Europe rearms for a world of greater geopolitical risk

Published Date: November 20, 2024 | Author: Tom Bailey

In the late 1980s, the US political scientist Joseph Nye coined the term “soft power”. Within the context of the perceived relative decline of US military power vs. the Soviet Union, and economic power vs. Japan, Nye sought to highlight the endurance of American soft power. Unlike “hard power,” the use of military or economic force to achieve goals, soft power relies on the appeal of a nation’s culture and political values.

But, as US policy analyst David Rieff, recently noted, one of the great ironies of geopolitics is that it was not the US that embraced the concept of soft power as a core part of its foreign policy. Instead, the European Union did. As Rieff notes in a recent essay: “The European Union had made soft power…the basis not just of its international diplomacy, but of its self-conception as a great power.”

This embrace of the soft power conception coincided with Europe’s disarmament. In the early 1960s, at the height of the Cold War, European NATO members spent an average 5% of their GDPs on defence. In the 1970s, with the advent of détente, defence spending receded to around 3% of GDP. But, with the fall of fall of Berlin Wall and the end of the Cold War, defence spending fell even further, bottoming out at 1.5% of GDP.

We can also put these numbers into more concrete figures. In 1989, the German Army had around 5,000 tracked vehicles. Today, it has around 700, a fall of 85%. At the same time, the German Navy has gone from around 150 vessels to around 50 today, a 65% decrease. Similar figures apply to other major European countries.

“Worldwide, defence spending is on the up. Global military spending grew by 6.8% in 2023, compared to the year prior. Total spend hit a record level of $2.4 trillion.”

Russia’s two invasions of Ukraine, however, have served as wake-up calls to Europe. In 2014, the year Russia illegally annexed Crimea, European NATO members agreed to progress towards spending 2% of their GDPs on defence. While some progress was made on increasing defence spending, the majority of European NATO members were still a long way off from reaching the 2% spending goal.

The decisive change came with Russia’s full-scale invasion of Ukraine in 2022. Whether it is the Polish Prime Minister Donald Tusk or the UK’s former defence secretary Grant Shapps, it is now common for leaders across the continent to speak of Europe being in a new “pre-war era.” As a result, we have seen most European NATO members make material increases in their defence spending.

Today, 23 out of the 32 members of NATO are spending at or above the 2% target. Notably, Poland is expected to spend 5% of its GDP on defence in 2025. Remarkably, if you exclude the US, NATO members are expected to collectively increase their defence spending by almost 18% in 2024, compared to the year prior.

Change in defence spending year-on-year among NATO ex-USA members

Source: NATO, June 2024. Data excludes the U.S. % yoy change in spending based on 2015 prices. For illustrative purpose only.

*Forecasted figures

Europe’s sense of vulnerability is further heightened by the re-election of Donald Trump. In his first term, Trump often questioned NATO’s purpose and implied that US support could wane for members not meeting their financial commitments. This adds further momentum to Europe’s defence spending push.

But US commitment to European security has already reduced compared to the Cold War era. At the end of the Cold War, the US Army in Europe numbered almost 300,000 troops. By 2014, just one tenth of that figure remained. These troops were deployed during the Cold War to ward off the threat of America’s biggest global competitor, the Soviet Union. Europe, at the time, was ground zero for the great power competition between the US and USSR.

Today, the situation is different. If we have entered a new Cold War, as many analysts contend, the geography, and therefore centre of US attention, is very different this time. China is the US’ primary global competitor, and the ground zero of their competition is the Asia-Pacific region. Europe, it is feared, will be left even more vulnerable should a major crisis break out over Taiwan.

Worldwide, however, defence spending is on the up. Global military spending grew by 6.8% in 2023, compared to the year prior. Total spend hit a record level of $2.4 trillion. Just as with Europe, states are spending more on defence not just because of an immediate threat but also the perception of forthcoming threats.

This growth in military spending, both in Europe and globally, is boosting the earnings of defence companies. It is now common to talk of a new “Defence Supercycle”. As a result, many investors are once again seeking exposure to the defence sector. The EQM Future of Defence Index provides exposure to a basket of companies involved in both physical defence and cyber defence. Importantly, every company included in the index are required to be domiciled within a NATO allied country, to reduce the risk of exposure to geopolitically irresponsible actors.

Future of Defence UCITS ETF (NATO) provides exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending. Global military spending is rising. In 2022, $2.2 trillion was spent on defence — the highest level ever recorded. With the ongoing geopolitical tensions, one area of growth is among European NATO members. But despite such record spending, most European NATO members are still lagging the 2% of GDP target. Simultaneously, we are seeing a sharp rise in cyber attacks by state-sponsored actors, necessitating the need for cyber defence, as well as physical defence.

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Europe rearms for a world of greater geopolitical risk

“Worldwide, defence spending is on the up. Global military spending grew by 6.8% in 2023, compared to the year prior. Total spend hit a record level of $2.4 trillion.”

Change in defence spending year-on-year among NATO ex-USA members

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