US President Donald Trump’s challenge to Europe to spend more on its own defence and to raise contributions to Nato and Ukraine has led to announcements of more spending on weapons by European countries. We highlighted last May the likely rise in defence budgets – and this has been led by the large German ten-year package.
The US wants all European members of Nato to get to the required minimum of 2% of GDP and then immediately to go well beyond that with pressure for up to 5% of GDP. Several countries are now seeking to get to 2.5% including the UK. The Nato Treaty Article 3 makes clear all members need to commit sufficient to their own defence. The Article 5 guarantee that an attack on one is an attack on all does not obviate the need to take prime responsibility for self-defence, nor does it trigger a mandatory requirement on other members to send troops to a battlefield of another member.
The temporary withdrawal of US support for Ukraine, and the attempt to get Kyiv to sign a deal for repayments for past US support via future American participation in Ukrainian energy and minerals exploitation, means the European members of Nato now need to provide much more support and supply more weapons to Ukraine than before. They also need to replenish their own stores of ammunition and depleted weapons stocks after three years of sending items to Ukraine – and they also need to strengthen their own defences. All this will be expensive and will fill armourers order books for years to come.
How much is sent on defence?
The largest militaries in the world are the US and the Chinese, followed by Russia. The 2023 figures for spending in billions of dollars are:
- US: 916
- China: 296
- Russia: 109
- Saudi: 75
- UK: 75
- Germany: 66
- Ukraine: 65
- France: 61
Source SIPRI
The US massively outspends the rest of the world, maintaining 11 carrier groups and a far-reaching air force with plenty of capability to intervene anywhere around the world. China is building a large air force and navy to gain similar capability. China has a very large army.
Russia spends at high levels relative to its gross domestic product (GDP), and Ukraine is currently fielding a large army with the economy on a war footing. It is channelling a third of its GDP into defence as well as receiving substantial equipment from abroad.
With war in Europe and the Middle East - and President Trump threatening Iran – many governments are assessing their defence capabilities. These moves came as the US sent B2 bombers to Diego Garcia and two carrier groups to the Middle East this week for possible action against the Houthis and Iran.
Increased plans
Germany is leading the way with a plan to spend around €500bn or so extra on defence over the next ten years. The old Parliament voted to lift the strict limits on borrowing to make it easier to increase the defence budget. Germany will need to spend on creating more factories to make weapons, ammunition and military components. Germany has been spending just 1.5% of GDP each year, compared to the US at 3.4%. The UK has announced plans to increase from 2.3% of GDP to 2.5% this decade and to go to 3% thereafter. The next year will see a £2bn increase in spending.
Beijing is likely to include increased defence purchasing in its stimulus programme as it seeks to speed the growth rate of China’s economy.
The impact of these wars
The recent wars have expended large amounts of munitions, which now need replacing. The wars have alerted the Western powers to the low level of stocks they were running, so there is need both to replenish and to expand the armoury. They have also drawn attention to the way modern warfare has evolved.
Western Generals and Air Marshals now need many more drones and smart missiles, seeing the high use of these in recent conflicts. The 155-mm shell has also been greatly in demand as artillery battles have formed an important part of the Ukraine battles. Tanks have proved more vulnerable than commanders expected.
The use of missiles against Israel and in the Gulf is making the US, as well as others, consider the need to strengthen defences in home territory against incoming drones, missiles and hostile aircraft. The hypersonic missiles are particularly difficult to track and destroy, and the West is catching up with the hypersonic developments. Digital and cyber warfare is also an important part of change, with modern militaries wishing to commit much more resource to remote and automated weapons systems and their controls.
The defence industries
Most companies in the sector report full order books and are having to consider how to expand capacity. Defence shares have been reflecting this build up. Many countries are considering onshoring more of their production as they realise in war conditions long and complex supply chains would be vulnerable.
Dependence on imports from afar or from a country that might not be your ally would be a problem. Countries need the capacity to make basic materials like steel and aluminium, and to have control over the supply of computer chips for control systems. Global competition and trade rules have always allowed exemptions for defence to permit subsidy and special rules for domestic producers.
The European Union (EU) is seeking a role in all this, proposing more common weapons design and procurement. It is establishing a €150bn fund for weapons purchase by member states. The French industry is hoping for home advantage, as other member states re-arm.
The Trump approach to Russia and Ukraine
It is clear President Trump wishes to end the war to trigger exploitation of Ukrainian minerals and oil and gas – with strong US participation. He seems to accept this might mean the end to sanctions against Russia and the rebuilding of the Russian oil and gas trade with the West, which is clearly a Russian aim.
Russia also wishes to lift the threat to its deposits in Western banks, which have been frozen. Any extension of the patchy peace moves so far will have implications for the world energy market. President Trump is now worried that Russia is planning to string out the negotiations over peace – whereas the US wants it done. He is also concerned that Ukraine is backing away again from the minerals deal.
Equity-market rally
Markets have bid-up defence shares in recognition of extra spending to come. Some European countries will remain reluctant and constrained by budget rules. Overall led by Germany. there will be increases to replenish run down stocks and to strengthen defences.
Europe thinks it can no longer so readily rely on support from the US. Any success in ending the Ukraine war will have a big impact on energy markets as sanctions are dismantled. It will shift the emphasis to paying for the reconstruction of Ukraine away from more weapons to Ukraine.
Continuation of the war will add to weapons demand as Europe struggles to replace lost US inputs. The rise of defence spending is part of the general theme we have set out of a retreat from globalisation and away from freer trade. Protectionism and onshoring policies are part of the same approach, as countries now consider how they would make enough weapons in a war they really had to fight.
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