Russia’s invasion of Ukraine and Donald Trump’s election redoubles pressure on European leaders to strengthen their military industries. A sizeable obstacle is financing.
Europe counts only a few defense champions capable of large-scale production and supported by a reliable national market: only 19 European firms rank among the world’s top 100 defense companies, compared with 48 in the United States. The best path forward is to support small and medium-sized enterprises. Europe counts 2500 of them. They specialize in niche technologies that fill capability gaps and develop dual-use innovations with military and civil applications.
Yet, their potential remains under-exploited due to limited access to private funding. According to a study conducted by the European Commission, almost half (44%) of defense SMEs avoid bank loans because they are difficult to obtain, while an even higher proportion (68%) avoid equity finance. The European Commission study blames strict interpretations of environmental, social, and governance criteria.
Although the Commission recently clarified that defense investments can fall within the scope of sustainable finance, investors continue to perceive weapon production as unethical. Many European banks restrict financing to companies with predominantly civilian revenues, while some exclude defense altogether. Arms procurement requires extensive due diligence to verify compliance with sustainability reporting and export controls – expertise and resources that few small companies possess.
In comparison, the US imposes no taboos and eases access to private finance. The US defense market is large and decentralized, bolstered by a strong private funding ecosystem. Specialized funds possess the expertise to navigate the regulatory environment and assess the specific risks associated with the defense sector.
Similar defense funds do not exist in Europe. From January 2022 to July 2023, European venture capital and private equity investments in defense amounted to €32 million, compared with €2.2 billion in the US. Germany and Spain have some venture capital activity, but private equity is rare in the EU, with France being the main exception.
Change is coming. In March 2024, the EU allocated €500 million to boost output capacity to two million shells annually by the end of 2025. European Commission President Ursula von der Leyen says the bloc needs to spend €500 billion to make up the defense spending shortfall since the end of the Cold War.
In May 2024, the European Union’s lending arm, the European Investment Bank, ended its ban on financing defense companies by allowing investment in dual-use technologies. Notable EIB defense initiatives include the €175 million Defence Equity Facility, set to grow to €500 million within three years. It supports private equity and venture capital investments by acting as a co-investor. The bank’s Strategic European Security Initiative allocates €8 billion to support dual-use research and development from 2024 to 2027, though this figure remains far lower than the planned €250 billion in funding to support climate industries.
The incoming European Commission has named its first ever Defense and Space Commissioner, Lithuania’s former Prime Minister Andrius Kubilius. He has expressed openness to issuing joint bonds or using unspent money from post-pandemic funds to raise vital funds for building up the military. He is tasked with delivering a White Paper on defense within his first 100 days in office.
“European defense is suffering from the fact that investments in defense are not seen as good investments,” Kubilius stressed during this month’s European Parliament hearing. Improving access to finance for defense companies represents one of his three main priorities.
The incoming Commissioner has expressed interest in creating new financial instruments to support private defense financing, including the creation of an investment guarantee program. Although he has not yet come forth with specific proposals, they should offer protection to SMEs by covering loan defaults. This would reduce financial risks for banks and investors, and encourage lending in the defense sector, where returns on investment often take long to materialize. The Commissioner should support the creation of a Europe-wide Capital Markets Union that would incentivize the development of specialized defense funds and facilitate new investment channels such as long-term pension products.
NATO officials worry about duplication with the new EU efforts. They criticize the bloc’s alternative set of equipment standards and procurement efforts. EU governments jealously guard national security as their domaine réservé and are reluctant to hand over power to Brussels. There is a long way to go to “create the same business conditions as in the United States,” Kubilius himself admits.
But recognizing the problem represents the first step in solving it. While a common EU defense remains a mirage and NATO remains on the front lines of defending Europe, Brussels can play an important role. It can start by facilitating access to private finance in defense.
Alexandre Buhler is a European defense and security analyst. He worked at the European Defence Agency and at the Hertie Centre for International Security in Berlin.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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