Amid rising geopolitical tensions, Europe finds itself at a critical juncture in its security strategy. Long reliant on American military support, European Union (EU) nations now confront the urgent need to assume greater responsibility for their own defense as the new U.S. administration signals a strategic shift in defense policy. This shift is compelling EU nations to significantly expand their military budgets.1
In the first few months of 2025, major European nations and the European Commission have announced substantial defense spending programs, totaling hundreds of billions of dollars, aimed at strengthening military capabilities through 2030. EU member states, which spent an estimated €326 billion on defense in 2024, are projected to increase expenditures by another €100 billion in inflation-adjusted terms by 2027.2
As Europe advances toward greater military self-sufficiency, we anticipate global defense expenditures to continue rising, with a particular focus on advanced defense technologies, over the next five years. As spending works its way through the value chain, international defense stocks, especially in Europe, are likely to benefit. In our view, the Global X Defense Tech ETF (SHLD) offers investors a well-rounded strategy to seek to capitalize on these strengthening trends.
Key Takeaways
- The new U.S. administration signals a strategic shift in its defense policy, prioritizing efficiency and technology leadership.
- European nations are compelled to take greater responsibility for their own security. We believe Europe’s rearmament is not a short-term reaction but a structural shift in defense policy.3
- We believe the digital transformation of defense is still in its early innings, with enormous ground to cover, particularly in Europe. Warfare increasingly relies on AI, cybersecurity, and real-time data.
A Shifting Global Landscape
The global defense landscape remains highly volatile, with nearly 30 major conflicts ongoing worldwide, according to the Council on Foreign Relations. Against this backdrop, the new U.S. administration’s 'America-first' stance, coupled with direct negotiations with Russia over the Ukraine war, is forcing Europe to reassess its defense strategy. Many European nations are now acknowledging decades of underinvestment in defense, with some already committing to increased spending.4
Meanwhile, the Trump administration is pursuing a bold defense strategy domestically, aiming to cut waste while modernizing its military capabilities with AI, autonomous weapons, drones, and robotics. Budget freed from legacy programs is expected to further accelerate defense modernization efforts, benefiting key defense technology providers.
These advancements are not occurring in isolation. As the U.S. modernizes its military capabilities, other nations are likely to feel compelled to strengthen their own defense technology arsenals, reinforcing a global defense-tech procurement cycle. This momentum, compounded by Europe’s commitments, is set to drive total global defense spending higher through 2030.
Europe's Defense Budgets Set for Secular Expansion
Prior to the new U.S. administration’s defense messaging, Europe had already been undergoing a historic rearmament phase, with defense budgets expanding at a pace not seen since the Cold War.5 For example, European military budgets grew 10% in 2023 to €279 billion, marking the ninth consecutive year of growth.6
Additionally, European members of the North Atlantic Treaty Organization (NATO) added $100 billion in new defense spending between 2022 and 2024, with multiple nations committing to multi-year increases.7 By the end of 2025, at least 20 European NATO members are expected to meet or exceed the group’s defense spending target of 2% of gross domestic product (GDP), up from only 9 members in 2021.8 Germany, France, and Poland are leading the spending surge, with Germany’s military budget expanding by 25% to roughly €86 billion in 2024 alone, making it the world’s third-largest defense spender behind the U.S. and China.9
Despite the urgency, European nations still lag other military powers in terms of defense expenditure as a percentage of GDP. The region’s defense spending commitments are growing, but they remain far below the newly discussed ambitions set by NATO’s leadership and key allies, meaning further spending growth could remain ahead. Recent spending initiatives signal momentum in this direction.
Additional Developments in 2025 Boosting European Defense:
- The UK’s Defense Overhaul: The UK has launched a new defense unit to oversee £20 billion in military spending. Prime Minister Keir Starmer has set out the biggest sustained increase in defense spending since the Cold War, suggesting a rise to 2.5% of GDP.10
- Rearm Europe Initiative: The European Union unveiled an €800bn defense initiative, dubbed Rearm Europe, to strengthen its military capabilities. The plan includes €150bn in loans to member states and aims to unlock private investment in defense technology.11 This follows NATO Secretary General Mark Rutte’s remarks that the alliance’s spending target would be considerably more than 3% of GDP, up from the 2% target currently.12
- Germany Defense Spending: Germany will exempt military spending from its strict fiscal rules and create an off-budget fund of €500 billion to finance infrastructure spending, laying the ground for a big boost in the country’s defense budget.13
- Paris Emergency Summit: In response to the pause in U.S. military aid to Ukraine, European leaders convened an emergency summit, committing to unlocking billions of euros for defense. Polish Prime Minister Donald Tusk emphasized that defense spending will no longer be treated as excessive expenditure.14
- Surge in Private Defense Investment: European private sector investment in defense, security, and resilience jumped 24% year-over-year (YoY) in 2024, reflecting growing interest in military modernization.15
Moreover, new equipment procurement and development remains central of Europe’s defense expenditure growth. In 2024, the budget spent on new equipment procurement likely reached beyond €90 billion, nearly 50% higher compared to 2023, and nearly 27% of the total budget. Similarly, spending on research and development grew 18% YoY in 2024, to €13 billion. This expansion is expected to continue over the next few years, signaling a broad effort to modernize defense capabilities.16
Defense Digital Transformation Has Ground to Cover
Despite record military expenditures, globally, defense remains one of the least digitized industries, with less than 1% of global military budgets allocated to software and digital capabilities.17 Militaries around the world are recognizing this gap, leading to an accelerated push toward AI, cybersecurity, and digital warfare.
Recent conflicts, such as those in Ukraine and the Middle East, have highlighted the critical advantages of technology—particularly real-time, data-driven decision-making, which is likely to drive massive upgrades in defense software infrastructure. Beyond operational superiority, technology also delivers cost advantages on the battlefield, reinforcing the strategic importance of defense tech solutions. Worldwide, and in Europe, companies specializing in advanced defense systems and defense-tech infrastructure are poised to benefit from sustained investment.
Three European Firms Driving This Transformation
- Rheinmetall AG, Germany’s largest ammunition manufacturer, has experienced significant growth over the last few years, benefitting from increased European defense spending. The company recently signed its largest-ever framework contract with the German Armed Forces for the digitization of infantry soldier systems. The agreement, valued at up to EUR 3.1 billion, will run until the end of 2030.18
- Thales SA, a French defense electronics giant, is among a growing list of companies that should see increasing order books on the back of heightened EU defense spend. Thales operates a best-in-class defense business that accounts for over 50% of its revenues and almost 60% of profits.19 The company recently secured a £250 million contract for Royal Navy fleet communications and has expanded its cybersecurity division with the acquisition of Imperva.20,21
- BAE Systems, UK’s leading defense and aerospace company, has benefited tremendously from the surge in defense spending in EU countries since the start of the Russia-Ukraine war, with orders for fighter jets, submarines, and frigates in high demand. The company reported record revenue of £28.33 billion in 2024, up 14% YoY from 2023. The firm received new orders worth £33.7 billion last year, while the total of the company's existing backlog of orders increased by £8 billion, reaching £77.8 billion, positioning it well for sustained growth.22
Conclusion: Long Growth Runway for Defense Tech
As global geopolitical uncertainty increases, defense spending is likely set for secular expansion this decade. By realigning its strategic priorities, the U.S. is likely to push Europe toward greater military self-reliance, driving increased procurement and benefiting some of the region’s largest defense contractors. We believe companies across the defense technology value chain—including software, components, hardware, drones, autonomy, and sensors—are positioned for sustained, and potentially stronger-than-expected growth. In our view, for investors looking to capitalize on this generational transformation of the global defense order, a diversified global approach with a strong focus on defense technology will be key.
Related ETFs
SHLD – Global X Defense Tech ETF
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