Boom in Europe's Defense Industry and Accelerating Arms Buildup: A Geopolitical Risk Analysis

Executive Summary

Amid the protracted war in Ukraine and overlapping pressure from the Trump administration for greater defense burden-sharing, European defense companies have seen a simultaneous surge in performance and new orders. The net profits of major firms like Indra, Thales, Leonardo, and Hensoldt have increased by 25%, with new orders exceeding €83 billion. Multilateral cooperation is also taking concrete shape, as seen in the Freyja missile defense project. However, the analysis suggests a high probability (55%) that the current structure will persist, where political integration at the EU and NATO levels remains largely declarative, while cooperation proceeds first at the level of individual nations and companies. Supply chain bottlenecks for raw materials such as titanium and rare earths are identified as a structural constraint on expanding production capacity, but also as an opportunity for South Korean companies to propose themselves as alternative suppliers. The analysis indicates that the South Korean government and companies should pursue a diversified integration strategy, simultaneously participating in multilateral consortia, pursuing bilateral cooperation with countries leading in threat perception, and linking up with dual-use R&D, rather than focusing on a single path.

I. Situational Analysis

Boom in Europe's Defense Industry and Accelerating Arms Buildup: A Situational Analysis

1. Background and Developments

The protracted war in Ukraine has fundamentally shifted Europe's security calculus. Negotiations to end the war have stalled, and the threat of Russia's westward advance persists[10]. EAI has characterized Europe's current situation as being "besieged on all sides"[10].

This has been compounded by the Trump administration's realignment of its alliance policy. "America First 2.0" has led to increased pressure for defense burden-sharing[6], and NATO has entered a transitional period, moving from a single, U.S.-centric pillar to a dual U.S.-European pillar structure[6].

The war in Ukraine has also spurred the spread of a new drone warfare paradigm. The lesson that conventional military forces struggle to achieve results has become widespread[6], and defense startups in the three Baltic states have been experimenting with rapid innovation models[6].

Poland has taken the lead in the rearmament discourse. Prime Minister Tusk declared his intention to make the Polish military the "largest in Europe," and the country's geopolitical position bordering Russia has heightened its threat perception[6].

A parallel trend of expanding dual-use research and development has also emerged. SIPRI has pointed to a trend of civilian R&D in European countries being integrated into the defense sector[4], incorporating universities, research institutes, and spin-offs into the defense ecosystem[4].

2. Current Situation

The performance of major European defense companies has surged. The net profits of firms like Indra, Thales, Leonardo, and Hensoldt have jumped by 25%[1], and cumulative new orders this year have surpassed €83 billion[1]. Rheinmetall, Airbus, and BAE Systems have also expanded their order backlogs[1].

Cooperation to ensure fighter jet interoperability has also begun in earnest. Indra, Thales, Leonardo, and Hensoldt have initiated efforts to promote European fighter jet interoperability[1], and Indra executive Recasens stated, "We are keeping all doors open to partnerships with other companies"[1].

A pan-European project in the missile defense sector has also been launched. Ukraine's FirePoint has initiated the integration of radar and guidance systems for the Freyja missile defense project, involving 12 European defense companies[13]. The project was officially launched in Paris by 10 governments and 12 defense firms[13], with participants including Eurosam, Leonardo, Thales, and SAAB[13].

Romania has announced an expansion of its drone production capacity. Acting Minister of Economy Dăscălu projected a surge in drone production through private and public initiatives[9], with tangible results expected from 2027, supported by funding from the SAFE Act[9]. The possibility of expanding local production through partnerships with Ukrainian companies has also been raised[9].

Incursions of Russian drones into NATO airspace have become frequent. A Spanish F-18 fighter on a NATO surveillance mission shot down a suspected Russian drone over Romania[12], and a NATO fighter had previously shot down a drone over Latvia[12]. An Italian Eurofighter was also involved in shooting down a drone that violated Latvian airspace[15].

Greece has also moved its defense modernization program into the implementation phase. The Ministry of Defense and military leadership began to seriously pursue procurement and modernization programs after the summer holiday season[14], and applications to military academies have surged, filling all available spots[14].

Vulnerabilities in the raw material supply chain have emerged as a bottleneck. Roland Berger assessed that the concentration of supply chains for materials like titanium and rare earths is a strategic vulnerability[3], acting as a risk factor for the production ramp-up in the aerospace and defense sectors[3].

3. Key Actors and Positions

Major European defense corporations (Indra, Thales, Leonardo, Hensoldt) have sought to expand their markets by securing fighter jet interoperability[1]. Indra has expressed an open stance toward partnerships with other companies, including startups[1], and has driven improved performance through a surge in new orders[1].

The Polish government has positioned itself as a leader in the rearmament discourse[6]. It has sought to change its standing within NATO based on its position as a country bordering Russia[6].

Ukrainian defense companies (such as FirePoint) have pursued securing missile defense capabilities through technological integration with European firms[13]. They have shown a desperate need to develop weapon systems capable of intercepting Russian ballistic missiles[13].

The Romanian government has officially announced the expansion of its drone production capacity using funds from the SAFE Act[9]. It has sought to strengthen its local production base through partnerships with Ukrainian companies[9].

The air forces of NATO member states (such as Spain and Italy) have frequently conducted live-fire responses to Russian drone incursions into their airspace[12][15]. Tensions have risen as they have carried out shoot-down operations during surveillance missions[12].

Research institutions like SIPRI and Roland Berger have warned of export control risks associated with the expansion of dual-use research[4] and have identified raw material supply chain vulnerabilities as a structural constraint[3].

4. Summary of Key Issues

A time lag exists between the boom in performance and the expansion of production capacity. It takes time for the surge in orders to translate into actual deliveries and increased production, and raw material supply chain bottlenecks are acting as a constraint on the production ramp-up[3].

The effectiveness of cooperation on fighter jet interoperability is also a key issue. Compared to the declarations of participation by numerous companies, the concrete timeline for standardization remains unclear[1], and coordination with the interests of each country in protecting its domestic industry is necessary.

Export control risks arising from the proliferation of dual-use technologies have also been raised. The increased military application of civilian R&D raises concerns about the emergence of regulatory blind spots[4], and the need to expand the scope of management to include spin-offs and research institutions has been suggested.

Russia's hybrid threats have shown signs of becoming a constant feature. Drone incursions into airspace have shifted from isolated incidents to a recurring pattern[12][15], and the increased frequency of live-fire responses by NATO member states has become a factor in escalating tensions.

Friction in the transition to a dual-pillar U.S.-European defense burden-sharing model has also persisted. The pattern of accelerating European self-strengthening in parallel with U.S. pressure continues[6], and the feasibility of an integrated self-strengthening path is assessed as limited[6].

II. In-Depth Analysis

Boom in Europe's Defense Industry and Accelerating Arms Buildup: An In-Depth Analysis

1. Analysis of Root Causes

A structural shift in security threat perception has acted as the primary driver. Following Russia's invasion of Ukraine, the sense of threat among NATO's border states has sharply increased[6], with frontline countries like Poland and the three Baltic states leading the rearmament discourse[6]. The threat has materialized as Russian drones have repeatedly violated NATO airspace[12][15].

The decline in the credibility of U.S. security commitments has become a secondary driver. The Trump administration's "America First 2.0" has translated into pressure for defense burden-sharing[6], and NATO is in a transitional period, moving from a single U.S. pillar to a dual U.S.-European pillar structure[6]. U.S. territorial pressure over Greenland has further widened cracks in alliance trust[10].

The lessons of the Ukraine war have reshaped industrial direction. A learning effect has emerged that conventional forces struggle to achieve results due to the spread of drone warfare[6], and demand for low-cost, mass-produced unmanned systems has driven investment trends in the defense industry[9]. Combat-proven technologies from Ukrainian companies like FirePoint have flowed back into the European defense sector[13].

2. Structural Context

Political Structure

The parallel existence of the EU and NATO institutional frameworks has constrained policy coordination. Discussions on political integration have tended to remain at a declarative level, such as Foreign Minister Sikorski's proposal for a 'European Legion'[6], and the differing threat perceptions between France and Germany have limited the implementation of integration discourse[6]. In contrast, individual industrial and technological projects have moved forward with concrete timelines[6].

The rise of far-right forces has acted as a domestic political variable in rearmament budget allocations. The rise of the far-right in several European countries has been identified as a factor of political instability[10], and the possibility has been raised that the momentum for integration could weaken at a time when EU cohesion is needed more than ever[10].

Economic Structure

The boom in defense orders has become visible in performance indicators. New orders for large European defense companies this year have surpassed €83 billion[1], and the net profits of Indra, Thales, Leonardo, and Hensoldt surged by 25%, reaching a record high for a half-year period[1]. Rheinmetall, Airbus, and BAE Systems have also expanded their order backlogs[1].

Industrial restructuring has also spread beyond traditional defense contractors. German automotive and engineering companies have pivoted to dual-use technologies such as drones and autonomous driving[5], and SIPRI has pointed to a trend of universities, research institutes, and spin-offs being incorporated into the defense ecosystem[4]. A pattern has emerged where Germany's stagnant manufacturing sector is leveraging defense demand as a new growth engine[5].

The concentration of raw material supply chains has acted as a structural bottleneck. Supply chains for key raw materials like titanium and rare earths are concentrated in a few countries[3], and Roland Berger has diagnosed this as a strategic vulnerability for expanding production capacity in the aerospace and defense sectors[3].

Security Structure

Achieving fighter jet interoperability has become a testbed for industrial integration. Indra, Thales, Leonardo, and Hensoldt have embarked on cooperation for European fighter jet interoperability[1], and Indra executive Recasens stated, "We are keeping all doors open to partnerships with other companies"[1]. However, the pace of integration appears to be limited due to differing national defense procurement systems and industrial policies.

The pan-European missile defense project has become a working model for multilateral cooperation. Ten governments and 12 defense companies are participating in the Freyja project[13], and firms like Eurosam, Leonardo, Thales, and SAAB have begun integrating radar and guidance systems[13]. The project is proceeding with a structure where combat-proven technology from Ukraine's FirePoint is directly integrated into the European system[13].

3. Comparison with Historical Precedents and Similar Cases

There are points of contrast with the NATO Standardization Agreement (STANAG) efforts of the Cold War era. During the Cold War, repeated attempts at standardizing weapon systems among NATO members were made but never completed due to the industrial interests of each country. It has been suggested that the current discussions on fighter jet interoperability could face similar barriers of national industrial protectionism[1].

Similarities are also observed with the consolidation and alliances in the European defense industry during the 1980s. A pattern of consortium-style cooperation between countries, like that seen at the time of Airbus's creation, is re-emerging. However, a key difference is that while past integration was government-led, current efforts are characterized by voluntary partnerships between companies moving first[1]. FirePoint's Freyja project has been cited as the latest example of this bottom-up cooperation[13].

Continuity with the first phase of rearmament since 2022 has also been confirmed. If the emergency rearmament immediately after the invasion was the first phase, the current phase is transitioning to the stage of expanding industrial production capacity[6]. Poland's early rearmament has served as a benchmark for other countries[6].

4. Key Variables Shaping Developments

The future direction of U.S.-European defense burden-sharing adjustments is considered a key variable. The baseline scenario, in which the transition to a dual-pillar structure proceeds in parallel with friction, is assessed to have a 55% probability[6]. The pace of allocation of Europe's self-strengthening budget is likely to vary depending on the intensity of U.S. pressure.

Whether raw material supply chain risks materialize is also a critical factor. The key question is whether procurement disruptions for titanium and rare earths will lead to actual production delays[3]. The ability to manage supply chain risks, particularly from China, is expected to determine the speed of Europe's defense production increase.

Changes in the intensity of Russia's hybrid threats are also noteworthy. If drone incursions into NATO airspace continue or expand, pressure to increase member states' defense budgets is expected to grow[12][15]. Conversely, if negotiations to end the war make progress, the momentum for rearmament could weaken.

The balance between EU-level integrated procurement and individual national self-strengthening also acts as a variable. The feasibility of an integrated self-strengthening path is assessed as limited, at 20%[6]. It remains to be seen whether the success of individual industrial projects (Freyja, fighter interoperability) will become the real driving force for integration discussions[1][13].