The €800bn question: Can Europe build the defence industry it needs?
Roberto Scaramella is a Partner and the Head of Aerospace and Defence for Europe at Oliver Wyman. Having served as chairman of an Italian air navigation service provider, CEO of an airline, and CEO of an aerospace logistics provider, Roberto boasts extensive industry experience.
The recent decision by European members of NATO to invest substantially more in the region’s defence capabilities marks a global security realignment set to reshape economies – especially in Europe..
Here, increased defence investment will compete head-to-head for limited domestic capacity with other manufacturing industries, from aerospace to electronics, several of which are also growing at a faster-than-expected pace.
To accommodate the increasing demand, European nations must build significantly larger industrial and engineering footprints, supported by national strategies that nurture regional champions in technology and defence.
Europe’s defence ramp-up requires more than just money
For Europe to effectively take up a leadership role would require an expansion of domestic capacity on a scale not seen on the continent since the end of World War II. It is possible, but only with a rethinking of industrial policy and the emergence of a bolder, more unified vision of a new Europe.
The building blocks and incentives are there for this to happen. NATO’s European members have approved substantial increases in defence spending, amounting to 5% of each’s gross domestic product.
The hike represents essentially a doubling of Europe’s NATO contribution, increasing from €400 billion annually to over €800 billion by 2030.
But the significance of the increase involves not only how much nations spend, but also on what.
European defence investments will drive economic growth
Where historically Europe invested less than 30% in new equipment and technology, more than 40% of future allocations are earmarked for hardware and tech innovation.
The switch should prove highly stimulative to the European economy.
Oliver Wyman’s analysis indicates that every euro spent on hardware and tech will generate four euros in economic growth – twice the impact of past spending. The heightened multiplier effect can help attract investor money and generate sufficient funding for domestic capacity expansion.
Domestic procurement will reinforce this effect. Historically, more than 65% of European acquisitions (except in France) came from US contractors. By 2035, Oliver Wyman expects that share to fall below 30% as governments favour European production.
That said, joint ventures with US companies will ensure the US retains a share of the market, particularly in strategic domains such as cyber, unmanned systems, electronic warfare, air defence, space surveillance, and undersea capabilities.
These partnerships have also featured prominently in recent EU–US tariff talks, helping US contractors maintain business in the near term.
One difference, moving forward: We expect European governments to acquire a larger share of Western joint ventures, especially for next-generation equipment, so they have more control over intellectual property.
Supply chain constraints will prove a problem
Europe’s biggest obstacle may be the heavy overlap between defence and commercial aerospace supply chains, which are already stretched.
This only amplifies the challenge facing Europe as it works to upgrade its industrial capacity and technology.
Take aerospace. Air travel demand has been growing at more than 3% per annum since the COVID-19 pandemic and is expected to continue at the same clip over the next decade.
To support that rise in passenger traffic, Oliver Wyman’s Global Fleet and MRO Market Forecast 2025-2035 projects commercial aerospace production will have to expand more than 7% per annum over the next 10 years to allow the global fleet to grow to 38,000 by 2035.
But domestic Tier 1 and 2 suppliers are already struggling to keep up with orders.
Four priorities for European defence
To ramp up European defence, we see four strategic needs governments, industry, and investors must address:
- Prioritise capabilities: The European Commission has already identified top strategic objectives in tactical unmanned aircraft systems and mechanised combat capabilities, information and spectrum dominance in areas like electronic warfare, integration software C4 and secured communications, and cyber security. The next steps for European Ministries of Defence include starting cross-industry discussions, hiring senior industrial advisers, and investing in forecasting capabilities on capacity needs.
- Recognise defence sector shortfalls: Top of the list must be training the necessary workforce. An Oliver Wyman study on the defence market in Europe indicates that the sector will require more than 250,000 additional engineers and skilled technicians in Europe (more than 25% of the current total) over the next five years to cope with the current industry backlog and the increasing market demand.
- Create new international partnerships: Given current market conditions and short-term requirements, multinational ventures represent the most reliable source of technological innovation. A recent Oliver Wyman study estimates that Western alliances will produce 40% of total equipment by 2030, up from 20% today.
- Develop supportive regulation: One of the most important goals must be to make the sector attractive to private capital with more flexible investment rules to finance capacity expansions and supply chain evolution.
The question is not whether Europe can spend €800bn, but whether it can turn that investment into real industrial strength.
