Why investors are cautious about EU's plans to increase defense spending

Although the European Union (EU) has signaled its desire to increase military spending, the ability of European defense companies to respond is still limited in the current context.

European Commission (EC) President Ursula von der Leyen. (Source: Asia Times)

In an article in Asia Times , former US Deputy Secretary of Defense Stephen Bryen analyzed the feasibility of increasing EU defense spending.

Proposal to sharply increase defense spending

European Commission (EC) President Ursula von der Leyen recently proposed increasing the European defense budget by 1.5% of GDP, compared to the average 2% that European countries are currently spending.

She worries that Europe needs to protect itself as the US may no longer be able to play the role of “protector” if the region is in turmoil. Meanwhile, the administration of US President Donald Trump has begun to signal a major change in the way the North Atlantic Treaty Organization (NATO) operates.

According to information circulating in Washington, NATO in the future could be led by Britain, France or Germany, instead of the US as it has been for a long time. This reflects a change in transatlantic security strategy.

The EC’s proposal would raise the EU’s total defense budget to €843 billion ($909.4 billion). To help member states navigate the proposed increase in defense spending, the EU plans to raise €150 billion in loans from capital markets. However, it remains unclear who would have access to the loans, what the terms would be, and which economies could support their deployment.

Shares in European defense companies jumped on the news, but the gap between expectations and reality remains wide.

European countries are facing many difficulties at the moment, especially high energy prices. Germany has fallen into recession and some of its major industries are gradually moving abroad, especially to the United States.

According to a report by the Kiel Institute for the World Economy (Germany), European defense businesses lack competitiveness and weapons production costs are being pushed up too high compared to the market.

Another important issue was that more weapons required more soldiers to operate them, estimated at 300,000 to 500,000 soldiers. Mobilizing such a large force was not easy, requiring a large payroll. Therefore, it was impossible to produce a full arsenal without people to operate them.

This partly explains why Ukrainian President Volodymyr Zelensky has said that Kiev could provide troops to Europe. However, in reality, Ukraine does not have enough manpower, as it is in conflict with Russia and has suffered heavy losses.

Even if the conflict in Ukraine ends, recruiting and training an army that meets EU standards will take generations and require huge financial resources. Moreover, a key question is: Is a Ukrainian soldier really ready to defend Paris or Warsaw?

German Leopard tanks are not as effective as expected. (Source: Alpha Defense)

Capacity is still limited

According to Asia Times , the European defense industry is facing many constraints, including inefficiency, slowness and lack of flexibility in expanding production beyond the factory scale. Defense companies in the region also often compete fiercely for production shares, leading to stagnation rather than acceleration. Increased investment in these businesses risks exacerbating corruption and slowing down the improvement of production capacity.

In addition, the quality of European weapons does not always meet expectations. A typical example is the German Leopard tank - which was expected to change the situation of the conflict in Ukraine but in reality did not achieve the desired effect.

Another weakness is air defenses. Europe lags behind in developing modern defenses, especially long-range ballistic missile capabilities. The emergence of the Russian-developed Oreshnik hypersonic missile, which was first used in Ukraine in November 2024, has raised deep concerns in the region.

To remedy this situation, the EU could look to outside suppliers, with the US and Israel being two potential suppliers. Systems such as the US’s Aegis Ashore or Israel’s Arrow 3 could help bolster Europe’s defense capabilities. However, if the EU actually gets the funding that the European Commission (EC) is proposing – which would require each member state to increase its defense spending – the financial benefits would largely fall to US and Israeli defense companies.

Another concern is the source of imported military components. Currently, some key components in European military drones come from China. If this trend continues, Beijing could become a low-cost supplier of military hardware, including missiles and electronics, for which European manufacturing facilities are inadequate. This poses a challenge to regional security.

Despite plans to increase defense spending, the EU is not ready to become an independent military force after years of relying on American protection. Some countries, such as Poland, have taken the initiative to increase their defense budgets, but not everyone has followed suit. While announcements are made regularly, significant changes have yet to materialize.

Source: https://baoquocte.vn/ly-do-cac-nha-dau-tu-than-trong-truoc-ke-hoach-tang-chi-tieu-quoc-phong-cua-eu-307180.html