Executive Summary

Europe is on a path to a long-overdue reconstruction of its defense industrial base. Years of fragmentation, underinvestment and external dependencies have eroded its capacity to equip and sustain its own armed forces. The (geo-)political momentum for rearmament is now strong, but the region needs to get funding, strategy and implementation right. If Europe is to achieve genuine strategic autonomy, it must not only spend more but spend intelligently, coherently and with industrial sovereignty in mind. To do so, we suggest five ways with both short- and long-term levers, taking stock of blueprints from elsewhere, and highlight the pitfalls Europe needs to avoid.

1: Increase defense spending and secure the money. Europe’s shortfalls in defense output stem from inconsistent and insufficient funding. The EU spends just around 2.2% of its GDP on defense, thus investment in R&D and production capacity lags badly behind the US and even mid-sized exporters like South Korea. Spending at 3% of GDP between 1993 and 2023 would have required EU member states to allocate an extra USD416bn in 2020 PPP terms a year to defense. Short-term fixes range from tapping into the NGEU funds or calling on the European Stability Mechanism (ESM), but states must be wary of falling into a debt trap and secure long-term financing for defense. We recommend that Europe secure a stronger and properly financed European Defense Fund over the long run. When spending, the region should be mindful of national hoarding of funds, avoid one-off style spending bursts and stay away from

2: Buy European First and align industrial goals. Europe’s procurement remains national, duplicative and inefficient. EU states operate 17 types of tanks and over 20 types of fighter jets – versus one mainline model in the US. Joint procurement remains below 20% of total spending and in the last decade almost half of Europe's arms imports came from the US. This reliance on imports is also visible at the corporate level. The European defense sector is highly fragmented with a number of small players and the largest defense firms in Europe have on average 84% of suppliers based overseas (vs only 32% for US firms). Israel or South Korea offer blueprints, with procurement policies that enable the government to act as both industrial planners and buyers. US programs like the F-35 (i.e. pooled, multi-nation procurement) are another example. Building on the “Buying European Defense Act” proposed by the EU Commission, we suggest that the region should lean towards coordinated purchases and collaboration targets. The recent Security and Defense Partnership, which gives the UK access to EU mechanisms for jointly developing and buying military equipment, is a boost for the region’s ambition as it allows UK defense giants to take part in the European rearmament program. In the longer term, Europe needs to integrate markets and standardize programs to mobilize firms across the EU and bolster a region-wide industry. “Flag planting” over interoperability, national bias in contracts and undermining smaller member states’ participation should be avoided when implementing such policies.

3: Arm Europe at scale and rebuild a complete defense supply chain. Europe’s defense industry is highly concentrated with a few very large players and a larger number of tier-2 and tier-3 suppliers. There are an estimated 2,500-3,000 firms in the sector in Europe in 2025 but this compares to 60,000 firms servicing defense in the US. With a large share of the supply chain located outside of their domestic base, relocating a comprehensive supply chain into the region is challenging and we estimate that it would take between three to five years for the EU to double its equipment capacities. To achieve this, European governments need to collaborate closely with industrial players. Countries like the US, South Korea and Israel have successfully managed to steer their industries towards growth both domestically and in global markets through a tight integration with government agencies. In the short run, we recommend that Europe increases production with a pragmatic approach (i.e. including strategic partnership with non-EU suppliers/countries) and stockpile as much as possible. Over the next five years, it should consolidate industries and secure supply chains by closely working with the industry and making sure SMEs and especially non-defense firms can pivot and participate in a region wide ecosystem. Over-reliance on a few countries for production should be avoided, red tape should be cut for strategic productions and countries should also resist handing out huge checks to domestic champions.

 4: Innovate to dominate and build a cutting-edge dual-use tech ecosystem. Europe trails in defense tech innovation. Its total defense R&D is about EUR9.5bn per year with limited dual-use integration (vs USD140bn in the US). The US leads in AI, cyber and aerospace because of civil-military synergies (e.g. SpaceX, Palantir, MIT labs). Likewise, Israel’s Talpiot program and elite R&D units have created world-class startups and missile defense systems. South Korea’s state-led research center incubated core technologies later commercialized by private firms. In the short term, Europe needs to ramp-up R&D funding and leverage existing programs by pivoting them towards dual-use research. In the long-run, dual-use R&D should be institutionalized via innovation hubs, defense-tech accelerators and industrial research. Governments should co-fund emerging tech (e.g. AI, quantum etc.) with civilian spillovers. STEM workforce development and IP-sharing mechanisms across borders are also key to long-term autonomy. To successfully achieve this, Europe should shun siloed fundings, stay away from “moonshot” costly programs, include start-ups and smaller firms which often have higher innovation capacity and make sure to stop talent drain.

5: Unify command through a cohesive governance. Without policy alignment, even increased spending and efforts risk being squandered. Europe lacks unified export rules, shared planning, interoperability standards or a common regulatory framework. Europe’s defense industry suffers from fragmented governance, weak enforcement of joint commitments, divergent export controls and industrial disaggregation. Procurement processes also need to be fast-tracked and streamlined to bolster efficiency. In contrast, the US benefits from centralized planning, unified procurement and coherent export policy. To build a “unifying command”, Europe requires stronger institutional leadership, binding coordination mechanisms and consolidated industrial strategies.