New army recruits of the Bundeswehr, Germany’s armed forces, during basic training on Nov. 29, 2022 near Prenzlau, Germany.
Sean Gallup | Getty Images
As Europe plans to pour billions of dollars into defense, many regional leaders are pushing for the money to be spent locally — but some market watchers say it’s inevitable that U.S. companies will benefit from the impending security splurge.
Last week, a parliamentary vote for historic debt reform paved the path for a defense spending hike in Germany. Separately, the U.K. Prime Minister Keir Starmer vowed to hike Britain’s national spend on defense, and the EU pledged to mobilize up to 800 billion ($867 billion) euros in a bid to “urgently” ramp up the bloc’s security spending.
‘Prioritise European companies,’ EU says
Officials — and companies — have made it clear they want to keep the money inside European borders.
An official update on the EU’s ReArm Europe strategy last week called on member states to “spend better, work together, and prioritise European companies.” New spending plans said most non-member state countries — including the U.K. and the U.S. — would be shut out of procurement processes unless they signed Security and Defence Partnership agreements with the EU.
Meanwhile, Thales CEO Patrice Caine told CNBC earlier this month that Europe should “take its destiny in its own hands” and strive to keep new defense budgets in the region.
“It’s only a political willingness to buy more and more from European suppliers rather than suppliers based outside of Europe,” he said in an interview. “The U.S. supply their defense equipment systems from U.S. suppliers … Australia does the same, the U.K. does the same — so why should Europe do it differently?”
Defense decoupling ‘extremely difficult’
Although the EU appears committed to spending as much of its new defense capital as possible in Europe, keeping procurement solely within the region would require a sizable shift. A number of U.S. defense giants currently occupy a big space in the European military supply chain.
Maryland-headquartered Lockheed Martin, for example, has been a supplier to Europe for more than seven decades. In recent years, the firm has partnered with Rheinmetall to provide Germany with a customized rocket artillery system, started production of a HOMAR-A Multiple Launch Rocket System for the Polish government and sold Joint Air-to-Surface Standoff Missiles to the Netherlands.
U.S. defense giant Northrop Grumman is another major supplier to European militaries that has powered core command and control (C2) systems for NATO and Britain’s Ministry of Defense for 25 years.
Since the beginning of this year, RTX’s Raytheon — headquartered in Arlington, Virginia — has won a $529 million contract to replenish the Netherlands’ Patriot air defense system, as well as a $946 million contract to supply air defense systems to Romania.
Michael Witt, professor of international business and strategy King’s College London’s Business School, told CNBC that defense decoupling between Europe and the U.S. “will be extremely difficult in the short term.”
“So, some money will certainly go to U.S. suppliers,” he said of the new budgets. “But in the longer term, European defense needs to stand on its own feet, with as little U.S. input as possible because security cooperation by U.S. administrations can no longer be assumed.”
“Of special interest could be spending on nuclear weapons to replace the U.S. umbrella over Europe — warheads, delivery systems, and so on,” Witt added in emailed comments.
The U.K.’s multibillion-dollar Trident nuclear deterrent program utilizes U.S.-built missiles, and it is reliant on the U.S. for maintenance, according to think-tank Chatham House.
“Continuing to rely on the US for its deterrent seems a risky option,” researchers at the institution said in commentary published Monday. “The first Trump administration might have looked like an aberration, but his second term may reflect deeper long-term shifts in US foreign policy … exploring options to develop substitute capabilities with European allies may be the next logical move, despite the challenges.”
Tobias Ellwood, a former U.K. politician who held a senior position in Britain’s Ministry of Defense during his parliamentary career, also said the time has come for the U.K. to consider reducing its reliance on American-made defense supplies.
“We have to make this assumption that America isn’t going to be there, that they’re dialing back,” he said on a phone call. “So, what can they deny which we’re going to have to fill in?”
Earlier this month, the U.S. temporarily halted military aid to Ukraine after a public clash between the nations’ two leaders. Washington’s support for Kyiv has since resumed.
“If things go [down] the trajectory that we’re seeing, then we can easily see the closing down of defense markets, even our nuclear deterrent, so there’s tough questions for us,” Ellwood told CNBC.
Capacity problems
However, Europe faces another obstacle to its spending objectives, according to Thierry Wizman, global interest rates and currencies strategist at Macquarie Group. He told CNBC that there simply “may not be the capacity” to keep new security budgets from reaching American companies.
“The economies of scale in the European defense industry, the highly specialized nature of what is being built, and the need to keep the kit conforming with NATO standards and interoperability with U.S. systems, which will still be in Europe — all of that seems to suggest that a good part of it can be directed toward the U.S.,” he said on a call.
‘Aggressive’ deal-making
Even if capacity and supply chain issues can be resolved, U.S. firms could make strategic moves to avoid being shut off from the growing source of capital in Europe, Bill Farmer, managing director at investment bank Brown Gibbons Lang & Company (BGL), told CNBC.
“You’ve got a situation where the U.S. still has a large budget, but it’s potentially not growing as fast as what it has, and the dynamics have shifted away from larger platforms to smaller, more nimble companies,” Farmer, who leads BGL’s activities in the aerospace, defense and government services sector, said in a call.
“Whereas you go to Europe, and there is this huge opportunity — budgets are changing, there’s a huge opportunity for increased investment in capital there. So I think that you potentially could see some fairly decent sized acquisitions in Europe.”
He signaled that American defense companies would be “fairly aggressive” in pursuing deals with their European peers.
“Leonardo, Rolls Royce, Airbus, Safran, Thales — all of these have huge opportunities in front of them,” Farmer said. “And so I think you’re going to see U.S. companies having conversations with all of these folks about, is there an opportunity for us to make an investment in a company, is there an opportunity for us to carve out a piece of that business to get access to that market?”
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