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Outlook for the Restructuring of the EU Defense Industry Amidst Accelerated European Self-Defense and the Rise of German-Led NATO Leadership
Executive Summary
Executive Summary
Accelerated European Self-Defense: The Rise of German-Led NATO Leadership and the Restructuring of the EU Defense Industry
- Structural Transition Confirmed: The Trump administration's demand for a reduction and transfer of NATO's role is not a temporary pressure but a long-term strategic shift, placing Europe in a situation where it must effectively assume NATO leadership by 2027.
- European Defense Market Begins Rapid Expansion: The target of 2% of GDP for all 32 member states has been achieved for the first time, with a further increase to 5% by 2035 confirmed. Defense spending in Europe and Canada has increased by $90 billion year-on-year, entering the actual execution phase and signaling the creation of the largest defense demand in history.
- Germany Emerges as the Core Axis of European Defense Restructuring: The Merz government's commitment to double defense spending within four years and achieve 3.5% of GDP, coupled with the promotion of five pan-European defense joint projects and strengthened cooperation with the Baltic states, is accelerating the restructuring of the European defense ecosystem under German leadership.
- Technological Gap and Capability Deficit as Key Risks: There exists a structural vulnerability where the pace of military modernization fails to keep up with the rapid evolution of warfare technologies such as drones, AI, and autonomous systems. The vacuum in areas like strategic bombers, previously filled by the U.S., remains unresolved.
- Proactive Positioning is Key to Market Dominance: Immediate actions are required to participate in the five EU joint projects, secure procurement demand from Germany and Eastern Front states, and strengthen European-based hubs. The Ankara NATO Summit (July 7-8) will be a watershed moment for confirming strategic direction.
I. Issue Situation Analysis
Accelerated European Self-Defense: The Rise of German-Led NATO Leadership and the Restructuring of the EU Defense Industry
Issue Situation Analysis
1. Background and Progression of the Issue
- Entrenchment of the European Defense Free-Rider Structure Post-Cold War - The U.S. played a core role in NATO's strength, while European allies consistently showed low defense spending. - The target of 2% of GDP spending was set at the 2014 Wales Summit, but implementation has been sluggish.
- Russia's Full-Scale Invasion of Ukraine (2022) as a Turning Point - The possibility of war within Europe became a reality, shattering the indifference towards defense [3]. - Rapid technological changes in warfare, such as drones, AI, and autonomous systems, became evident [3].
- Weakening of U.S. NATO Commitments Following the Second Trump Administration - In May 2025, the U.S. notified NATO of a reduction in military capability commitments within the NATO Force Model [4]. - In December 2025, the Pentagon demanded the transfer of NATO leadership to Europe by 2027 [11]. - Further erosion of transatlantic alliance credibility, such as independent decisions on the Iran war [11].
- Phased Increase in NATO Defense Spending Targets - As of 2025, all 32 member states have achieved the target of 2% of GDP for the first time [13]. - At the 2025 Hague Summit, the target was raised to 5% of GDP by 2035 [13].
2. Current Situation (Latest Trends)
- Ankara NATO Summit (July 7-8) Imminent, Highlighting a Turning Point - Discussions are scheduled on expanding Europe's defense role, increasing defense industry production, and continuing support for Ukraine [12][15]. - Mending relations with the U.S. and demonstrating alliance cohesion are key agenda items [12].
- European Allies Swiftly Compensating for U.S. Deficiencies - NATO Supreme Allied Commander General Greenewich: "European allies have compensated for most of the U.S. reduction in a matter of weeks" [1][4]. - The remaining gap is in strategic bomber capabilities, with alternative measures being explored [7].
- European Commission Proposes Five Pan-European Defense Joint Projects (July 3) - ① Drone and Counter-Drone Project (26 EU member states + Norway & Ukraine participation) - ② Eastern Flank Watch Project (13 member states + Norway & Ukraine) - ③ Integrated Maritime and Subsea Defense Project - ④ Air and Missile Defense and Early Warning Project - ⑤ Space-Based Defense Project [2]
- Germany Rapidly Emerging as the Leading Nation within NATO Europe - Chancellor Merz: Commitment to double defense budget within four years and achieve 3.5% of GDP by 2029 [17][18]. - European media, including NZZ, publicly call for Germany to take a leadership role in NATO Europe [5]. - Reaffirmed defense commitments at the meeting with Baltic state leaders in Berlin [17].
- France Secures Parliamentary Approval for a €36 Billion Defense Budget Increase by 2030 [10]
- Lithuania Pursues Amendment to Constitutional Clause Prohibiting Nuclear Weapons - Party leaders have reached a principled agreement; announced by President Nausėda on July 2. - Linked to discussions on the stationing of German troops and the expansion of the French nuclear umbrella [8].
- United Kingdom announces defense investment plan worth 30 billion pounds- Pursuing military modernization with an additional 15 billion pounds in spending - Explicitly aims to build a "stronger NATO within Europe" [19]
- Canada promotes the establishment of the Defense Support and Reconstruction Bank (DSRB)- Aims to secure 10 founding member countries, plans to provide up to $133 billion in low-cost loans - Part of the "Coalition of Middle Powers" initiative to move away from U.S. dependence [20]
3. Key Actors and Positions/Interests
- United States (Trump Administration)- Position: Gradually reduce NATO commitments, pressure Europe to strengthen its own defense capabilities - Interests: Focus on Indo-Pacific strategy, reduce burden of responding to simultaneous conflicts such as the Iran war - Key strategic assets like strategic bombers remain irreplaceable [7]
- Germany (Merz Government)- Position: Abandon historical restraint on military power, actively embrace leadership within NATO in Europe - Interests: Link security leadership with economic influence as Europe's largest economy - Double defense budget within four years, aiming for 3.5% of GDP by 2029 [17][18]
- France (Macron Administration)- Position: Consider expanding nuclear umbrella to Europe, lead efforts to strengthen strategic autonomy - Interests: Maintain security leadership within the EU, maximize bargaining power as a possessor of independent nuclear deterrence - Increase defense budget by 36 billion euros by 2030 [10]
- Eastern Flank States (Poland, Baltic States, Lithuania, etc.)- Position: Directly exposed to Russian threats, most active in strengthening deterrence - Interests: Maintaining U.S. troop presence and securing nuclear deterrence are top security priorities - Lithuania: Opened possibility of deploying nuclear weapons through constitutional amendment [8]
- NATO Secretary General (Mark Rutte)- Position: Urges bridging the gap between funding and actual weapons production capacity - "Missiles and tanks cannot be stopped with dollars or euros" — Emphasizes accelerating defense industry production [6]
- European Commission- Position: Leads EU-level defense integration through five pan-European defense joint projects - Interests: Foster the EU defense industry ecosystem and enhance interoperability among member states [2]
- United Kingdom- Position: Actively participates in strengthening European defense within NATO, despite not being an EU member - Explicitly contributes to "NATO within Europe" with a 30 billion pound defense investment plan [19]
- Canada- Position: Leads the creation of a multilateral defense finance structure to move away from U.S. dependence - Interests: Secure a central role in the Coalition of Middle Powers, expand independent security diplomacy space [20]
4. Summary of Key Issues
- ① Possibility of fully replacing the U.S. void- Europe has compensated for most of the void within weeks [1][4] - Key strategic assets like strategic bombers remain irreplaceable [7] - Persistent issue of insufficient actual weapons production capacity relative to the speed of financial investment [6]
- ② Political burden of accepting German leadership- Potential public resistance in Germany due to historical trauma of militarism - Lingering historical distrust among Eastern European countries towards a German-led security order - External calls for leadership (e.g., NZZ), but the scope of Germany's actual role remains undefined [5]
- ③ Defense industry production capacity and technological gap- Delayed expansion of defense industry production relative to the speed of budget increases [6] - Europe's delayed response to new warfare trends such as drones, AI, and autonomous systems [3] - Lack of production base to meet the scale of attrition warfare demonstrated by the war in Ukraine
- ④ Nuclear deterrence void issue- Lack of a plan for Europe to secure its own nuclear deterrence if the U.S. nuclear umbrella weakens - Discussions on expanding France's nuclear umbrella are ongoing but lack concrete agreement - Lithuania's constitutional amendment is symbolic, but actual nuclear deployment is a long-term process [8]
- ⑤ Institutional limitations of EU-NATO defense integration- Unclear division of roles between EU defense joint projects and NATO command structure - Complexity of cooperation structure due to Turkey's (NATO member) non-EU status - Conflicts of interest in the defense industry among member states and nationalistic priorities [2][14]
II. Final Recommended Response Measures
Accelerating European Self-Defense: Comprehensive Recommended Response Measures and Action Plan
1. Overall Assessment and Recommended Response Measures
Core Assessment
- Confirmation of Structural Shift: The U.S. reduction of its role in NATO is a long-term strategic direction, not a temporary bargaining chip [11] - Entry into a Phase of Rapid Expansion in the European Defense Market: European and Canadian defense spending increased by $90 billion year-on-year [6], entering the actual implementation phase - Coexistence of Technological Gap Risks: Structural vulnerability where the pace of rearmament does not keep up with the evolution of war technologies such as drones and AI [3] - Emergence of German leadership as a key variable: The Merz government's pledge to double defense spending is the central axis of European defense restructuring [17][18]
Recommended Response Measures (in order of priority)
① Establish a strategy for entering the European defense industry supply chain - Target the EU's five major pan-European defense joint projects as key entry opportunities [2] - Prioritize technology-intensive areas such as drones/counter-drones and space-based defense - Consider partnerships or equity participation with German and French defense companies
② Focus on the German defense ecosystem - Seize procurement demand arising from Germany's pledge to double defense spending within four years [17] - Identify projects linked to the modernization program of the German Federal Armed Forces (Bundeswehr) - Strengthen on-site presence in Berlin and build a lobbying network for the German defense industry
③ Respond to the special needs of Eastern flank countries - Rapidly increasing demand for enhanced deterrence in Baltic and Eastern European countries such as Lithuania [8] - Seize demand for nuclear-related infrastructure, early warning, and border surveillance systems - Develop customized solutions for Eastern Front countries such as Poland and Romania
④ Seize opportunities in areas lacking residual capabilities, such as strategic bomber gaps - Monitor areas of strategic asset gaps that NATO has not yet addressed [7] - Explore opportunities for cooperation in technology transfer or licensed production with US defense companies
⑤ Utilize the Canadian-led multilateral defense finance platform - Track trends among participating countries in the establishment of the Defense, Security, and Resilience Bank (DSRB) [20] - Examine the possibility of utilizing low-interest defense project financing
2. Short-term/Mid-term/Long-term Implementation Plan
Short-term (0-6 months): Information Gathering and Positioning
- Immediate analysis of the Ankara Summit (July 7-8) outcomes [12][15] - Confirm the level of reaffirmation of defense spending targets and whether German leadership is formalized - Grasp the details of budget allocation and participation conditions for the EU's five major projects [2]
- Obtain the implementation roadmap for German and French defense budgets - Analyze the annual implementation plan for France's €36 billion increase [10] - Identify the annual procurement plan to achieve Germany's 3.5% GDP target [18]
- Urgently strengthen the on-site information network in Europe - Deploy personnel to hubs in Brussels (European Commission), Berlin (German Ministry of Defense), and Warsaw (Eastern Front) - Consider contracting with consulting firms and lobbyists for NATO procurement
- Internal capability assessment and gap analysis - Evaluate the competitiveness of our company's technologies in drone/counter-drone, early warning, and space-based defense sectors - Review compliance with European defense regulations (EDIRPA, ASAP, etc.)
Mid-term (6 months - 2 years): Market Entry and Partnership Building
- Pursue participation in EU pan-European defense project consortia [2] - Secure a position as a technology supplier within the drone/counter-drone project (participating in 26 countries) - Enter the sensor and communication fields for the Eastern Flank Watch project
- Sign strategic alliances with German defense companies - Negotiate partnerships with major companies such as Rheinmetall, Hensoldt, and KNDS - Review various cooperation models, including technology transfer, joint development, and equity participation
- Participate in government procurement in Eastern flank countries - Strengthen direct sales activities to the Ministries of Defense of Lithuania, Poland, and Romania [8] - Consider establishing joint ventures (JVs) with local defense companies
- Obtain NATO procurement process certification - Complete registration and certification procedures with NSPA (NATO Support and Procurement Agency) - Pursue acquisition of NATO Security Clearance
- Design financing structure utilizing Canada's DSRB [20] - Develop a plan to utilize low-interest financing for participation in European defense projects
Long-term (2-5 years): Consolidate Market Position and Expand Portfolio
- Establish a position as a key supplier within the European defense ecosystem - Seize continuously growing procurement demand in the process of achieving the 5% GDP target by 2035 [13] - Diversify portfolio across multiple countries and multiple projects
- Proactively invest in next-generation war technologies - Strengthen R&D in drone swarm technology, AI-based battlefield awareness, and autonomous systems [3] - Pursue cooperation to enhance technology based on battlefield data from Ukraine
- Execute M&A strategy aligned with European defense industry restructuring trends - Internalize local production capabilities through acquisition of European small and medium-sized defense companies - Consider corporate restructuring to be eligible for EU defense industry subsidies
- Prepare for entry into the nuclear-related infrastructure market - Prepare for demand for nuclear weapons hosting infrastructure following the constitutional amendment in Lithuania [8] - Preemptively establish a framework for compliance with relevant technology regulations and international agreements
3. Monitoring Indicators and Trigger Points
Key Monitoring Indicators
① Political/Diplomatic Indicators - Level of explicit mention of German leadership in the Ankara Summit Joint Declaration [5][12] - Whether and to what extent the US announces additional NATO capability reductions [1][4] - Schedule for the passage of the Lithuanian constitutional amendment in parliament [8] - Whether France officially formalizes an expansion of its nuclear umbrella
② Budget/Financial Indicators - Actual execution rate of Germany's defense budget by year (Target: 3.5% of GDP by 2029) [18] - France's execution status of €36 billion by year [10] - Budget allocation and tender announcement schedule for the EU's five major projects [2] - Number of participating countries and scale of funds raised for the DSRB establishment [20]
③ Industrial/Technological Indicators - Speed of NATO defense industry production capacity expansion (weapon procurement lead time) [6] - Scale of European investment in drone, AI, and autonomous systems sectors - Progress in developing capabilities to replace the strategic bomber gap [7]
Trigger Points (Situations Requiring Immediate Response)
| Trigger | Response Action |
|---|---|
| Announcement of tender for EU's five major projects | Commence consortium formation immediately; activate proposal preparation team |
| Public release of Germany's detailed defense budget procurement plan | Deploy Berlin sales team intensively; accelerate negotiations with German partners |
| Announcement of additional US NATO capability reductions | Conduct urgent analysis of capability gaps; prepare to propose alternative solutions |
| Passage of Lithuanian constitutional amendment | Form task force to identify business opportunities related to nuclear infrastructure |
| Official launch of DSRB and confirmation of member states | Immediately commence review of financing utilization methods |
| Announcement of interim review results for NATO's 5% GDP target | Re-evaluate procurement needs by country and adjust strategy |
4. Summary Conclusion
- European defense restructuring is a structural megatrend that will continue for years. - Driven by the triple factors of reduced US role, persistent Russian threat, and upward revision of NATO budget targets [11][13][3] - Entering a long-term market expansion phase of over a decade, not a short-term event.
- Germany and EU projects are the key entry points. - Germany's rising NATO leadership is forming a new hub for European defense procurement [5][17] - The EU's five joint projects offer leverage opportunities for multi-country simultaneous entry [2]
- Securing technological superiority is key to market sustainability. - In a structure where technological evolution outpaces rearmament speed, drone and AI capabilities are differentiating factors [3] - Advancing technology based on lessons learned from the Ukrainian battlefield is core to competitiveness.
- Proactive positioning determines success or failure. - Competition in European defense procurement is expected to intensify following the Ankara Summit [12][15] - Completing partnerships, certifications, and local base establishment within six months is a prerequisite for medium-term performance.
References
[1] [Defense News] Europeans to fill almost all gaps left by US in NATO defense plans, source says
[2] [Business Times (SG)] EU Commission proposes five major cross-border defence projects
[3] [The National (UAE)] Europe's race to rearm outpaced by the future of war
[6] [Hürriyet Daily News] NATO presses to produce more weapons
[7] [Al-Monitor] Europeans to fill almost all gaps left by U.S. in NATO defence plans, source says
[8] [Kyiv Independent] Lithuania poised to lift nuclear weapon hosting ban
[9] [Business Times (SG)] Europe has replaced most US cuts within Nato, top commander says
[10] [TASS] France’s National Assembly approves hike in military budget
[11] [Foreign Affairs] The Only Way to Save Europe
[13] [Daily Sabah] NATO defense spending: How allies stand ahead of key Ankara summit
[14] [Cyprus Mail] What a changing Nato means for Cyprus and the future of European defence
[15] [Al-Monitor] Explainer-What are the key challenges facing NATO?
[17] [DW (Deutsche Welle)] Germany: Merz rebukes Trump jab over defense at Baltic event
[19] [Kyiv Independent] UK unveils landmark defense plan, incorporating lessons from Ukraine
*This text is an AI translation of an original written in Korean. Some translations or nuances may be inaccurate.