Europe's defense spending flood should not ignore innovation

Arab News

14-03-2025

https://arab.news/rjgxt
The ongoing dramatic shifts regarding the Ukraine war and in diplomatic arenas across Europe and the West have brought defense investments to the fore. Like in many previous cycles, it is fair to say there is now growing hype around investment in defense tech, security and space. Despite this excitement, it is ill-placed, especially when it comes to most early-stage companies.
The numbers stated at various European conferences and the many commitments to greater defense spending over the past month have largely created this excitement, which is based on the fact that this spending will partly go to defense companies and will hence increase their profits. Yet, where most are mistaken is that, as governments shift to a more warlike mentality, the spending will go more toward the essentials and what already works as opposed to innovation. I am no military man, but if I were directing a defense budget, I would be pushing for artillery and systems that will work tomorrow rather than an innovative technology that might or might not work in 10 years' time. In short, Europe is late. I fear that this could cost the continent in terms of innovation and the new startups that might be the saviors of the day after tomorrow.
There is great innovation taking place in Europe, especially in the space domain. It would be a disaster to see it go to waste. And so, as the EU gears up for its new emergency investments in defense, it is most likely that the money spent will go on securing the basics. This is one of the biggest risks of the current European policies. The defense giants are the ones that will benefit, but they will only provide an immediate solution. Hence, Europe is reacting but it risks stifling the champions of tomorrow, which the US and China are developing.
I am not giving investment advice, but it is surely much safer to invest in listed defense and space companies, which already have a track record and inroads to government contracts, than in an early-stage startup that still has to build up its model and develop its hardware or software.
Europe is late. I fear this could be costly in terms of the startups that might be the saviors of the day after tomorrow.
Khaled Abou Zahr
European nations are significantly ramping up their investments in the defense and space sectors. The goal is clear: to strengthen their military capabilities and reduce their reliance on external allies. One of the key initiatives is the 'ReArm Europe' plan, which was proposed last week by European Commission President Ursula von der Leyen. This plan seeks to distribute up to €800 billion ($869 billion) to fortify Europe's defense infrastructure.
ReArm Europe includes measures like offering fiscal flexibility by suspending EU budget rules to allow member states to increase defense spending and potentially unlock €650 billion over the next four years. Another notable aspect of this initiative is the provision of €150 billion in loans for joint defense projects, which will cover areas like air and missile defense systems. Additionally, the plan includes repurposing existing EU funds and introducing mechanisms to attract private investments into defense projects. The European Investment Bank is also expected to play a pivotal role in supporting European defense firms.
This comes on top of the European Peace Facility, which has distributed funds to help Ukraine. Initially, the facility provided €500 million, but this was later increased to €2 billion, with further commitments to supply ammunition and military equipment. The EU also set up a defense loan program, directing €150 billion toward member countries and mandating the purchase of military equipment from European producers. This initiative should fund advanced air defense systems, drones, air transport and cybersecurity projects.
This is being matched by national-level investments by leading European countries. As an example of the legacy focus, in Germany, Rheinmetall, the country's largest weapons manufacturer, this week reported record profits and increased orders. This is expected to continue as Germany's defense strategy evolves to push for more military spending.
And as an example of the return to basics, France is advancing its artillery capabilities with the development of the CAESAR Mark II 6x6 self-propelled howitzer. In February 2022, Nexter secured a €600 million contract from the French defense procurement agency for this project. An additional €350 million contract was awarded in December 2023, bringing the total to €950 million.
This hasty shift in military spending should not come at the expense of investments in new technologies.
Khaled Abou Zahr
In the space sector, Leonardo, an Italian aerospace and defense group, plans to deploy 40 satellites by 2028. Of these, 18 will be military satellites funded by the Italian Ministry of Defense and 20 will be civilian satellites financed by Leonardo itself.
Poland, a strategic country, as history has proven, has significantly increased its defense spending, allocating 4.7 percent of its gross domestic product to military expenditure in 2025, far surpassing NATO's 2 percent target. The country has also launched the 'East Shield' initiative, a $2.55 billion program to fortify its eastern borders with Belarus and Kaliningrad through advanced surveillance systems and physical barriers. Similarly, Sweden increased its military budget to 2.2 percent of GDP in 2024 and the Netherlands announced an extra €2.4 billion in funding for its armed forces, ensuring it meets the NATO target.
This hasty shift in military spending, which has its origin in bad politics, should not come at the expense of investments in new technologies or make the tech sector a mere box-ticking exercise that so-called tourist investors hype up. It must be driven by genuine value creation, with a long-term strategic goal of reestablishing deterrence and preventing uncontrolled escalation.