How the Ukraine Conflict is Transforming Europe's Defence Industry

Rising Defence Spending in Europe

Jan 14 (Reuters) - Europe's defence sector has been reshaped since Russia's full-scale invasion of Ukraine in February 2022, as governments increase spending on defence and plan to boost their military ranks almost four years into the conflict.

With global unrest and tension from Venezuela to Iran, the sector has drawn greater investor interest, with shares of public defence contractors hitting consecutive record highs. Europe's aerospace and defence index gained around 55% over the past year, according to LSEG data.

The rally has been reinforced by signs of capital markets appetite for defence exposure, including the planned initial public offering of Czech arms maker Czechoslovak Group (CSG), one of Europe's largest privately held defence companies.

Key Defence Players and Innovations

EUROPEAN DEFENCE SPENDING ON THE RISE

EU member states' defence spending climbed to 343 billion euros in 2024 (about 1.9% of GDP) and likely hit 381 billion euros in 2025 (around 2.1% of GDP), while defence investment jumped to a record 106 billion euros in 2024 and is projected at nearly 130 billion euros in 2025, EU Council data shows.

European nations are lifting budgets towards or above NATO's 2% of GDP target. Alliance leaders in June agreed a higher benchmark equivalent to 5% of GDP by 2035, split into 3.5% for core defence and 1.5% for wider security-related spending.

Germany created in March a 100 billion-euro special fund to accelerate procurement. Parliament has approved measures allowing defence spending above 1% of GDP to bypass constitutional debt rules.

Poland, NATO's top defence spender by share of GDP, spent about 4.1% of output in 2024 and is targeting some 4.7% in 2025, while France, Italy and Nordic countries are spending more across air defence, ammunition, cyber and naval platforms.  

SPOTLIGHT ON DEFENCE CHAMPIONS AND RISING STARS

Emerging Defence Companies

The focus on defence and aerospace has bolstered firms around the region, big and small. 

Established names include giant aircraft maker Airbus, British defence group BAE Systems, German armoured vehicle maker Rheinmetall, and helicopter-to-electronics Italian firm Leonardo.

German radar and electronic‑warfare systems expert Hensoldt has seen rising demand for situational-awareness and air-surveillance technologies as European states address air defence gaps.

Sweden's Saab produces Gripen fighter jets, submarines and electronic-warfare systems; while French firms Safran and Thales supply kit for military propulsion, defence electronics, radar and cyber systems.

Rising stars include German tank gearbox maker Renk Group, which listed in 2024.

(Reporting by Maria Rugamer and Hugo Lhomedet in Gdansk, editing by Ed Osmond)