Shortly after the start of the war in Ukraine, German Chancellor Olaf Scholz described 24 February 2022 as a „turning point in the history of the continent“. The defence industry is now right in the middle of this turning point. What was unthinkable is now being thought. At the recent Eurosatory defence trade fair in Paris, 67 German companies alone were represented in the German Pavilion of the defence & security association BDSV to present their products. This made the German defence industry one of the larger exhibitors. Rheinmetall alone has a record order book, which will be worth around 60 billion euros by the end of 2024 – the lion's share of which is for artillery ammunition that will be fired in Ukraine, among other places. Rheinmetall's stock market value has doubled since October.

The background to the ongoing upswing in the defence industry cannot be overlooked. German Defence Minister Boris Pistorius warns that Russia could well attack NATO countries in a few years' time. In five years' time, Germany must be „ready for war“, the minister demands, as does Inspector General Carsten Breuer. A special fund of 100 billion euros has been made available. Within the North Atlantic Treaty Organisation, the target of 2% of GDP for defence spending has been reaffirmed several times by political leaders.

In the meantime, it has been possible to allocate money from the special defence fund, and thus ensure initial planning certainty for large parts of the industry. From the defence companies' point of view, what is missing is stable funding in the federal government's medium-term financial planning. Rheinmetall CEO Armin Papperger believes that the amounts spent to date are far too low. In order to make Germany ready for defence, the armaments budget would have to increase from 52 billion euros to more than 80 billion euros.

Among the investors at a recent conference on the defence industry held by investment bank Morgan Stanley, there was no doubt that defence spending in Europe is increasing. This is necessary and unavoidable. On average, defence spending will reach 2% of GDP this year. Trying to accurately predict the timing of the benefit to companies in the sector remains challenging. Still, most investors are willing to look past the short-term noise, because they believe that higher growth can be expected in the medium term.

Is the upturn in defence spending structural? Some investors fear that the risk of change in the US government alone is the reason for the current spending upswing, and that future plans could be curtailed if expectations change. However, Morgan Stanley estimates that Europe would need to spend more than 2 trillion dollars to make up for the under-spending – compared to commitments of 2% of GDP – of the last 30 years. This reinforces the belief that Europe is in the early stages of a decade-long upswing in defence spending. Short-term sentiment towards the sector may be heavily influenced by political rhetoric, but the need for increased spending seems undeniable.

The EU must now reach a consensus on the goal and purpose of European defence measures to complement NATO. Regardless of the outcome of the US presidential election, the USA will inevitably turn its attention more to the crises in Asia in the future. The EU states must, therefore, cooperate. This can only be successful if the member states succeed in harmonising their requirements, standards and export control regimes in such a way that the collaborative products can be realised successfully in economic terms. The plans for a future European fighter aircraft project under French leadership, and a new main battle tank under German leadership, for example, already bear witness to this.