Europe and defense have been written about relentlessly over the past year. And while the urgency keeps getting louder, actions are still not matching the scale of the problem.
January’s events alone, such as troop withdrawals, tariff threats, and Arctic brinkmanship, turned a slow debate about burden sharing into a real test of whether Europe can protect itself without defaulting to someone else, again.
Ultimately, Europe is not choosing strategic autonomy. It is being forced into it, faster than its institutions are designed to handle. And investors are pricing this in.
When security stops being abstract
Administration charts and staffing decisions speak louder than battlefields nowadays, especially when it comes to protectionism.
The United States began pulling a small number of officers out of NATO bodies tied to intelligence fusion, special operations planning, and maritime coordination. And though the numbers were modest, the message was not.
At the same time, European leaders committed to defense spending targets that would have sounded unrealistic a few years ago.
5% of GDP is now discussed openly, not as a distant aspiration but as something that should arrive closer to 2030 than 2035.
For context, NATO data shows that only a handful of European countries reached even 2% before the Ukraine war.
The result is a new starting point. Security is no longer an insurance policy underwritten by someone else.
It has become a line item that competes with pensions, healthcare, and debt servicing. Markets have already adjusted to this reality. Politics is still catching up.
Europe still has a dependency problem
Europe often describes its defence challenge as one of spending too little. The deeper issue is spending in the wrong way for too long.
Between 2020 and 2024, about 64% of European NATO arms imports came from the United States, according to SIPRI.
This includes aircraft, missiles, air defence systems, and the software layers that tie them together.
These are not items that can be swapped out easily, because they lock buyers into supply chains, upgrades, spare parts, and data access for decades.
Energy tells a similar story. After cutting Russian gas imports by roughly 75% between 2021 and 2025, Europe replaced that supply mainly with liquefied natural gas from the United States.
By last year, US LNG accounted for about 57% of Europe’s imports. On current contracts, that share could reach 75% by the end of the decade.
Finance completes the picture. European investors hold more than $10 trillion in US Treasury bonds. These are considered safe assets. They also tie Europe’s savings to US fiscal and political decisions in a way that is rarely discussed in public debates.
Taken together, these links mean that Europe’s exposure is not just commercial. It is operational. That difference becomes important once security turns into a negotiating tool rather than a given.
The real price of standing alone
Replacing external security support is expensive, but not in the way most people expect.
The highest costs do not sit in tanks or fighter jets, but in the systems that make armies usable.
Estimates vary, but a reasonable range suggests that accelerating defense spending to 5% of GDP by 2030 would require roughly an extra 0.6% of GDP each year across the continent.
Replacing intelligence, logistics, satellite communications, and transport capabilities adds another one to 2% of GDP during the build-up phase.
Extending credible nuclear deterrence beyond the existing national frameworks adds further pressure.
Combined, Europe could be looking at defense-related spending increases of around 3% of GDP annually through the end of the decade, on top of plans already in place.
The European Commission forecasts an aggregate EU budget deficit of about 3.3% of GDP in 2026.
However, under a more independent defense posture, that figure would move closer to 6%.
There are only three ways to fund that gap. Higher taxes reduce private demand. Larger deficits raise borrowing costs, especially for heavily indebted countries.
Central bank involvement through joint defence bonds would test long-standing rules around monetary policy. None of these paths is painless.
Investors should assume that the trade-offs will be visible in bond spreads and currency markets well before they appear in official strategies.
Why more money does not mean better defence
Even with funding, Europe faces a production problem. Military manufacturing is still organised around national preferences.
France buys French. Germany buys German. The result is low volume, high cost, and poor interoperability.
Europe produces roughly 50 main battle tanks a year. Russia produces more than 15,000.
A modern European tank costs several times more than its Russian equivalent, even allowing for differences in quality and support. This is all about scale, and Europe does not have it.
Financing is just as fragmented. Defense effort depends on fiscal capacity and threat perception.
Poland spends close to 5% of its GDP. Spain spends about 2%. Germany can mobilize hundreds of billions. France cannot. There is no shared borrowing mechanism to spread costs evenly or quickly.
Ideas to fix this exist. A coalition of willing countries could issue joint defence debt and procure at scale, focusing on air defence, drones, cyber systems, and logistics where national champions are weaker.
Such a vehicle could also create a genuine European safe asset. So far, politics has moved more slowly than markets.
Equity markets rarely wait for institutional reform. European defence stocks have risen sharply again in early 2026, extending gains that began after the Ukraine invasion.
The Stoxx Europe Aerospace and Defence index rose almost 15% in January alone. Some individual companies are up more than 30%.
Companies like Saab, Rheinmetall, and BAE Systems have been the main beneficiaries.
This rally reflects a simple belief. European defence spending is no longer a cycle.
It is a long-term commitment driven by politics, geography, and credibility.
Domestic suppliers benefit first, not because they are cheaper but because reliance now carries risk.
There are limits. Valuations assume that governments follow through, that procurement is pooled rather than fragmented, and that geopolitical pressure remains high.
Any pause in tension or delay in budgets will show up quickly in prices. The sector has moved from ignored to crowded in less than three years.
The more interesting signal lies beneath share prices. Capital markets are adjusting faster than policy frameworks.
Defence is being treated less like discretionary spending and more like infrastructure. That change in perception will outlast the current headlines, regardless of how individual disputes are resolved.
The uncomfortable truth is that Europe built its economic model on outsourced security.
Rebuilding that foundation at home will change budgets, markets, and politics in ways that are only starting to be understood.
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