European Defense Industry: Why US-EU Trade Agreement Fears Are Overstated

The European defense sector experienced initial turbulence following the announcement of a framework trade agreement between the United States and the European Union. Investors grappled with the implications of potential U.S. military equipment purchases by the bloc, quickly fearing that a stated commitment by the EU to increase U.S. imports, particularly in defense, could divert significant capital away from European defense contractors who have seen substantial rallies this year. However, expert analysis suggests these initial anxieties might be overblown, positing that Europe’s own industrial capacity limitations will ensure sustained benefits for domestic firms despite any U.S. procurement.

• The announcement of a US-EU trade agreement sparked investor concerns about a potential shift in European defense spending towards U.S. suppliers.
• Leading European defense companies, including Thales, Renk, Rheinmetall, and Leonardo, experienced immediate stock value declines.
• The White House indicated the EU agreed to $600 billion in new U.S. investments by 2028, explicitly including “hundreds of billions of dollars” in U.S. military equipment purchases.
• Conversely, the EU’s account emphasized private sector investment of $600 billion by 2029 across “various sectors,” alongside substantial purchases of U.S. energy products and AI chips, notably omitting military equipment.
• Analysts suggest Europe’s inherent defense production capacity limitations will necessitate continued procurement from U.S. providers, mitigating negative impacts on domestic firms.
• The agreement is largely seen as political signaling, buying time for detailed specifics rather than a radical reorientation of defense procurement.

Market Turbulence and Divergent Interpretations

Immediately following the agreement’s announcement, leading European defense companies witnessed a notable decline in their stock valuations. France’s Thales saw a 4.3% drop, while Germany’s Renk and Rheinmetall were down 5.1% and 3.3% respectively. Italy’s Leonardo also experienced a 0.74% dip. This swift market reaction stemmed from initial interpretations that a considerable portion of the EU’s planned increased defense spending, aimed at bolstering the bloc’s security, could be directed towards U.S. suppliers. Such a redirection would inevitably erode the anticipated boom for European manufacturers.

These concerns were fueled by a White House summary of the deal, which projected that the EU would make $600 billion in new investments in the U.S. by the end of President Donald Trump’s term in 2028, in addition to existing annual investments. Furthermore, the summary explicitly noted the bloc “agreed to purchase significant amounts of U.S. military equipment,” with the U.S. President indicating “hundreds of billions of dollars” in arms purchases. This narrative painted a clear picture of substantial U.S. gains at the potential expense of European industry.

Conversely, the European Union’s own account presented a strikingly different perspective. The EU statement indicated that companies within the bloc “have expressed interest in investing at least $600 billion” in “various sectors” in the U.S. by 2029, emphasizing private sector investment rather than direct government procurement for defense. Crucially, the EU’s detailed outline focused on commitments to buy 700 billion euros ($810 billion) worth of U.S. liquified natural gas, oil, and nuclear energy products, alongside 40 billion euros worth of AI chips. European Commission President Ursula von der Leyen’s public statements on the deal, coinciding with a proposed 2 trillion euro, seven-year EU budget featuring a fivefold increase in defense and space spending, notably omitted any mention of U.S. military equipment purchases.

Uncertainty Regarding Defense Spending Scope

This stark divergence in reporting highlights a significant source of uncertainty, particularly regarding the scope and nature of the defense component. Peter Schaffrik, global macro strategist at RBC Capital Markets, observed that the specifics around the defense spending remain unclear, including whether these sums are additional to existing plans or the exact timeframe for their allocation. Despite calls from European leaders to prioritize regional suppliers, U.S. military contractors such as Lockheed Martin, Northrop Grumman, and Raytheon have already been anticipated to benefit substantially from higher EU defense spending, driven by contract extensions and new agreements, regardless of the precise EU-U.S. agreement details.

Europe’s Industrial Capacity: A Mitigating Factor

The underlying factor mitigating the impact on European firms, and indeed shaping the reality of defense procurement, is the region’s inherent production capacity limitations. Dmitrii Ponomarev, an exchange-traded fund product manager at VanEck, pointed out that Europe accounted for approximately 35% of all U.S. arms exports between 2020 and 2024, with the U.S. supplying about 64% of arms imported by European NATO states. This historical reliance underscores existing capacity gaps within the European defense industrial base.

The Stockholm International Peace Research Institute (SIPRI) has previously “raised concerns about the EU’s ambitions for domestic defense manufacturers, citing historical difficulties in scaling up production, cost inflation from protectionist policies, and a persistent mismatch between supply and demand within the bloc,” as noted by Ponomarev. This suggests that even with increased European budgets, a significant portion of new procurement may necessarily flow to U.S. providers, especially for advanced, NATO-compliant systems not widely produced within Europe. The imperative to rapidly rearm and enhance capabilities often prioritizes immediate availability and proven interoperability over a slower, domestically driven buildup.

Strategic Outlook and Practical Realities

Dean Turner, chief euro zone and U.K. economist at UBS Global Wealth Management, echoed this sentiment, suggesting that while the U.S. aims to attract capital, the immediate challenge for European nations seeking to bolster their defense capabilities lies in the limited output capacity of local manufacturers. He reiterated that some funds will inevitably flow to the U.S. due to its unique position as a provider of certain critical defense systems, such as advanced fighter jets, long-range missiles, and specialized naval vessels.

While the overarching European strategy, articulated by leaders like French President Emmanuel Macron, remains a push for more localized defense spending and greater strategic autonomy, the immediate practicalities of rearmament mean external suppliers, particularly U.S. ones, will remain crucial. Ultimately, the trade agreement may be more about political signaling and buying time for detailed specifics rather than a radical reorientation of defense procurement, especially given the existing and well-documented capacity constraints within the European defense industrial base. The imperative to rapidly enhance defense capabilities will likely continue to necessitate a diversified supply chain, with the U.S. playing a prominent role.