Rearm Europe: The “Rapid Deployment Capacity” (RDC) – Finally sovereign? The roadmap to a strategically independent Europe

Industrial Renaissance: Why security can strengthen our economy now

Europe has awakened from a decades-long geopolitical slumber, but the awakening is brutal and costly. Russia's war of aggression against Ukraine has not only shaken the continent's security architecture but also revealed a fundamental truth: the era of the "peace dividend," in which European welfare states could comfortably settle under the US nuclear umbrella, is irrevocably over. What follows is the painful and costly process of "re-militarization"—an undertaking that goes far beyond mere budget increases and deeply impacts the industrial and macroeconomic structure of the European Union.

At the heart of this new ambition lies the "Rapid Deployment Capacity" (RDC), a rapid reaction force intended to symbolize the will to strategic autonomy. But behind the political declarations of intent and the nominally exploding defense budgets lies a complex reality of industrial inadequacy, inflation-induced loss of purchasing power, and national egoism. While politicians invoke a "war economy," industry is still grappling with the logistical constraints of peacetime operations. We are witnessing a watershed moment in which Europe must decide whether to consolidate and streamline its fragmented defense landscape, or whether the promised billions will simply vanish into thin air within an inefficient system.

The following text analyzes the anatomy of this challenge: from the operational illusion of a rapid reaction force without its own transport aircraft, through the absurdity of 178 competing weapons systems, to the crucial question of financing in times of tight budgets. It is an assessment of the situation between industrial renaissance and strategic impotence.

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The end of the peace dividend: A macroeconomic turning point

The European security architecture is currently experiencing not only a geopolitical upheaval, but also a fundamental economic recalibration, the implications of which are often underestimated. For decades, Europe benefited from the implicit subsidization of its welfare states through US security guarantees – the so-called peace dividend. This era is irrevocably over. Current data paints a clear picture: Defense spending by European NATO states rose by around 50 percent to €435 billion between 2021 and 2024. However, these nominal increases mask the real problem. Adjusted for inflation and taking into account the dramatically increased costs of armaments, the purchasing power of these budgets is far less impressive than the headlines suggest. We are moving toward a scenario in which spending of up to €970 billion annually may be necessary by 2030 to compensate for the shortcomings of the last three decades and simultaneously build new capabilities.

From an economic perspective, this represents a massive resource shift. Capital that previously flowed into civilian infrastructure, decarbonization, or social systems is now being redirected to the defense sector. This certainly generates positive short-term effects. Studies, such as the one by the Kiel Institute for the World Economy, suggest that increasing spending to 3.5 percent of GDP could boost economic growth by up to 1.5 percentage points through the multiplier effect in high technology. However, this view should be treated with caution. It assumes that the money flows efficiently into domestic research and production and does not primarily flow out for "off-the-shelf" purchases in the US or South Korea, which is still frequently the case. The domestic market for defense equipment thus becomes the decisive lever: If value creation within the EU succeeds, the necessity of rearmament can be transformed into a re-industrializing economic stimulus program. If this fails, a classic "crowding-out" effect threatens, in which government defense spending crowds out private investment and further fuels inflation by creating shortages of skilled workers and raw materials.

The paper tiger grows teeth: Anatomy of the intervention force

A central element of the new European ambition is the Rapid Deployment Capacity (RDC), which is intended to reach full operational capability with 5,000 soldiers by 2025. On paper, this number seems modest, almost homeopathic, compared to the troop numbers on the Ukrainian front. But the strategic value of this unit lies not in its size, but in its function as a political litmus test for the Union's ability to act. The RDC is an attempt to replace the failed EU Battlegroup concepts, which were never deployed due to political gridlock, with a more modular and flexible structure. The economic challenge here lies less in the personnel costs of the 5,000 soldiers, but rather in the so-called "strategic enablers."

A rapid reaction force is worthless without the capability for strategic air deployment, satellite-based reconnaissance, and a robust command and control structure. This is precisely where the European deficit lies. Acquiring these enablers is extremely capital-intensive and technologically demanding. To date, European armies have relied almost entirely on US assets in this area. Emancipation in this field requires investments that go far beyond simply fielding infantry battalions. It involves building an independent logistics chain, ranging from heavy transport aircraft to secure data links. The costs for this infrastructure of power projection are enormous and are often neglected in national budgets in favor of more visible weapon systems like tanks or frigates. Without these investments, however, rapid deployment remains an operational illusion: an army that is ready but cannot reach where it is needed, or is forced to operate blindly there.

Furthermore, the RDC concept reveals the underlying problem of cost-sharing mechanisms. Who pays when troops are deployed? Until now, the principle "costs lie where they fall" often applied, meaning that those states providing troops also bore the financial burden – a massive perverse incentive for active engagement. Reforming these financing mechanisms towards joint funding through instruments such as the European Peace Facility is therefore not a mere accounting detail, but the operational prerequisite for any serious European defense policy. As long as the distribution of the financial burden is not automated and based on solidarity, every decision to deploy the RDC in the Council of the European Union will be thwarted by national fiscal self-interest.

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The Achilles heel of production: scaling up in a scarcity economy

A look inside the factory floors of the European arms industry reveals a dangerous discrepancy between political ambition and industrial reality. Politicians demand a "war economy," yet industry continues to operate according to the logic of peacetime. The main problem is not technological lag, but a lack of scalability. For decades, industry has been geared towards efficiency, just-in-time delivery, and low inventory levels. Now, suddenly, resilience and mass production are required. This is leading to serious bottlenecks along the entire value chain. There are shortages of everything: from specialized steels and guncotton for propellant charges to microchips and optronic components.

A particularly critical factor is human capital. The defense sector competes with civilian industry for the same scarce skilled workers – mechatronics engineers, software engineers, systems architects. The "war for talent" drives up labor costs and thus the final prices of armaments. Inflation in the defense sector is significantly higher than the general inflation rate. A tank or an artillery shell now costs many times what it did just three years ago. This rapidly devalues ​​nominal government budget increases. A 20 percent increase in the defense budget can be almost entirely ineffective in real terms when sectoral inflation is at 15 percent.

Added to this is the industry's financing dilemma. Despite the political shift, banks and institutional investors remain hesitant to invest heavily in the defense sector. The stringent ESG (Environmental, Social, Governance) criteria established in the European financial world in recent years are acting as a brake. Many funds exclude defense investments by their statutes. While there are efforts at the EU level to adapt the taxonomy and classify "defense" as sustainable in terms of security, the internal risk aversion of the compliance departments of large banks is changing only slowly. Without access to cheap capital for expanding production lines, however, capacity expansion remains piecemeal. The industry is therefore demanding long-term purchase guarantees—so-called "offtake agreements" of ten or fifteen years—to secure investments in new factories. The state must act as an anchor customer here, mitigating the entrepreneurial risk of overcapacity in the event of a renewed easing of restrictions. Without this government guarantee, no CEO of a publicly traded arms company will invest billions in new production lines that might be idle in five years.

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Fragmentation as a cost trap: The price of national vanities

Perhaps the greatest economic obstacle to effective European rearmament is the chronic fragmentation of the market. Europe indulges in the luxury of 178 different weapons systems, while the US manages with around 30. This figure is more than a statistical curiosity; it is an indicator of massive capital waste. The parallel development of tanks, aircraft, and ships in France, Germany, Italy, and Spain means that economies of scale remain systematically untapped. Each nation insists on its own specifications, certifications, and supply chains. The European Commission estimates the cost of this "non-European" policy at between €25 billion and €100 billion annually—money simply wasted through inefficiency.

A prominent example of this dysfunction is the Franco-German project MGCS (Main Ground Combat System), intended to replace the Leopard 2 and the Leclerc. Instead of leveraging synergies, the participating industrial giants—KNDS (a holding company comprised of the German KMW and the French Nexter) and Rheinmetall—are mutually obstructing each other in a battle over work packages and intellectual property. National industrial policy takes precedence over military necessity. Each state wants to protect its "national champions" and secure jobs at home. The result is complex consortia that are politically balanced but industrially inefficient. Merger control and antitrust law further hinder the necessary consolidation, although initial relaxations are emerging due to geopolitical pressure.

Fragmentation also has operational consequences for rapid deployment. When a multinational force comprised of five different nations deploys with five different radios, three different calibers, and incompatible logistics vehicles, the logistical nightmare becomes an operational hazard. Standardization is therefore not just a matter of cost savings, but of combat survivability. The interoperability that NATO standards are supposed to guarantee often exists only on paper in European reality. True economic rationalization would mean that smaller states would specialize their defense industries in niche markets and purchase large, off-the-shelf systems from European partners instead of producing their own small batches. But this requires a level of mutual trust and a relinquishment of national symbols of sovereignty that has not yet been achieved politically.

Financial architecture under stress: Guns, butter, and the debt brake

The crucial question that will determine the success or failure of European rearmament is that of financing. We face a classic "guns versus butter" dilemma, exacerbated by the self-imposed fiscal constraints of many EU member states, particularly Germany's debt brake. The necessary investments—the EU Commission speaks of a €500 billion gap over the next decade—can hardly be covered by current budgets without jeopardizing social peace through massive cuts in welfare.

In this complex situation, the debate surrounding "defense bonds"—that is, joint European bonds for defense purposes—is gaining momentum. Countries like France, Poland, and the Baltic states are pushing for such a solution, analogous to the "NextGenerationEU" recovery fund after the pandemic. The argument is economically sound: defense is a public good at the European level. If the external border in Poland or Romania is secured, the internal market in Portugal or the Netherlands also benefits. Mutualizing the debt for this specific public good could reduce the interest burden for highly indebted states and quickly mobilize the necessary volume. Moreover, if such bonds were linked to "buy European" clauses, they would flow directly back into European industry, thus triggering the aforementioned economies of scale.

But the resistance from the "frugal four," led by Germany and the Netherlands, remains vehement. There is considerable fear of a transfer union and legal concerns regarding the EU treaties, which make financing military operations from the EU budget difficult. Compromise solutions under consideration include instruments such as the European Defence Investment Programme (EDIP), which, however, is dramatically underfunded at €1.5 billion and must be considered more of a pilot project than a true game-changer. The most likely outcome is a hybrid model: national special funds (such as the €100 billion in Germany) will be complemented by smaller EU funds for research and infrastructure, while the European Investment Bank (EIB) will expand its mandate to more aggressively finance dual-use goods. Whether this will be sufficient to close the enormous investment gap remains questionable. A two-tier army is looming in Europe, where fiscally powerful states are rearming, while highly indebted countries are falling behind and forced to cannibalize their military capabilities.

The Price of Freedom

“Rearm Europe” and “Rapid Deployment” are not purely military projects, but rather represent one of the largest industrial policy and macroeconomic operations in postwar history. Success depends not primarily on whether the 2 percent target is met on paper, but on how this money is spent. An uncoordinated increase in budgets risks only driving up prices and entrenching inefficiencies. Genuine strategic autonomy requires the courage to consolidate, to relinquish national industrial privileges, and to create new financing instruments. The economic costs of inaction—the loss of deterrent potential and geopolitical vulnerability—would, however, be far greater than any price that rearmament demands now. Europe must learn to use its market power as a weapon and to organize its industrial base in such a way that it can produce not only prosperity but also security. The window of opportunity is closing.

Markus Becker

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Chairman SME Connect Defense Working Group

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Konrad Wolfenstein

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