A stark new reality in Europe — that its long-time ally and security guarantor, the United States, may not come to its rescue in a future war — has set the stage for a faster ramp-up in military spending on the continent.
And in anticipation of higher revenues for European defense companies, investors have poured into their stocks, pushing a key index to an all-time high this week.
The US held talks with Russia this week to explore ending the war in Ukraine, three years after Moscow launched the full-scale invasion of its neighbor. Neither Kyiv nor its European allies were invited to take part.
“I’ve been in and around defense for a long time, and I’ve never seen anything like this,” Trevor Taylor, a director at the Royal United Services Institute, or RUSI, a London-based think tank, said of the cracks in the transatlantic alliance.
The sidelining of the European Union and the United Kingdom — who have funneled more than $160 billion in aid and military equipment to Ukraine since February 2022 — has fueled fears that the region can no longer rely on the US to backstop its security.
It’s a role Washington has played for decades, stationing troops and nuclear weapons on European soil to help deter aggressors, Taylor noted.
Last week, US Defense Secretary Pete Hegseth made it clear that his country’s support of peace in Europe now came with preconditions.
“The United States will no longer tolerate an imbalanced relationship which encourages dependency,” Hegseth told a coalition of more than 50 countries coordinating the delivery of military equipment to Ukraine, during a visit to Brussels. “Rather, our relationship will prioritize empowering Europe to own responsibility for its own security.”
Faced with the cold shoulder from Washington, European leaders hastily organized a summit in Paris Monday to discuss Ukraine and the continent’s security, including the willingness of European countries to step up defense spending.
Europe will always want American support for its security, Taylor at RUSI said, but “readiness to increase (its) reliance on the United States has disappeared.”
“There is a recognition that Europeans should… do as much as possible for themselves,” he added.
Defense stocks surge
Europe’s new vulnerability has been a boon to its defense companies.
The STOXX Europe Total Market Aerospace & Defense index soared to an all-time high Tuesday, falling back slightly since then. So far this year, the index — which tracks Europe’s leading defense and aerospace companies — has gained 14%. And compared with its value before Russia invaded Ukraine in 2022, it has surged 127%.
The shares of Germany’s Rheinmetall have risen 9% so far this week, while France’s Thales and Italy’s Leonardo have jumped almost 10% and more than 11% respectively.
Europe’s defense stocks have “plenty of room” to go higher still, according to Ross Mayfield, an investment strategist at Baird, a wealth management firm.
Even without Washington’s stunning snub of Brussels and Kyiv this week, European defense companies would have benefited from the “slow and steady change in how the world operates,” Mayfield argued.
Weakening of economic ties between some countries and a more “multipolar world” compared with previous decades have intensified the need for nations to invest more in their security, he said.
But translating current market buzz into concrete returns for investors will depend on the amount of extra money European governments commit to defense, Mayfield added.
In a speech last week, Ursula von der Leyen, the head of the EU’s executive, said she would propose exempting defense investments from the bloc’s limits on government spending. “We need a surge in European defense spending,” she told attendees at the Munich Security Conference.
Trump has long chided a number of European members of the North Atlantic Treaty Organization, or NATO, for failing to spend 2% of their gross domestic product on defense, a target set more than a decade ago. He has recently called for an increase to 5% and NATO Secretary General Mark Rutte has said it must be “north of 3%” of GDP.
Yet, simply throwing more money at defense won’t be enough.
Roberto Cingolani, chief executive of Leonardo, told CNN in an interview last month that European countries needed to work jointly to develop the best military technology and equipment for the entire continent.
“All big countries in Europe tend to develop… their own aircraft, their own tank, their own ship,” he said, adding that the continent needed “stronger industrial alliances.”
Olesya Dmitracova contributed reporting.
