Rethinking European Defense Spending
In December 2024, the United States urged NATO allies to increase their defense budgets to 5 percent of GDP. While the appropriateness of this figure is debated—last year, the U.S. allocated 3.4 percent of its GDP to defense—the consensus remains that Europe must urgently enhance its military spending. Kaja Kallas, the EU’s chief diplomat, voiced this sentiment in a recent address to the European Defense Agency, asserting the need for increased investment. UK Prime Minister Keir Starmer has already redirected funds from the foreign aid budget to push his country’s defense spending up to 2.6 percent, while Germany’s new Chancellor Friedrich Merz has sealed a billion-euro agreement to bolster military capabilities and infrastructure.
However, merely increasing funding without implementing substantial reform could perpetuate inefficiencies within an already strained system that is slow, fragmented, and inadequately prepared for modern warfare. Europe’s defense strategies require not just greater financial commitment but a thorough reevaluation of how investments are structured and allocated.
Challenges with Legacy Contractors
The European defense sector is primarily dominated by established prime contractors, which often maintain a risk-averse attitude and are slow to innovate. Contracts are routinely awarded to these legacy firms, limiting competition and resulting in unchecked costs and poor contract terms. This creates a cycle where budgets are locked into lengthy agreements that cater to these giants, sidelining smaller, agile startups that could introduce innovative solutions. Additionally, the longstanding apprehension of venture capital towards defense investments remains a significant barrier, as many firms have restrictions in place that prevent them from engaging with the sector.
This dynamic was perhaps tenable during decades of relative peace in Europe, but in light of current geopolitical challenges, such an approach has become outdated and increasingly dangerous.
The Importance of Speed and Innovation
Historical trends show that technological advancements have always drastically altered warfare dynamics, a lesson that Ukraine’s ongoing conflict underscores today. The conflict has dramatically accelerated the innovation cycle of military technology, with drone designs evolving at a breathtaking pace since 2022. Startups that can quickly iterate on battlefield feedback are now developing cutting-edge countermeasures and manufacturing capabilities in highly secure facilities, often hidden underground to avoid enemy detection.
Europe must preemptively embrace these emerging lessons rather than waiting for crises to dictate its strategy. By increasing innovation budgets, investing in nascent companies, and ensuring they remain independent from acquisition by larger defense firms, Europe can foster the next generation of military technology.
Collaboration Among Major Defense Contractors
While prominent defense contractors have a critical role to play, they also need to evolve. Enhanced collaboration across European nations is essential for the effective development of defense equipment and services. The fragmentation of projects along national lines has proven inefficient; often, it yields mediocre outcomes where the division of labor overshadows combat effectiveness.
Europe possesses a unique opportunity with commitments to sixth-generation fighter programs. Instead of competing with multiple designs, countries should aim for collective investment in a single platform, leading to an order book that rivals American competitors like Boeing’s F-47, thus securing better global standing and operational capability.
Fostering an Ecosystem for Startups
Transformation in Europe’s defense landscape also necessitates creating an environment conducive to startups and innovative entities. Governments must develop procurement processes that prioritize transparency, competitiveness, and inclusivity of non-traditional players. This requires robust investments in research and development, a reduction in bureaucratic hurdles, and an overall acceleration of the defense procurement system.
Moreover, investors need to reassess their hesitance regarding defense spending. The current situation starkly illustrates that prosperity cannot exist without security; Ukraine’s struggles emphasize the necessity of a fortified defense as a cornerstone of economic stability.
Sovereignty in Defense Capabilities
While transatlantic cooperation remains vital, Europe must prioritize building its own sovereign defense capabilities. To achieve this, an investment mindset that emphasizes long-term goals and data-driven decision-making is crucial. This means shifting away from cost-plus contracts towards milestone-based funding that incentivizes timely delivery and performance.
As the continent grapples with the balance between maintaining a proud culture of peace and recognizing the need for a robust defense, it’s critical to understand that innovation—instead of inertia—will ensure the preservation of that peace. Building a resilient defense ecosystem is a paramount objective for Europe’s future.
