“The proximity to Russia has caused Central and Eastern European countries to adapt their defence strategy and spend more, while fiscal changes are generally accepted by their population,” said Julien Malizard (French Institute for Higher National Defence Studies) at the “Investment in European Defence: Risk & Opportunities for the Asset Management Industry” conference on 27 October 2025. 

Malizard noted that these adjustments in Western Europe have been slower in particular on arm procurement. Yet this has changed in 2025 after the election of Donald Trump, the visit of vice-president Vance at the Munich Security Conference and the visit of president Zelensky at the White House.

The elephant in the room

According to Malizard, Europe has experienced a surge, reporting a 17% increase in defence spending as of last year, with budgets rising sharply by 27% between 2021 and 2024. Europe currently spends 2% of GDP on defence, aiming to reach 3.5%. While the US remains the world's largest defence spending country by a significant margin, European dependence on the US is evident, particularly for urgent capabilities.

Malizard thinks that the EU is transitioning to be a key defence player in the market. Key initiatives include the creation of the European Defence Fund and the use of the European Peace Facility to support Ukraine. Furthermore, the EU rearm plan encompasses the SAFE programme, designed to spend €150bn in joint purchases, requiring at least two-thirds of the products to be locally produced in Europe.

Resistance to defragmentation is pricey

Despite these efforts, Malizard noted that the European defence market is fragmented and three times smaller than the American market. Cooperation is crucial, especially because the unit cost of military equipment rises exponentially (Augustine’s law), i.e., “if you want better equipment in the future, you have to spend two or three times more in the future compared to the current equipment.” This makes national procurement unsustainable.

However, cooperation faces steep challenges: difficulties aligning timelines (for example, the Franco-German Main Battle Tank programme launched in 2017 may not deliver until 2040), political reluctance to compromise on national defence industrial bases, and complexities in fairly sharing the industrial workload and skills.

The private sector coming up with solutions

Innovation is also seeing a focus on newer technologies, such as AI and cyber security. Malizard remarked that Helsing AI, a Franco-German company, is emerging, specialising in swarm drones where the primary value proposition lies in AI, suggesting room for highly innovative non-US related defence capabilities. To ramp up production and fund such new technologies, Ye stressed that attracting private finance (private equity and venture capital) is essential to help transform the defence industry and to “steer Europe towards a more strategically independent pathway.”

Market developments in support of defence

In the investment industry, there has been “a significant proliferation of investor interest in defence products,” said Andrew Ye, Global X ETFs. He observed that defence has been the thematic category receiving the most inflows in 2025 year-to-date (ETFs and funds), capturing $10.1bn out of approximately $13.5bn in thematic inflows.

He added that the conversation surrounding environmental, social, and governance (ESG) has shifted significantly. Ye noted that regulatory bodies, such as the UK FCA, have indicated that defence is compatible with sustainability. This change is reflected in Article 8 funds, where the percentage investing in defence companies increased from 30% in 2022 to approximately 50% in 2024.

It will therefore not come as a surprise that index providers are seeing increased requests for thematic benchmarks focusing on defence and AI, and “asset managers are requesting custom benchmarks with less strict filters concerning defence companies in climate benchmarks,” according to Jean-Hugues Lasbatre at FCI. Ye has observed that clients are nowadays increasingly looking to position defence as part of their core portfolio allocations rather than purely tactical plays.