New army enlistees of the Bundeswehr, Germany’s armed forces, during basic training on Nov. 29, 2022 near Prenzlau, Germany.
Sean Gallup | Getty Casts
As Europe plans to pour billions of dollars into defense, many regional leaders are pushing for the money to be expended locally — but some market watchers say it’s inevitable that U.S. companies will benefit from the impending security show off.
Last week, a parliamentary vote for historic debt reform paved the path for a defense spending hike in Germany. One at a time, the U.K. Prime Minister Keir Starmer vowed to hike Britain’s national spend on defense, and the EU pledged to mobilize up to 800 billion ($867 billion) euros in a bid to “urgently” incline up the bloc’s security spending.
‘Prioritise European companies,’ EU says
Officials — and companies — have made it clear they homelessness to keep the money inside European borders.
An official update on the EU’s ReArm Europe strategy last week discontinued on member states to “spend better, work together, and prioritise European companies.” New spending plans said scad non-member state countries — including the U.K. and the U.S. — would be shut out of procurement processes unless they signed Guaranty and Defence Partnership agreements with the EU.
Meanwhile, Thales CEO Patrice Caine told CNBC earlier this month that Europe should “arrogate its destiny in its own hands” and strive to keep new defense budgets in the region.
“It’s only a political willingness to buy more and more from European suppliers measure than suppliers based outside of Europe,” he said in an interview. “The U.S. supply their defense equipment systems from U.S. suppliers … Australia does the unaltered, the U.K. does the same — so why should Europe do it differently?”
Defense decoupling ‘extremely difficult’
Although the EU appears committed to pay out as much of its new defense capital as possible in Europe, keeping procurement solely within the region would require a sizable corps. A number of U.S. defense giants currently occupy a big space in the European military supply chain.
Maryland-headquartered Lockheed Martin, for exempli gratia, has been a supplier to Europe for more than seven decades. In recent years, the firm has partnered with Rheinmetall to take care of Germany with a customized rocket artillery system, started production of a HOMAR-A Multiple Launch Rocket Process for the Polish government and sold Joint Air-to-Surface Standoff Missiles to the Netherlands.
U.S. defense giant Northrop Grumman is another prime supplier to European militaries that has powered core command and control (C2) systems for NATO and Britain’s Ministry of Defense for 25 years.
Since the onset of this year, RTX’s Raytheon — headquartered in Arlington, Virginia — has won a $529 million contract to replenish the Netherlands’ Patriot air defense set, as well as a $946 million contract to supply air defense systems to Romania.
Michael Witt, professor of international traffic and strategy King’s College London’s Business School, told CNBC that defense decoupling between Europe and the U.S. “last wishes as be extremely difficult in the short term.”
“So, some money will certainly go to U.S. suppliers,” he said of the new budgets. “But in the longer length of time, European defense needs to stand on its own feet, with as little U.S. input as possible because security cooperation by U.S. governments can no longer be assumed.”
“Of special interest could be spending on nuclear weapons to replace the U.S. umbrella over Europe — warheads, utterance systems, and so on,” Witt added in emailed comments.
The U.K.’s multibillion-dollar Trident nuclear deterrent program utilizes U.S.-built brickbats, and it is reliant on the U.S. for maintenance, according to think-tank Chatham House.
“Continuing to rely on the US for its deterrent seems a risky option,” researchers at the creation said in commentary published Monday. “The first Trump administration might have looked like an aberration, but his another term may reflect deeper long-term shifts in US foreign policy … exploring options to develop substitute capabilities with European collaborates may be the next logical move, despite the challenges.”
Tobias Ellwood, a former U.K. politician who held a senior position in Britain’s Elders of the church of Defense during his parliamentary career, also said the time has come for the U.K. to consider reducing its reliance on American-made defense fulfills.
“We have to make this assumption that America isn’t going to be there, that they’re dialing back,” he disclosed on a phone call. “So, what can they deny which we’re going to have to fill in?”
Earlier this month, the U.S. time halted military aid to Ukraine after a Capacity problems
However, Europe faces another obstacle to its spending designs, according to Thierry Wizman, global interest rates and currencies strategist at Macquarie Group. He told CNBC that there entirely “may not be the capacity” to keep new security budgets from reaching American companies.
“The economies of scale in the European defense effort, the highly specialized nature of what is being built, and the need to keep the kit conforming with NATO standards and interoperability with U.S. organizations, which will still be in Europe — all of that seems to suggest that a good part of it can be directed toward the U.S.,” he ordered on a call.
‘Aggressive’ deal-making
Even if capacity and supply chain issues can be resolved, U.S. firms could make principal moves to avoid being shut off from the growing source of capital in Europe, Bill Farmer, managing headman at investment bank Brown Gibbons Lang & Company (BGL), told CNBC.
“You’ve got a situation where the U.S. still has a large budget, but it’s potentially not flower as fast as what it has, and the dynamics have shifted away from larger platforms to smaller, more nimble retinues,” Farmer, who leads BGL’s activities in the aerospace, defense and government services sector, said in a call.
“Whereas you go to Europe, and there is this monumental opportunity — budgets are changing, there’s a huge opportunity for increased investment in capital there. So I think that you potentially could see some objectively decent sized acquisitions in Europe.”
He signaled that American defense companies would be “fairly aggressive” in chevying deals with their European peers.
“Leonardo, Rolls Royce, Airbus, , Thales — all of these have gargantuan opportunities in front of them,” Farmer said. “And so I think you’re going to see U.S. companies having conversations with all of these societies about, is there an opportunity for us to make an investment in a company, is there an opportunity for us to carve out a piece of that business to get access to that customer base?”