European Defence Industry Programme – Europe’s armament programme: Late course correction or expensive symbolic politics?
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Published on: October 19, 2025 / Updated on: October 19, 2025 – Author: Konrad Wolfenstein
Europe's armament program: Late course correction or expensive symbolism? – Image: Xpert.Digital
From the Peace Dividend to Defense Investment – A Continent Re-Arms Itself
Embarking on arms autonomy: Europe's multi-billion euro program for the arms industry
The European Union has sent a historic signal with a budget of €1.5 billion for the European Defence Industry Programme. The EDIP is intended to strengthen the production capacities of the European defence industry, stabilize supply chains, and reduce strategic dependence on American weapons systems. Of this amount, €300 million will flow directly into cooperation with the Ukrainian defence industry, underscoring the geopolitical dimension of this industrial policy intervention. However, behind the facade of these announcements lies a fundamental realignment of European economic and security policy, the economic implications of which extend far beyond military issues.
The key challenge is that Europe currently sources more than 60 percent of its weapons systems from outside the European Union, with the United States being the dominant supplier with a share of over 64 percent. The EDIP, however, sets a clear target: a maximum of 35 percent of components may come from third countries in the future. By 2030, at least 50 percent of defense equipment is to be procured within the EU, and even 60 percent by 2035. These figures mark nothing less than a turning point in industrial policy, requiring investments in the hundreds of billions of euros and intended to transform the entire European defense industry.
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The legacy of the peace dividend: empty arsenals and painful dependencies
After the end of the Cold War in 1991, Europe underwent a phase of comprehensive disarmament and a reorientation of its security policy. The so-called peace dividend led to drastic cuts in defense budgets in almost all European countries. While the United States transformed its defense industry into highly efficient conglomerates such as Lockheed Martin, Raytheon, and Northrop Grumman through massive waves of consolidation in the 1990s, European countries largely retained their fragmented national structures.
The German Armed Forces, for example, reduced its anti-aircraft missile units from 10,970 positions in 1990 to just around 2,300. Of the original 36 Patriot squadrons, only twelve remained. This development was reflected throughout Europe. European defense companies shrank into highly specialized factories producing small batches of technologically sophisticated systems and reliant on export markets to maintain their production lines.
The structural weaknesses of this development became apparent with all their brutality with the Russian attack on Ukraine in February 2022. The EU member states had pledged to deliver one million artillery shells to Ukraine within twelve months, but by January 2024 had only been able to fulfill 52 percent of this commitment. European production capacities for 155-millimeter artillery ammunition were so low that they could neither guarantee deliveries to Ukraine nor rebuild their own stockpiles. By comparison, Russia produced an estimated 1.7 million rounds of artillery ammunition in 2022 and planned to produce three million rounds by 2025. The USA doubled its production capacity from 14,000 to 28,000 rounds per month and announced the goal of producing one million shells annually by 2025.
This discrepancy highlights the core problem of European defense policy: For decades, the continent had relied on the US to guarantee its military superiority in an emergency. The resulting strategic dependence affects not only weapons systems but also extends to critical supply chains. China is the main supplier to European manufacturers in the production of nitrocellulose, a key component for propellant powder. This dependence on Russia's most important ally reveals the geopolitical vulnerability of European defense structures.
A patchwork instead of a fortress: The fragmentation of the European arms landscape
The European defense industry is dominated by a handful of large corporations, whose revenues, however, lag far behind American and, increasingly, Chinese competitors. The British company BAE Systems leads the way with defense revenues of $27.4 billion in 2022. It is followed by Italy's Leonardo with $14.5 billion and Airbus Defence and Space with $11.2 billion. Rheinmetall, Germany's largest defense company, achieved total revenues of approximately €10 billion in 2024, ranking it 20th among global defense companies. By comparison, the American industry leader Lockheed Martin achieved revenues of $64.65 billion in 2023, almost six times that of Rheinmetall.
These size differences are no coincidence, but the result of fundamental structural problems. It is estimated that Europe uses over 170 different weapon systems, while the USA gets by with just 30. This fragmentation prevents economies of scale, increases unit costs, and inhibits technological innovation because research and development budgets are spread across too many parallel programs. The German-French company KNDS, which emerged from the merger of Krauss-Maffei Wegmann and Nexter, illustrates this dilemma perfectly. Despite a formal merger in 2015, the two companies continue to operate largely independently to this day. The Leopard 2 main battle tank, the flagship of KNDS Germany, requires key components such as the cannon, fire control technology, and ammunition from competitor Rheinmetall.
National procurement policies further exacerbate this fragmentation. Each EU member state attempts to maintain the broadest possible portfolio of its own production capabilities in order to preserve industrial and security sovereignty. The principle of juste retour, according to which each country seeks to secure as much as possible from the EU budget, prevents concentration on a few highly efficient production locations. These national solo efforts have even increased in recent years, as rising military budgets have increased the incentive to use funds for local jobs rather than pooling resources.
The EDIP attempts to break down these structures by providing financial incentives for cross-border cooperation. Projects must involve at least four EU member states to be eligible. The European Defence Fund, with a budget of €8 billion for the period 2021-2027, complements these efforts. However, compared to the scale of American defence research, which spends around €28 billion annually on research alone, these sums remain modest.
The US's market power is manifested not only in the size and efficiency of its defense companies, but also in its ability to shape European procurement decisions. Between the periods 2015-2019 and 2020-2024, arms imports by European NATO members doubled, with the US share rising from 52 to 64 percent. For critical systems such as missile defense, aircraft engines, and drones, Europe often lacks competitive alternatives. For example, Germany opted for the Israeli-American Arrow 3 missile defense system at a cost of approximately €4 billion because comparable European systems were either unavailable or technologically inferior.
Between record spending and skill gaps: The quantitative dimension of the turning point
Defense spending by the 27 EU member states reached a record high of €343 billion in 2024, representing a 19 percent increase over the previous year. The European Defence Agency forecasts a further increase to €381 billion in 2025. This would exceed NATO's two percent target for the first time, which most European countries missed for many years. Measured as a percentage of gross domestic product, spending in 2024 corresponded to approximately 1.9 percent and is expected to rise to 2.1 percent in 2025.
But these increases mask structural deficits. The new NATO target, adopted at the summit in The Hague in June 2025, stipulates that all member states should spend a total of five percent of their GDP on defense by 2035: 3.5 percent for traditional defense spending and a further 1.5 percent for defense-related infrastructure. For Germany, this would mean increasing annual defense spending from the current level of approximately €90 billion to over €200 billion. The entire EU would have to spend more than €630 billion annually, according to estimates.
These figures illustrate the extent of the impending economic transformation. The investment share of EU defense spending already reached 31 percent in 2024, significantly above the NATO benchmark of 20 percent. For 2025, the investment share is expected to rise to 130 billion euros, or 34 percent. These investments will primarily go into equipment procurement and research and development.
The production capacity of the European arms industry is growing at a historic pace. According to an analysis of satellite data by the Financial Times, European arms factories have been expanding three times faster than in peacetime since 2022 and now occupy over seven million square meters of new industrial space. Rheinmetall, for example, plans to increase the production of artillery shells to 700,000 units annually, spread across production facilities in Germany, Spain, South Africa, and Australia. A new ammunition plant was built in Unterlüß, Lower Saxony, and a production facility was inaugurated in Denmark with government presence.
Despite this expansion, critical gaps remain. Europe had 1,627 main battle tanks in 2023, but needed between 2,359 and 2,920, depending on the scenario. Air defense systems such as Patriot and SAMP/T had only 35 units available in 2024, while 89 were required. NATO is calling for a massive expansion of ground-based air defense from the current 293 to 1,467 units. These capability gaps cannot be closed in the short term, as building up production capacity takes years and requires highly skilled workers and long-term planning security.
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How the Ukraine war is accelerating Europe's arms innovation
War as a driver of innovation: Ukraine as a testing ground and strategic ally
A notable development in the European defense sector is the increasing integration of the Ukrainian defense industry. Since the Russian attack in 2022, Ukraine has increased its defense production 35-fold. Production value increased tenfold from 2021 to 2024, reaching over €10 billion, and could triple again in 2025. The number of drone manufacturers grew from seven to over 500 companies, producing more than four million units annually. The number of electronic warfare companies increased from 10 to over 300.
The BraveTech-EU initiative, announced at the Ukraine Recovery Conference in Rome in July 2025, institutionalizes this cooperation. With a total volume of €100 million, jointly funded by the EU and Ukraine, the program connects the Ukrainian BRAVE1 platform with EU instruments such as the European Defence Fund. The BRAVE1 platform has registered over 3,500 developments, codified more than 260 according to NATO standards, and awarded grants worth 1.3 billion hryvnia.
For European companies, Ukraine offers a unique advantage: the opportunity to test technologies under real combat conditions. German companies like Diehl Defence are testing their robotic systems via BRAVE1 at the 3rd Assault Brigade's training center. Such tests provide insights that cannot be obtained in any laboratory or simulator and significantly accelerate development cycles. The Ukrainian government plans record investments of €16 billion in weapons production and procurement by 2025, which corresponds to approximately 38 percent of the state budget and 20 times the pre-war expenditure.
Nevertheless, Ukrainian capacities are only utilized at about 40 percent, mainly due to inadequate protection of production facilities and a lack of financing. Ukrainian defense companies are pushing for export rights, as they can produce more than the country itself consumes. Industry leaders argue that exports would enable the mass production necessary to reduce costs and strengthen domestic defense. This debate reveals a fundamental tension between short-term wartime requirements and long-term industrial structures.
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The high price of security: economic risks and political turmoil
Europe's massive military buildup poses significant economic, social, and geopolitical risks. Fiscally, NATO's five percent target would require a dramatic reallocation of public resources. For Germany, this would require additional spending of more than 100 billion euros annually, equivalent to over 40 percent of the current federal budget. These funds would have to be raised either through tax increases, new borrowing, or cuts in other areas. Each of these options entails significant political and economic risks.
The question of prioritization is becoming increasingly controversial. While investments in defense equipment create jobs and stimulate short-term demand, they do not generate long-term productivity gains like investments in education, infrastructure, or research. The Draghi Report on European Competitiveness, presented in September 2024, emphasizes the need for massive investments in innovation, decarbonization, and the development of an independent defense industry. However, pursuing all these goals simultaneously requires investments on a scale not seen in Europe since the Marshall Plan.
Another structural risk lies in technological dependence. The European defense industry relies on supplies in critical areas that are subject to geopolitical risks. Taiwan produces more than 90 percent of the world's most advanced semiconductors. These chips are essential for modern weapons systems, from guided missiles to drones and communications systems. A military escalation in the Taiwan conflict would drastically impact the European defense industry and could lead to estimated losses of $500 billion. While Europe is investing in building its own semiconductor capacities, its dependence on Taiwan will remain for the foreseeable future.
Arms export policy remains a hotbed of ethical and security controversies. German arms exports to Saudi Arabia, a country playing a controversial role in the Yemen war, have been repeatedly criticized and temporarily restricted. Similar discussions are underway regarding deliveries to Turkey. The balance between the economic interests of the arms industry, security considerations, and human rights standards remains precarious. The EDIP exacerbates this dilemma, as it is intended to strengthen European production capacities on the one hand, but could also facilitate exports to third countries on the other.
The consolidation of the European arms industry is progressing slowly and fraught with conflict. While Rheinmetall and Leonardo have entered into a strategic partnership for the Italian tank market and established a joint venture with a volume of over 20 billion euros, national interests remain dominant. The Franco-German project for the Main Ground Combat System, the battle tank of the future, is being hampered by disputes over jurisdiction and national considerations. What was originally scheduled for introduction in 2035 has now been postponed beyond 2040. At a time when speed is increasingly becoming the decisive factor for success in the arms race, this paralysis endangers Europe's strategic ability to act.
Between strategic autonomy and failure: Three scenarios for the future
The future of the European defense industry will be shaped by several factors, the interplay of which harbors considerable uncertainty. In the optimistic scenario, Europe succeeds in overcoming fragmentation and achieving economies of scale through coordinated procurement and production. Investments in research and development would close technological gaps, particularly in air defense, precision munitions, and autonomous systems. Cooperation with Ukraine would integrate battle-proven innovations into European production lines. In this scenario, Europe would actually source the targeted 60 percent of its defense equipment from its own production by 2035, substantially strengthening its strategic autonomy.
The more likely moderate scenario envisions a gradual improvement, but without fundamental structural change. National procurement traditions remain dominant, and the EDIP budget is insufficient to finance truly transformative projects. Europe would reduce, but not overcome, its dependence on the US. Production capacities would grow, but at a slower pace than demand. Technological breakthroughs would remain isolated, while structural inefficiencies would persist. In this scenario, Europe would continue to import 40 to 50 percent of its weapons systems and be globally competitive only in niche areas.
The pessimistic scenario assumes that the fiscal burden will lead to political turmoil. The simultaneous need to invest in climate protection, digital infrastructure, and welfare states will overwhelm public budgets. Populist movements are gaining support by portraying defense spending as a waste of public funds. European integration is coming under pressure, and national unilateralism is increasing. In this scenario, the EDIP would fail, fragmentation would intensify, and Europe would further lose its strategic capacity to act.
Disruptive technologies could change the entire fabric of European defense planning. Artificial intelligence, autonomous weapons systems, hypersonic missiles, and space weapons are already defining new dimensions of military superiority. China and the US are investing heavily in these areas, while Europe is hesitant due to regulatory concerns and ethical debates. If Europe falls behind in these key technologies, massive investments in conventional weapons systems could prove to be a strategic misinvestment.
Geopolitical shocks remain the greatest risk. A military escalation in the Taiwan conflict would disrupt global supply chains and cut Europe off from critical technology imports. A US withdrawal from NATO, which seems conceivable under certain political constellations, would force Europe to build up its defense capabilities drastically faster than currently planned. Conversely, a de-escalation of the Ukraine war could reduce political pressure for rearmament and lead to further cuts before the structural problems are resolved.
Catalyst or symbolic politics: A final assessment of the defense turnaround
The European Defence Industry Programme marks a historic turning point. For the first time in decades, Europe is accepting the need for substantial investment in its defence industry and committing to overcoming national fragmentation. However, at €1.5 billion, the EDIP budget falls far short of what would be required for genuine structural change. By comparison, Germany's €100 billion special fund exceeds the entire EDIP budget by 66 times.
The key strategic question is whether Europe is prepared to bear the necessary economic and political costs. Achieving the 5 percent target would cost Europe over €630 billion annually, more than double current spending. These resources must be mobilized, while simultaneously requiring massive investments in decarbonization, digital transformation, and social security systems. The question is not whether Europe can raise these resources, but whether it is politically willing to manage the associated distributional conflicts.
Significant growth opportunities are opening up for companies, especially in the technology sector. Dual-use technologies that can be deployed for both civilian and military purposes are becoming the focus of funding policy. Through instruments such as EUDIS, SMEs and startups gain access to financing and markets that were previously inaccessible to them. The BraveTech EU initiative offers additional cooperation opportunities with battle-tested Ukrainian defense technology. Companies that enter these markets early can secure long-term competitive advantages.
For political decision-makers, the defense transition requires a recalibration of fiscal, industrial, and foreign policy priorities. The debt brake, long considered non-negotiable in Germany, is up for debate. European integration must prove its worth in defense policy, an area that traditionally symbolizes national sovereignty. The balance between alliance loyalty to the United States and Europe's strategic autonomy must be readjusted.
For investors, the defense transition signals a fundamental shift in capital flows. Defense stocks like Rheinmetall have multiplied since 2022. The order books of European defense companies are at record levels. KNDS, with an order backlog of €23.5 billion, is planning an IPO that aims to transform the company into a European champion. But this development also carries risks. Defense stocks are volatile and sensitive to geopolitical events and changes of government. The ethical controversies surrounding arms exports could lead to tightening regulations.
The long-term significance of the EDIP will be measured by its ability to overcome the structural weaknesses of the European defense industry. The fragmentation into over 170 weapon systems, the lack of consolidation, the dependence on critical imports, and the insufficient research investment are problems that have accumulated over decades. They cannot be solved with a budget of €1.5 billion and a time horizon of three years. At best, the EDIP can be a catalyst that triggers more far-reaching reforms. If it fails to do so, it will go down in history as expensive symbolic politics, another missed opportunity for a continent that recognized the signs of the times but failed to act in time.
The economic analysis shows that Europe's defense transition is overdue, underfunded, and fraught with considerable risks. Its success will determine not only the continent's military capability, but also its economic competitiveness, its political coherence, and its role in an increasingly multipolar world order. The coming years will show whether Europe has the will and the means to implement this transformation. The alternative would be progressive strategic marginalization in a world where military strength has once again become the currency of geopolitical power.
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The global economy is currently experiencing a fundamental change, a broken epoch that shakes the cornerstones of global logistics. The era of hyper-globalization, which was characterized by the unshakable striving for maximum efficiency and the “just-in-time” principle, gives way to a new reality. This is characterized by profound structural breaks, geopolitical shifts and progressive economic political fragmentation. The planning of international markets and supply chains, which was once assumed as a matter of course, dissolves and is replaced by a phase of growing uncertainty.
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