and scale up. Of course, a major economic policy reset appears out of reach of European policymakers, for complex political reasons endemic to democracies with aging populations, the structural nature of barriers to growth, and the absence of effective leadership.
Alternatively, one can imagine that the EU, as a budding federation, could serve as a vehicle for raising the resources necessary to fund such buildup through its own debt. Yet such a move, executed at the needed scale, would break significant taboos and likely require deep constitutional reforms to the EU’s architecture akin to those taken by America’s Founding Fathers in the late 1780s. This is a difficult proposition in a political environment marked by deep divisions between and within EU member states.
What remain are solutions that are necessarily imperfect—falling short of the financial firepower that is required or not encompassing all EU member states, for example. Yet the perfect should not be the enemy of the good. Europe should stand ready to seize every opportunity to expand the resources available to the continent’s defense industrial base.
One such imperfect but decidedly helpful solution is the idea of a “European Rearmament Bank,” modeled after the European Bank for Reconstruction and Development and advanced by an informal group led by that bank’s former executive committee member, Guy de Selliers.29 The proposed bank would be built by a coalition of the willing, including EU member states and nonmembers with a keen interest in Europe’s security. A rearmament bank would leverage capital contributions from these states into lending capacity extended at low borrowing costs to countries and defense companies on a project basis.
The bank’s scale depends critically on the involved coalition’s width and the size of its contributions. Yet European Rearmament Bank proponents estimate that €10 billion in paid capital from major European governments could be leveraged into €250 billion in lending capacity for European countries to finance new procurement.30 If the bank grew into a major funder of Europe’s rearmament effort, it could use its position to help consolidate different orders, avoid parochialism by making tendering international, and foster interoperability and NATO standards—all simply by using carrots in the form of loans to cash-constrained governments.
Using a bank for financing would present two advantages over current policies. One, it would allow, under sound management, to expand the available resources through leverage—in contrast to ad hoc funds or schemes such as SAFE. Two, because it would finance projects, not just procurement by governments (or investment by defense firms), it could structure the contracting to prevent cost inflation and excessive lead times. Short of a utopian, top-down overhaul of Europe’s defense procurement systems, access to this mechanism provides a compelling way to avoid the usual pitfalls of fragmentation, overbidding, and delays.
Conclusion
This report is not a blueprint for a transatlantic divorce. Rather, it seeks to provide a recipe for putting the US-Europe relationship, particularly in the area of security, on a more solid and equal footing—one that successive US administrations have long called for. It does not rule out a constructive role for the US defense industry going forward—quite the contrary. The additional European spending and investment is an opportunity for US companies to set up new production capacity in Europe, co-funded on favorable terms by the new financial instruments developed in Europe, to better serve their European customers.
Such outbound investment would have the added benefit of reducing America’s trade imbalances, a professed goal of the Trump administration, while extending the existing relationships tying Europe and America together. Relatedly, China’s domination of mining and supply chains surrounding rare earth minerals—inputs to various industrial processes, including in defense—should be a strong impetus for transatlantic cooperation upstream of actual defense production.
That said, the success of an eventual emancipation and growth of Europe’s defense industry, even if it comes at the cost of additional European purchases of US weapon systems and the emergence of a new category of competitors to US military exports, remains deeply in the US interest. The idea that European leaders can step up in managing their continent’s security without disturbing any special interests benefiting from the status quo is an illusion. The sooner it is discarded, the better—for the sake of Europe’s security and the transatlantic alliance.
Neither is this report calling for massive overhauls of Europe’s institutional architecture. The EU, with its current membership base, is singularly unwieldy—and not only because of “troublemakers” in its midst, most notably Hungary. Its heterogeneity and deep domestic challenges in some core member countries, such as France and Germany, make rapid collective action on security, involving all 27 EU member states, highly unlikely. For that reason, this report proposes policies that can be enacted through a coalition of the willing (namely, the creation of a European Rearmament Bank) and EU-level policies that should not encounter great political resistance because of their technicality and overall desirability in improving the EU’s economic competitiveness (by completing the savings and investment union). The spirit of the report thus goes, one hopes, with the grain of the European project by preferring incrementalism and incentive-compatible solutions over utopias while recognizing the enormity of the security challenge facing Europe in 2025.
About the Author
Dalibor Rohac is a senior fellow at the American Enterprise Institute, where he studies the political economy of the European Union, transatlantic relations, and the future of Central and Eastern Europe.
Acknowledgments
I am grateful to Edward Lucas, Niccolò Comini, and Eduardo Castellet Nogués for helpful comments on an earlier draft. Katherine Camberg provided excellent research and editorial assistance. All errors are my own.