Will Europe be forced to defend itself alone?

Published Date: December 12, 2024 |

Author: Jane Edmondson, VettaFi, index provider for the Future of Defence UCITS ETF (NATO)

Authors’ views are their own and not those of HANetf.

2025 will be an important year for the defence sector.

Trump’s election has created both opportunity and uncertainty. On the one hand, high levels of defence spending are expected to continue, especially in Europe.

The primary focus of increased funding has been on modernisation and recapitalisation. This increases its sovereignty and encourages further collaboration as part of a NATO alliance trying to catch up on defence spending and replenish and modernise its equipment. Trump will also be under pressure to retain large US defence contracts. But Musk’s Department of Government Efficiency (DOGE) and the prospect of trade tariffs, along with a decreased level of US NATO involvement, has heightened the environment of uncertainty as well.

Notably, on the campaign trail, Trump indicated he would remain in the alliance as long as European countries “play fair” and stop taking “advantage” of US defence spending. While it seems unlikely that Trump will pull the US out of NATO entirely, especially given the opportunities for large US defence contracts, it could remove the US from the military command as France did in 1966. Trump has promised to end Russia’s war on Ukraine within twenty-four hours. Many in Europe fear he could strike a deal with the Russian leader, Vladimir Putin, at the expense of Ukraine or at least that he could scale back America’s support for Kyiv. Given all these considerations, could the outcome of the US election accelerate the drive for more EU autonomy and unity? Many experts remain sceptical. It is one thing to talk about strategic autonomy in an aspirational sense, but quite another to operationalize it. This involves rebuilding European defence capability in a way that could take many years.

“Europe has become a key driver of global defence-spending growth, with annual increases across the region as a whole averaging 3.9% in real terms since 2014”

Meanwhile, Russian President Vladamir Putin has approved a record-breaking defence budget, setting aside one-third of the government’s total spending in defence as the war versus Ukraine goes into its third year. The budget for 2025, which was just published, allocates about $126 billion (13.5 trillion rubles) to national defence, equating to 32.5% of government spending. Russia is racing ahead of NATO in terms of weapon production for the Russia-Ukraine war despite a NATO defence budget that is also continues to rise. With a record 23 out of 32 NATO members now meeting the 2% of GDP target, the NATO target percentage is likely to be increased to keep pace with Russia.

The cybersecurity landscape is also set to face significant challenges in 2025, with predictions of escalating cyber threats driven by advanced technologies and increased vulnerabilities. Gartner has projected that global end-user spending on information security will reach USD $212 billion in 2025, marking a 15.1% rise compared to the previous year. Imperva, a cyber security company, has identified several key trends anticipated to influence the security sector including AI-enhanced threats to the risks posed by APIs.

While there is some uncertainty in the details, defence budgets continue to grow to record levels and defence companies are reaping record earnings results and order backlogs after years of spending neglect. Technology spending on AI, drones, and cyber defence will be key beneficiaries in an era embracing modern defence solutions as a method to increase scale and efficiency and reduce cost.

Future of Defence UCITS ETF (NATO) seeks to provide exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending. The “NATO screen” seeks to align with the values of investors who may have concerns about defence investing, but cannot ignore the current political climate, and therefore seek a smarter and more considered approach. NATO is a defensive alliance and itself states that “deterrence and defence is one of its core tasks” – focusing on companies operating in NATO allied countries limits the possibility of constituents of the ETF being companies operating in countries that could one day be adversaries to the alliance.

For professional investors only. Capital at risk.

Sources available upon request.

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Will Europe be forced to defend itself alone?

﻿ “Europe has become a key driver of global defence-spending growth, with annual increases across the region as a whole averaging 3.9% in real terms since 2014”

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“Europe has become a key driver of global defence-spending growth, with annual increases across the region as a whole averaging 3.9% in real terms since 2014”