Key considerations for stakeholders as Europe’s defence industry faces “once-in-a-generation moment”

Introduction

In recent months, the European Commission has led a concerted effort to coordinate and bolster European defence spending. The ongoing war in Ukraine and the US's current position under President Trump have coalesced to give rise to what Commission President Ursula von der Leyen has called a "once-in-a-generation moment" for Europe, as she has highlighted the estimated EUR 500 billion in defence investment EU states require over the next decade.

Background

On 27 May, 2025, the Council of the European Union adopted the regulation establishing a EUR 150 billion defence fund proposed by the European Commission under emergency powers in EU treaties in March. The SAFE (Security Action for Europe) instrument, through which the Commission will raise the funds on the capital markets and disburse loans to member states (and potentially non-member states) to finance key products, is part of the European Commission's EUR 800 billion ReArm Europe plan, announced in March this year.¹

The European Commission's plans are emblematic of a recent trend of significant increases in defence spending across Europe (and globally), a pattern expected to continue in the coming years. In 2024, global defence spending increased by 9.4% to more than US$2.7 trillion, the steepest year-on-year rise since at least the end of the Cold War. Europe was the main contributor to this increase, with a 17% rise to US$639 billion, up 83% since 2015. European defence spending is expected to rise to 3% of GDP by 2030. Meanwhile, NATO has announced a plan to adopt a spending target of 5% of GDP for members.

In this client alert, we set out some of the key considerations for companies and governments as European nations race to increase spending and companies position themselves to benefit from what von der Leyen has labelled Europe's "era of rearmament", namely:

Procurement challenges: while increased government spending presents key market opportunities, governments and the private sector will need to address barriers posed by national and institutional procurement policies to meet key objectives, as well as combatting other issues such as corruption;

Innovation: in the short- and medium-term, a large proportion of spending increases is set to be allocated toward equipment procurement. In the longer-term, however, investment will increasingly need to be focused on innovative defence technologies, including the utilisation of dual-use technologies, to modernise and future-proof Europe's defence sector;

Barriers to financing: given competing pressures on national budgets, achieving European and NATO defence objectives over the coming years is likely to require concerted inter-governmental cooperation, as well as close collaboration with the private sector; and

Reputational risk: despite ESG-based criticism of the defence sector, European governments have begun to change their messaging in recent times in order to encourage investment in defence. Further policy changes, by both public and private sector institutions, are likely to be required if European defence objectives are to be met.

Key considerations for companies and governments

While the concerted European push to bolster the continent's defence will undoubtedly present significant economic opportunities and contribute to economic growth, companies and governments will encounter certain key challenges, spanning the legal, financial, regulatory, and reputational spheres. Below, we consider four key such challenges and analyse how they might be addressed by the public and private sectors.

1. Procurement challenges

   Equipment procurement is expected to be the main area of focus, with annual European spending on equipment forecast to quadruple to nearly 1.5% of GDP by 2030, from 0.3% pre-2022.² This would follow a pronounced recent trend: driven by the war in Ukraine, in 2023, more than 80% of EU member states' new defence investments were allocated to the procurement of new defence products; among European NATO members, spending on equipment accounted for 33% of total spending in 2024, more than double the percentage in 2014.

   With this, governments and companies are likely to encounter procurement-related challenges. The European defence market is less consolidated than that in the US and national champions tend to dominate domestic markets, with would-be newcomers restricted by national procurement rules. Institutional procurement rules may also pose difficulties – NATO's protocols, for example, mean the procurement process cannot start until a company has received a military order, following which it typically takes 1-2 years, costing upwards of EUR 200,000.³

   In June, the European Commission is expected to unveil a proposal to simplify procedures and reduce regulatory barriers in a bid to encourage joint defence procurement and aid the import and export of defence products within the EU. NATO is also moving to modernise its policies to streamlines procurement processes. European defence manufacturers have significantly increased capacity in recent years.

   As well as addressing institutional barriers to effective procurement, governments and the private sector will have to combat the ongoing risk posed by corruption. In May, authorities across several European countries and the US conducted raids and made arrests in connection with alleged bribes paid to NATO officials for intelligence on military procurement. The investigation centres on potential irregularities in defence contracts for the purchase of military equipment for NATO.

   Finally, despite the sense of urgency present in Europe's plans, it will be important to maintain a robust approach to due diligence. In Ukraine's efforts to bolster its supplies of military equipment since 2022, we have seen significant issues arising from procurement agreements. Ukrainian state agencies and state-owned companies are parties to several disputes arising from such deals. Spetstchnoexport, a state-owned defence company, is pursuing a London-seated arbitration against a US weapons exporter in an effort to recover US$347 million under a contract to purchase artillery. Progress, a state-owned arms trading company, sought to enforce a US$20 million arbitral award against another US weapons exporter in Arizona. It has been reported that the two contracts are among at least 30 deals between Ukraine and foreign suppliers which saw equipment arrive in unsatisfactory condition or go part- or non-delivered.

   As spending on procurement in particular – and defence spending generally – continues to increase over the coming years, public and private sector operators are likely to face procurement-related challenges. Such risks will be best addressed by further institutional and policy reform, as well as a robust approach to ensuring common procurement-related issues, including the risk of corruption and disputes, are minimised.

   The allocation of significant amounts of planned investment to equipment procurement is driven by near-term considerations; in the longer-term, though, European governments are expected to shift their collective focus to investing for future conflicts, which are likely to present different challenges altogether.

2. Innovation

   While spending in the short- and medium-terms is likely to centre on equipment procurement, European governments are increasingly cognisant of the need for innovation. In fact, while the war in Ukraine is a contributing factor to the focus on equipment procurement in the short-term, it has also proven to be a testing ground for technological innovation, the importance of which is set to increase significantly in coming years.

   While the private sector is likely to be the driving force behind such developments, it is also incumbent on governments to ensure that defence spending is adjusted accordingly going forward to reallocate funds from legacy items to new technologies and equipment. European governments have been encouraged to switch from spending on traditional hardware to investing in drones and software.

   Start-ups have, to date, been at the forefront of technological advancement in the defence sector, though traditional defence contractors have also recognised the need to invest in innovation. Traditionally non-defence sector companies have also begun to play an important role as they have pivoted into defence to utilise dual-use technology – that which has military as well as civilian applications. For example, European companies developing autonomous driving technology for the logistics industry, AI training software for the offshore wind and aviation sectors, and sensors for vehicles, among others, have all noted receiving interest from the defence sector. Such is the importance of dual-use technologies that the European Commission has proposed a ‘targeted exception' to allow the European Innovation Council, which runs a fund to support start-ups, to invest in companies developing them.

   Recent years have already seen an increase in investment in early-stage European defence companies. Since 2019, venture capital investment in defence start-ups in NATO countries has risen fourfold. To date, such investment has been largely concentrated in the US, though investment in Europe has still reached record levels despite a downturn in the wider venture capital market. Of European recipients, Germany, the UK, and France have seen the biggest inflows.

   NATO has also established its own EUR 1 billion innovation fund, focused on "deep tech", to support such start-ups, while the European Investment Fund, part of the European Investment Bank Group, has been active in defence investments, citing the "strategic imperative" of innovation.

   Further government investment – and support for the private sector companies leading the field – will be critical to ensure that Europe is well-prepared for future defence challenges as well as current ones.

   In order to address innovation gaps through targeted spending while meeting shorter-term procurement needs, governments and the private sector will need to specifically address some of the barriers to such significant investment needs. Some of the key policy developments intended to address this are detailed below.

3. Barriers to financing

   Despite the European Commission's sizeable proposals and national governments' commitments to increasing defence spending, further efforts are likely to be required if decades of underinvestment are to be fully addressed.

   There has been a push among certain European states, NATO members, and international allies for the creation of a multilateral defence bank, the DSR (defence, security and resilience) Bank to help finance large-scale rearmament efforts and fund joint military equipment purchases. It would also bankroll the stockpiling of weapons and other equipment that governments would only pay for when drawing them down. Such an institution would alleviate governmental funding crunches by reducing upfront investment costs, though must be accompanied by ‘cash' spending by governments.

   This would mirror and support moves by the European Investment Bank, which has proposed expanding its mandate to include projects dedicated for military use, following a European Commission proposal on the same. The EIB has hitherto only been permitted to invest in dual-use goods – those which have civilian as well as military purposes. The European Commission envisages this change being a guide for private institutions' internal rules.

   Relatedly, in addition to public sector policy reform, governments and supranational bodies are increasingly encouraging private sector institutions to invest in the defence sector in a bid to alleviate some of the reputational concerns typically surrounding the sector, analysed further below.

4. Reputational risk

   Governments have typically attracted criticism when seeking to increase defence spending, particularly as they are forced to make cuts in other areas. Private defence sector companies and investors in the industry are similarly often the subject of ESG-centred activism.

   More recently, there has been a discernible shift in messaging and policy from governments and other stakeholders. NATO and national governments, including the UK, France, and Germany, have encouraged financial institutions to embrace defence investments. Governments have similarly pledged to loosen ESG restrictions that have hitherto discouraged such investments and thus served as barriers to defence companies, and especially start-ups, which will play an important role in advancing innovation, seeking funding. NATO has noted that defence companies face a "significant barrier" when seeking financing from the private sector, particularly due to ESG restrictions.

   In a March 2025 White Paper,⁴ the European Commission announced a ‘Defence Omnibus' proposal to amend various EU rules, including removing obstacles to finance such as sustainability rules, in a bid to encourage investment in the defence industry. As part of its package of defence proposals, the European Commission is also expected to relax environmental restrictions facing the defence industry.

   Public and private sector policy reform will be critical if perceptions are to be shifted sufficiently to facilitate the requisite levels of investment to meet the estimated EUR 500 billion defence spending required over the next decade.

Key takeaways

As governments and the private sector do their part to address the "once-in-a-generation moment" facing European defence, the following key points are likely to be crucial in addressing the challenges discussed in this alert:

1. Collaboration – both between governments and between the public and private sectors – will be critical in addressing key challenges, especially those relating to procurement. It will also be essential in fostering innovation, including in fully utilising dual-use technologies to future-proof Europe's defence sector;
2. Private sector contribution will be essential if Europe's "era of rearmament" is to be achieved as envisaged. While government spending increases, facilitated and encouraged by institutions such as the European Commission and NATO, have thus far been the key driver, financial institutions will be important in providing capital and support for European companies at the centre of Europe's rearmament, particularly early-stage companies at the forefront of technological advancement in the defence sector; and
3. Vigilance – on behalf of both public and private sector actors – will be key in ensuring that, in a bid to significantly boost spending generally, and procurement in particular, in a condensed period of time, common issues seen in procurement, including corruption and contractual disputes, are minimised.

Mitch Riding (Trainee Solicitor, White & Case) contributed to the development of this publication.

_{1 We previously detailed the European Commission's defence spending plans in an April 2025 client alert.
2 Oxford Economics report. 
3 We have considered issues surrounding NATO procurement policies, particularly for Nordic companies, in previous client alerts (March 2025; April 2025). Joint White Paper of the Commission and the High Representative of the Union for Foreign Affairs and Security Policy for European Defence Readiness 2030, 19 March 2025, available here.
4 Joint White Paper of the Commission and the High Representative of the Union for Foreign Affairs and Security Policy for European Defence Readiness 2030, 19 March 2025, available here.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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