For years, security was perceived in Europe as a guaranteed good. The so-called “era of the peace dividend”, after the fall of the Berlin Wall, allowed many countries to reduce military spending and redirect those resources to other social and economic purposes.
However, the invasion of Ukraine in 2022 marked a turning point: defense has returned to the center of the political, economic and business agenda. And with that, the key question of how to finance this effort.
NATO has set much more ambitious targets: reaching defense spending of 5% of GDP by 2035, from current levels where only a few countries exceed 2%. This represents an unprecedented leap and poses a financing challenge in a context of strict fiscal rules and growing needs in other areas such as the energy transition or digitalization.
The European Commission has responded with the ReArm Europe – Preparedness 2030 plan, which combines fiscal flexibility, the creation of a joint fund of 150 billion euros (SAFE), the reorientation of community resources and a policy change in the European Investment Bank to finance military projects. The sign is clear: Defense is no longer considered a discretionary expense, but a strategic investment in security and autonomy.
This impulse is not limited to traditional weaponry. The value chain of the defense sector includes areas as diverse as cybersecurity, artificial intelligence, the protection of critical infrastructures or dual technologies, those with both civil and military applications.
This explains why technology, transport or even energy companies today have a growing role in the European defense ecosystem.
The dynamism is already reflected in the markets. The order books of the large companies in the sector are growing by double digits, and stock market valuations recognize that potential. The European defense index is trading at a significant premium to the EuroStoxx 50 and has outperformed the index over the last 12-18 months, reflecting medium-term profit expectations.
Stock market performance of the defense sectors of Europe and the US compared to market indices
Even so, public financing alone is not enough to cover the enormous needs of the sector. A paradox arises here: while European states promote massive spending plans, part of private capital continues to face ethical and regulatory dilemmas when investing in defense. The rise of sustainable investment had relegated this industry to the list of excluded sectors, but geopolitical reality has changed the debate.
Large international funds have already reviewed their policies, arguing that investing in defense can be compatible with sustainability, as it protects essential goods such as security, fundamental rights and the stability of societies.
The data is illustrative: since 2022, the positioning of the global defense market has increased by 70% and the positions in European companies in the sector have appreciated more than 250% in just three years. Companies such as Rheinmetall, BAE Systems and Dassault have seen their order books grow and announced ambitious capacity expansion plans to meet new demand.
Europe, however, starts from a lagging position compared to the United States. Investment in defense research and development is significantly lower in the EU, which generates a clear technological gap that conditions European competitiveness and limits its strategic autonomy. Added to this situation are structural obstacles such as industrial fragmentation, lack of standardization and difficulties in coordinating joint acquisitions between Member States.
The initiatives underway, such as the European Defense Industrial Strategy or the European Defense Industry Program, seek precisely to consolidate the industrial base, foster innovation and improve interoperability.
Thus, The aim is to make better use of resources and avoid duplication that reduces spending efficiency.
Financing of the defense sector, in this new framework, is not reduced to strengthening armies. It involves promoting the European technology industry, integrating SMEs into critical supply chains, investing in resilient infrastructure and developing capabilities in areas such as space or cybersecurity.
In short, it is about providing Europe with a comprehensive security ecosystem that combines public and private resources.
Europe is facing a paradigm shift: defense has gone from being an often-questioned budget item to becoming a strategic and economic priority. The challenge is immense: Achieving spending and capacity targets will require overcoming financial, regulatory, and also ethical barriers.
But the conclusion is clear: the financing of the defense sector is not only a military issue, but a decision for the future for the European project.
*** Miguel Díaz is a professor at Afi Global Education