European financial markets saw a surge in defense stocks last week, as regional leaders are preparing for a substantial increase in military spending. This shift comes amid growing concerns over Russian threats and renewed pressure from the United States, particularly from its vice president J.D. Vance, urging NATO allies to "step up in a big way to provide for its own defense." The prospect of a major boost in European defense investments has driven stocks of key defense companies to record highs.
Europe's Strategic Shift in Defense Policy
In a move to bolster European security, leaders from France, Germany, the UK, Italy, Poland, Spain, the Netherlands, and Denmark, along with top EU officials, convened in Paris last week to outline a common defense strategy. This meeting comes in response to the U.S. initiative to negotiate directly with Russia on Ukraine, raising fears that Europe may need to take greater responsibility for its own defense. Trump's return to power has intensified transatlantic tensions, prompting European nations to accelerate military investment planning while Vance has blamed the old continent for mass migration and accused its leaders of retreating from "some of its most fundamental values."
Defense Stocks Reach New Highs
Amid rising defense commitments, investors have flocked to defense equities, pushing the sector to new highs. The seven top-performing stocks in the Stoxx 600 index this week were all defense-related companies. Notable gains include:
- SAAB AB (BS:SAABBs): +21.36% – Swedish aerospace and defense manufacturer
- Thales (BS:HOp): +10.22% – French leader in defense electronics and cybersecurity
- Rheinmetall (BS:RHMd): +9.45% – German defense contractor
- Dassault Aviation (BS:AMp): +6.95% – French manufacturer of military aircraft
- BAE System (BS:BAl): +2.24% – British defense company
These increases reflect investor confidence that European governments will significantly boost defense budgets in the coming years.
The Financial and Political Burden of Strengthening European Defense
According to Bloomberg Economics, modernizing European defense and supporting Ukraine could require an additional $3.1 trillion over the next decade. To address this financial strain, discussions have emerged around a possible revision of the Maastricht Treaty, which currently enforces strict debt and deficit limits on EU member states. Adjusting these constraints would provide greater fiscal flexibility for defense spending without violating EU budgetary rules.
The United States has made it clear that its military support for Europe will depend on greater defense commitments from NATO allies. President Donald Trump has urged European nations to increase their military spending to 5% of GDP, a level only Poland is close to reaching. He has also emphasized that the U.S. will no longer shoulder Europe's security costs, suggesting that increased purchases of American-made military equipment could play a crucial role in maintaining U.S. defense commitments.
Defense ETF Performance Overview
The Aerospace & Defense ETF segment recorded gains over the week, rising 0.55% WTD and extending its YTD performance to +7.46%. Investor enthusiasm was reflected in significant inflows, with €208.3 million added over the week and €774.7 million since the beginning of the year, highlighting growing confidence in the sector amid expectations of increased European defense spending.
Among individual funds, the VanEck Defense ETF (ETR:DFENG) performed well, gaining 0.76% WTD and 7.79% YTD. DFEN also attracted €176.6 million in inflows, bringing its YTD net inflows to €690.3 million.