Themen:
Insights March 25, 2025

Shaping up: Market implications of the EU’s "ReArm Europe" plan

PERSPECTIVES Memo | Authors: Dr. Ulrich Stephan, Chief Investment Officer Germany - Dr. Dirk Steffen, Chief Investment Officer EMEA - Wolf Kisker, Senior Investment Strategist

Key takeaways
 
• European Union (EU) leaders have given the green light to plans to strengthen the EU's defence capabilities
• The central element is the "ReArm Europe" plan presented by European Commission President Ursula von der Leyen, which envisages up to EUR800bn for European defence over the next four years.
• Shares in European defence companies have risen by more than 30% year-to-date and are no longer cheap. National defence plans by EU member states could create new upside potential.

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What happened?

At its spring summit on March 20 and 21, the European Council of the 27 (EU 27) member states approved the Commission's plan to strengthen the EU's defence capabilities by 2030. The "ReArm Europe" plan, presented by Commission President Ursula von der Leyen in early March, aims to prepare the EU for possible changes in the transatlantic alliance. It aims to support Ukraine with financial and military aid, strengthen Europe's strategic defence capabilities by boosting European arms production, and prepare the EU for possible future security crises by investing in critical capacities such as missile defence, military mobility and cyber security.

To enable Member States to carry out the necessary investments and, at the same time, to encourage private investment in defence, the following measures are to be carried out:

  1. Financial flexibility: Temporary suspension of the rules of the Stability and Growth Pact to allow EU countries to increase their defence spending without risking an excessive deficit procedure. Assuming an increase in defence spending of around 1% of EU-27 Member States' GDP, this would result in an investment volume of around EUR650bn over the planned four-year period.
  2. Defence loans: The European Commission is to provide member states with a total of EUR150bn for joint defence projects. The procurement of defence equipment (e.g. artillery, missiles, ammunition, drones and anti-drone systems, air and missile defence systems) from European production – including European manufacturers from the UK, Norway and Switzerland – is eligible for financing.
  3. The re-allocation of existing EU funds for defence investment, such as the Cohesion Fund.
  4. Lifting existing lending restrictions on the European Investment Bank (EIB) and strengthening its role in supporting European defence companies.
  5. In order to leverage private capital for defence purposes, a mechanism to promote private investment in the defence sector is to be established.

What does it mean for investors?

The announcement of these substantial investment plans has led to significant share price gains among European defence companies. The Stoxx Europe Aerospace and Defence Index is up more than 37% over the past 12 months and more than 32% so far this year. However, shares are now also trading at more than 47 times expected annual earnings. By comparison, the Stoxx Europe 600, based on expected earnings over the next twelve months, trades at just over 15 times, despite a 9% increase so far this year.

Nevertheless, the rally in defence stocks could continue for a while yet. After all, it is not just European money that is expected to flow into the sector. European countries are also compiling budget proposals for their national defence.

However, a lot of positive expectations have already been priced into share prices. Investors should therefore be cautious and look at the entire value chain of defence spending. This includes the raw materials as well as the technology developers.

The feasibility of the announced defence spending is another issue. Although the EU plans to spend up to EUR800bn on defence in the medium term, bureaucratic hurdles, lengthy tendering procedures and the need for European coordination could delay the rapid allocation and use of funds. These factors could cause the expected positive impact on defence companies' earnings to come later than investors might hope.

For investors, these major changes in the European defence sector on the horizon create both opportunities and risks.

While political commitments to increase defence spending are constructive signals, investors should not underestimate the challenges of actually implementing these measures. In addition, the European defence industry is highly fragmented. Careful analysis and a balanced approach are thus crucial to the successful implementation of investment strategies in this dynamic environment.

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