Perhaps the best way to know where Europe's rearmament may be heading is not to ask a politician or a military officer, but rather the person who moves money to (or from) defense companies. If this strategy is followed, the right person is Benjamin Heelan, Chief Analyst at Bank of America for Defense, Aerospace, and Capital Goods in Europe, the Middle East, and Africa.
Donald Trump's submission to Russia, his open hostility towards Europe, and the EU's decision to create a 150 billion euro defense fund in response to Russia's aggressiveness and the indifference of the US have placed the sectors followed by Heelan at the center of interest for global investors. If we add to this the outflow of capital from US markets since Trump took office, and especially since the tariff chaos began in that country two weeks ago, European defense could become one of the hottest sectors in this Cold War into which the EU and its neighbors have been dragged.
Question. The market seems excited about European defense stocks. To what extent is this due to a structural change in perspectives or simply a rotation of capital from the US to this side of the Atlantic?
Answer. My opinion is that defense in Europe will be a growth sector in the next 5-10 years. The perspectives have structurally changed. In this context, prices are very attractive. The rift between the US and the EU will last, and for the past two months, we have been hearing that Europe has been benefiting for too long from the 'peace dividend' provided by the US deterrent umbrella. That is a fundamental change in mindset. When I speak with companies, I realize the magnitude of the change is enormous.
Q. How will this paradigm shift affect the companies you speak with?
A. For now, everything is 'top-down'. The market is asking questions like, "What are the implications for Rheinmetall if Germany wants to spend a certain amount on defense?" The same goes for Indra in Spain or BAE Systems in the UK. But we have not yet seen what specific capabilities Governments will need.
Q. Are you referring to what types of weapon systems?
A. Of course. The big issue right now is the Ground Forces in Eastern Europe. This impacts companies involved in the manufacturing of tanks, artillery, armored vehicles... In other words, how will the entire border with Russia be rearmed?
Q. Does this mean manufacturing equipment and increasing production capacity?
A. Yes and no. Europe has been expanding its production capacity for three years [since Russia invaded Ukraine] and its defense budgets for two. What we are seeing now is how those budgets are moving from 1.5% of GDP to 2%. What we will see in the next five years is the jump from 2% of GDP to 3%. This implies an acceleration of business turnover for companies, but also more spending in areas like technology or communications, which are not part of the initial wave we are discussing. Currently, companies are already seeing their revenue grow, but the real impact of the decisions Governments are making in 2025 will be felt in 2027 and 2028. That is when the sector will take off.
Q. We are focusing on the short term. But Europe is planning to invest more in defense permanently. Once this phase focused on Ground Forces on the border with Russia concludes, where will the spending be concentrated?
A. It will mainly revolve around technology and how to maintain a sustained advantage over the adversary. This fundamentally means three things. The first is surveillance, such as radars, early warning systems, etc. The second is communications, ensuring all systems are interconnected. The third is air superiority, which can be a combination of Eurofighter and Rafale [fighter jets] with missile defense systems and drones, which can be sophisticated but also very basic. All of this requires the ability to manufacture weapons, not only to supply the Armed Forces of European countries but also because the military-industrial capacity itself is a deterrent. If a country can manufacture a thousand drones per month if attacked, anyone would think twice before doing anything to them.
Q. Will all of this happen gradually over time or simultaneously?
A. Developing these capabilities takes time. Rheinmetall is working on a European equivalent of the US HIMARS [land-to-land missiles that have had a devastating impact in Ukraine], but it won't be ready until 2028 or 2029. We have nothing similar to the F-35 [fighter jet]. There is no European Patriot [anti-aircraft missile]. So, we will continue to depend on the US for a long time. But we need to start doing things.
Q. The UK is excluded from the European defense system as it is not in the EU or EEA. Will British companies be losers in this process, or will Great Britain sign a security agreement with the EU to not miss out on a piece of the ¤150 billion defense pie that the EU will invest?
A. I believe everyone will work towards an agreement because the more countries and companies participate in European defense, the better for everyone, especially because one of our biggest problems in this sector is the small scale of the industry. I foresee that in a few years, there will be a large number of cross-border defense programs while at the same time countries maintain a certain sovereignty over their defense industry.
Q. Do you think European Governments will be reluctant to award contracts to European companies controlled by US companies or with technological partners from that country?
A. I suppose you are referring to General Dynamics in Spain.
Q. Exactly [the US company General Dynamics owns Santa Bárbara].
A. To be honest, I haven't heard anything about it, perhaps because everything happening is so recent that we will have to wait 6-12 months to see what decisions Governments make.
Q. European Governments are precisely the major uncertainty factor in this EU defense process. Not everyone in Europe sees things the same way.
A. Defense is a national priority and part of each country's sovereignty. The European Commission is trying to generate as much cohesion as possible among the different Governments, but ultimately, it is up to them, for example, whether the Spanish Government is willing to spend more on defense.