According to the financial research firm Rothschild & Co. Redburn, as most European countries remain committed to NATO’s 2035 spending targets, European defense companies could increase the revenue they generate from European customers over the next decade by an average of 0.5 to .5 annually from their European customers over the next decade. This means the sector’s European revenue could at least triple by 2035.
Analysts Olivier Brochet and Joe Orchard note that rising military budgets have led to a “significant surge” in the order backlog, which has not yet been fully reflected in the financial results of the continent’s defense industry. European Union countries have raised their defense spending to a record 343 billion euros in 2024, and it is expected to rise to 381 billion euros this year.
Drivers of Growth and the Potential to Outpace the U.S.
According to the report, the fastest growth will continue in countries like Germany —which historically underfunded defense—or in European regions perceived as being “disturbingly close” to the perceived threat from Russia.
Defense Equipment Spending Doubles
Based on the assumption that Europe will spend 3.5 percent of its GDP on defense by 2035, project that Europe’s defense equipment spending will amount to approximately 1.2–1.4 percent of GDP— more than double current levels.
According to Brochet and Orchard, as Europe rearms, it will “significantly outpace” the U.S., which plans to keep defense spending at roughly 1% of GDP.
Order Backlog and the Rise of Local Players
The sharp increase in defense budgets is expected to translate into sector orders in 2025–2026. It was noted that the sales backlog of the companies in the sample increased from an average of three years during the 2013–2021 period to 3.9 years during the 2023–24 period.
Analysts emphasize that domestic players are benefiting disproportionately from the surge in defense spending. Germany and Eastern Europe, in particular, stand out in this growth:
German Companies: The combined sales of six major German companies (Rheinmetall, KNDS, Hensoldt, TKMS, Diehl, and Renk) increased annually from 2020 to 2024.
Eastern European Companies: The compound annual growth rate for six Eastern European companies (PGZ, CSG, Colt CZ, VMZ, Romarm, and WB Group) stood at 3 over the same period.
Critical Need Areas and New Risks
European defense investments will focus primarily on the most critical capabilities, such as air defense and ground defense equipment like tanks and artillery. Other priority areas include deep strike, air superiority, UAVs, and counter-UAV technology.
UAV Technology Risk
Analysts noted that UAV innovation is “far from” maturity and that the countermeasure cycle in Ukraine lasts no more than three months. This means there is a risk that a new system could quickly become obsolete. This risk could make European governments reluctant to place large orders for UAV production.
Financial and Political Risks
Financing defense spending poses a “serious” challenge, particularly for France, the United Kingdom, Italy, and Spain, due to high public debt. Additionally, analysts note that public support for rearmament in Europe carries a political risk; if it implies trading social security for defense security, it could trigger widespread public rejection of this move. There are warnings that upcoming elections could face the risk of having to backtrack on this plan.
Despite these challenges, companies actively pursuing joint ventures and mergers and acquisitions strategies are expected to secure a larger share of the growing procurement budget.
