Geopolitical Shifts Fuel Surge in European Defence Shares
It has been all caused by Trump
By Wei Cheng
The latest developments in international geopolitics have triggered a significant surge in the stock prices of European defense companies.
At the close of trading on Monday, March 3rd, shares of Rheinmetall AG, Germany's largest defense contractor, soared by 15%. Leonardo S.p.A., an Italian multinational defense giant, saw its stock price skyrocket by 17.3% on the Milan Stock Exchange. In Paris, shares of French arms manufacturer Thales rose by 16.7%. BAE Systems plc, the UK's largest defense company, listed in London, experienced a 14.3% increase. Swedish aerospace and weapons manufacturer Saab AB also enjoyed a strong performance on Monday, with its stock price climbing by 11.6%.
The STOXX Europe Aerospace and Defense index jumped by 8% on Monday, marking its largest single-day gain since November 2020. The index has now risen by over 30% year-to-date. Germany's DAX index also saw a significant increase, rising by 2.6% on Monday, its largest gain in over two years.
"White House Dispute" Shocks Europe
Since Trump's re-election as US President, the international geopolitical landscape surrounding the Russia-Ukraine conflict has undergone a dramatic shift. Trump has directly contacted Russian President Putin, seeking to negotiate with Russia without the involvement of Ukraine or Europe, aiming for a US-Russian resolution of Ukraine's fate. Ukraine has expressed its unwillingness to accept a ceasefire agreement without Western security guarantees, while Trump has threatened to halt US arms supplies if Ukraine refuses a ceasefire. The US has also joined Russia and North Korea in opposing UN resolutions condemning Russian aggression.
On February 28th, Ukrainian President Zelensky, who had intended to visit the US to sign a minerals agreement in exchange for security guarantees, engaged in a heated dispute with US President Trump and Vice President Vance in the Oval Office, in front of numerous reporters. The meeting ended in discord, with no agreement signed and no security guarantees secured.
Furthermore, according to a recent report in the Wall Street Journal, current and former US officials have stated that the Trump administration has halted funding for new weapons sales to Ukraine and is considering freezing previously approved arms shipments.
Analysts suggest that these actions by Trump will significantly undermine Ukraine's combat capabilities at a critical juncture in the conflict.
The "White House Dispute" has profoundly shocked Europe, leading to the sudden realization that the US under Trump's leadership might abandon not only Ukraine but also Europe. Faced with the prospect of the US becoming unreliable, Europe sees no alternative but to seek self-preservation.
On March 2nd, the European Union and 17 European countries, including the UK, France, Germany, and Italy, convened in London for a summit on the Ukraine crisis. Participants agreed to continue providing military aid to Ukraine and to exert economic pressure on Russia. They also reached a consensus on the need to increase defense spending.
European Nations Increase Military Spending
Prior to the summit, several European countries had already expressed their intention to increase defense budgets.
For example, UK Prime Minister Starmer announced that the UK would raise its defense spending to 2.5% of GDP by 2027. This increase would translate to an additional £13.4 billion in defense spending by 2027. Currently, the UK's defense spending is around 2.3% of its GDP. Starmer also stated that if the Labour Party wins the 2029 UK general election, defense spending would be further increased to 3% of GDP.
French President Macron has also called for an increase in France's defense spending to over 3% of GDP. France's current defense budget is approximately 2.1% of GDP.
Poland plans to increase its defense spending to 4.7% of GDP by 2025, making it one of the NATO countries with the highest defense expenditure ratios.
The Baltic states of Estonia, Latvia, and Lithuania have pledged to raise their defense budgets to 5% of GDP to strengthen their defenses against potential Russian threats, given their history as former Soviet republics.
The Italian government also plans to increase its defense budget to 2.5% of GDP in response to NATO's requirements. Currently, Italy's defense spending is around 1.57% of GDP, well below NATO's minimum standard of 2%.
In Germany, the EU's largest economy, reports indicate that the next German government may consider establishing two special funds for defense and infrastructure spending, totaling hundreds of billions of euros.
European policymakers are exploring various options to increase military spending, including the establishment of a European Rearmament Bank, modeled after the European Bank for Reconstruction and Development, to leverage Europe's savings pool.
Amidst this backdrop of geopolitical upheaval and the expectation of substantial increases in European military spending, investors have confidently placed bets on the future growth of European defense companies.
Europe's Defense Industry Remains Strong
For nearly 80 years since the end of World War II, Western Europe has largely avoided large-scale hot wars. Despite the Cold War and regional conflicts in Eastern Europe and the Balkans, and the ongoing Russia-Ukraine conflict, Western Europe has enjoyed nearly eight decades of peace under the US nuclear umbrella. This has led to questions about Western Europe's ability to defend itself.
However, this skepticism overlooks the fact that Western Europe still possesses some of the most powerful defense companies outside of the US.
According to the Stockholm International Peace Research Institute (SIPRI), the top 20 global arms companies in 2023, ranked by arms sales revenue, include five US companies at the top, followed by four European companies: BAE Systems (UK), Leonardo (Italy), Thales (France), and Airbus Group. The list also includes companies from Israel, South Korea, Japan, and China, with three more European companies – Safran, Naval Group (France), and Rheinmetall (Germany) – rounding out the top 20. Notably, Russian arms companies are absent from this list, despite Russia's claim to be the world's second-largest military power.
Concerns Over US Acquisitions
European leaders seeking to revitalize Europe's military capabilities and arms industry are also concerned about the potential for European defense companies to become acquisition targets for their wealthier US counterparts.
This concern was evident in a recent statement by UK Prime Minister Starmer, who, on March 3rd, risked angering US President Trump by stating that UK defense companies would be protected from further US acquisitions.
Starmer's remarks were in response to reports of a potential acquisition of UK defense company Chemring Group by US private equity firm Bain Capital.
Starmer praised UK defense industry companies and emphasized the importance of keeping these companies "British."
Chemring Group, headquartered in Romsey, Hampshire, and listed on the London Stock Exchange, manufactures critical countermeasures equipment for the Royal Air Force and the US Air Force. Reports in late February indicated that Bain Capital had made a £1.1 billion offer to acquire Chemring Group, leading to a surge in the company's stock price.
If the deal goes through, Chemring Group would join a list of UK defense companies acquired by US firms, including Meggitt Limited and Cobham Limited.
On March 3rd, when asked whether it was important to ensure that defense companies like Chemring Group remained in British hands, Starmer stated, "Absolutely, we want to keep them British. We are proud of our work. We are very good at inventing things, making things. We lead the way in AI and technology. We are world-beating. We want to make sure we keep it that way."
While the UK government has the power to block foreign acquisitions of defense companies on national security grounds, it has historically approved US acquisitions. However, growing concerns about sensitive defense assets falling into foreign hands led the UK government to introduce new regulations in 2022, granting it greater power to block such deals.
The recent actions and statements of a re-elected Trump have highlighted the importance of domestic defense industries, even in the UK, the US's closest ally. Starmer's comments about Chemring Group suggest that this awareness has reached the highest levels of the UK government.
This heightened awareness is also evident among leaders in other European countries, as the international geopolitical landscape undergoes a profound transformation.
However, merely strengthening Europe's defense industry and protecting it from US acquisitions is not sufficient to enhance Europe's military self-defense capabilities. A strong defense industry does not automatically translate into a strong defense. Without military personnel and the will to fight, even the most advanced weapons may be rendered useless.
This is perhaps the most pressing concern for European citizens and political elites today.