Important factors for interested parties as Europe's military industry experiences a significant turning point
Strengthening Europe's Defence Capabilities: A Comprehensive Approach
The European Commission is spearheading a series of initiatives to bolster Europe's defence capabilities and industrial capacity. These efforts aim to create a more resilient, integrated, and innovative defence ecosystem by 2035.
In June 2025, at the Hague Summit, allies committed to allocating at least 3.5% of GDP annually by 2035 to core defence needs, with an additional up to 1.5% of GDP for infrastructure protection, innovation, and industrial base strengthening. Non-NATO EU members aim to raise spending to about 2% of GDP by 2035, with an annual European public spending target of around €510 billion.
To address procurement challenges, innovation, financing barriers, and reputational risks, governments and companies are implementing coordinated actions.
Cooperation and joint procurement are being promoted through the European Defence Industry through Joint Procurement Instrument (EDIRPA) and the European Defence Industry Programme (EDIP). These initiatives aim to expand production capacities, improve interoperability within the EU defence sector, and facilitate joint investment and harmonize certification and planning.
The European Commission's 2024-2025 industrial strategy emphasizes a fundamental transformation of the defence and armaments industry. This transformation aims at enhanced innovation and capacity expansion through public-private partnerships and investment.
Financing solutions, including addressing financing gaps, are being addressed by leveraging existing public funding mechanisms and initiatives like the SAFE mechanism. The Commission plans to provide loans (€127 billion potential volume) and facilitate private capital mobilization, as well as synergy with the European Investment Bank (EIB) to signal investment attractiveness and bridge these gaps.
Flexible fiscal frameworks and institutional reforms are also being considered. The SAFE initiative and ReArm Europe Plan/Readiness 2030 aim to boost national defence budgets by introducing flexibility under the Stability and Growth Pact and mobilizing cohesion and regional funds for defence investments.
To combat the ongoing risk posed by corruption in defence contracts, vigilance will be key in ensuring that common issues seen in procurement, including corruption and contractual disputes, are minimised.
The European Commission has proposed a EUR 150 billion defence fund under emergency powers in EU treaties, which was adopted by the Council of the European Union on 27 May, 2025. The Commission is also expected to unveil a proposal to simplify procedures and reduce regulatory barriers in a bid to encourage joint defence procurement and aid the import and export of defence products within the EU.
The European Commission has proposed expanding the European Investment Bank's mandate to include projects dedicated for military use. Additionally, the Commission has proposed a targeted exception to allow the European Innovation Council to invest in companies developing dual-use technologies.
Equipment procurement is forecast to quadruple to nearly 1.5% of GDP by 2030, from 0.3% pre-2022. However, public and private sector policy reform will be critical if perceptions are to be shifted sufficiently to facilitate the requisite levels of investment to meet the estimated EUR 500 billion defence spending required over the next decade.
The European defence market is less consolidated than that in the US, and national champions tend to dominate domestic markets. Institutions may pose difficulties in the procurement process, such as NATO's protocols that require a military order before the procurement process can start.
Venture capital investment in defence start-ups in NATO countries has risen fourfold since 2019. Institutions like the DSR Bank, a proposed multilateral defence bank, may help finance large-scale rearmament efforts and fund joint military equipment purchases.
In conclusion, the European Commission and Member States are actively increasing defence spending commitments, boosting joint procurement and industrial collaboration, investing in innovation and infrastructure, and employing tailored financing mechanisms to reduce gaps and reputational barriers. These efforts aim to create a more resilient, integrated, and innovative European defence ecosystem by 2035.
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