How Europe Can Make Its Defense Industry a Global Competitor

In the decades since the end of the Cold War, European defense spending declined and the European Union rose to prominence as an economic power, not a military one. During this time, European countries largely allowed their defense industries and military capabilities to atrophy. This shift was in part due to the economic appeal of peace dividends, as well as the ease of relying on the United States for its security—in addition to the United States’ motivation to keep Europe as a defense customer.

Following Russia’s invasion of Ukraine, European policymakers have made a 180 on defense spending. In stark contrast to what had been Germany’s post-Cold War foreign and defense policy for decades, German Chancellor Olaf Scholz announced major increases in German defense spending in the face of the conflict. This sentiment was echoed throughout Europe, with countries simultaneously cutting ties with Russian trading partners and pledging large increases in defense spending. While more spending and investment is, without a doubt, necessary, the amount of money is not what is holding the European defense industry back. At a systemic level, the biggest obstacle is how and where that money is spent, not just how much.

Rather than being a coordinated and collaborative entity, the European defense industry is fractured and highly political. Despite the economic and political cohesion of the European Union and the existence of the Common Security and Defense Policy, defense issues are still largely handled at the national level, and defense companies are closely entangled with their national governments and politics. This fragmentation has two fundamental consequences for the competitiveness of European defense companies: European contractors have limited production capacities based on their domestic demand, and there is little to no pooling of resources and R&D capabilities.

National contractors are heavily protected by their governments and often produce to their nation’s exact domestic demand, a demand that is based on short-term planning and insufficient for the larger geopolitical environment. The lack of cross-border collaboration also leads to unnecessary costs for the industry, where money could otherwise be saved. This lack of resource-pooling and collaboration is in large part due to the absence of a single market for defense in the European Union, leading to high barriers of entry for outside competition and making national industries less competitive internationally. Because of this fragmentation, any investment in the industry is less efficiently spent, and European militaries and companies struggle with costly duplication of systems. As of 2017, the European Union had 178 different major weapons systems, compared to a mere 30 in the United States; the NH90 helicopter has over 20 different configurations to fit the standards and requirements of 20 different markets.

Fragmentation also means that European defense companies have limited manufacturing capabilities because of the industry’s “built-to-order” model. European defense companies traditionally only produce pre-ordered supplies of ammunition and systems because of the high cost of manufacturing, lack of capital investment, and the long-term investment needed to create new plants. Moreover, pre-orders come almost entirely from the companies’ domestic markets. Part of scaling up manufacturing capability for European defense companies is addressing the fragmentation in the industry, as the lack of resource pooling and a common market inflates the cost of manufacturing and lowers potential profits. Because of industry fragmentation and the lack of joint procurement, these companies only produce to meet their national, pre-ordered demand. This has meant that the industry cannot rapidly scale production in the face of a geopolitical crisis like the invasion of Ukraine.

Industry fragmentation and its limited manufacturing capabilities have meant that the European defense industry is not only unable to compete to its full potential, but it is also unable to respond rapidly and effectively to security crises. Europe has struggled to sustain military aid to Ukraine because of its limited stockpiles and short-term supply and demand manufacturing model, with defense contractors producing supply only to short-term demand with little to no room for accommodating sharp changes in demand from geopolitical shifts. To make the European defense industry competitive and lessen dependence on the United States’ security guarantees, Europe will need to establish a single market for its defense industry with joint procurement and cooperative development, rather than 27 national markets with high barriers to entry and siloed defense companies. The European Union will also have to radically change its approach to defense spending by investing in solid, long-term orders to give their defense contractors the ability and financial incentive to scale up their manufacturing capabilities.