Europe’s Defence Industry: Growth, Fragmentation and the Integration Problem
Updated: 2 days ago
Europe’s defence industry is expanding at a pace that would have been difficult to imagine only a few years ago.
Defence budgets are rising. Production capacity is increasing. New EU instruments are moving beyond research and into industrial scale-up and procurement. Investors are paying more attention to defence. Governments are placing larger orders.
But there is a structural problem behind these numbers.
Europe is spending more on defence without yet operating as a single defence market.
The industrial base remains divided by national procurement systems, ownership structures, capability requirements and supply chains.
This does not mean Europe lacks strong defence companies. It means that many strong national industries still operate inside a fragmented European system.
Understanding this distinction is important for any company trying to position itself in European defence.
Overview
The industrial expansion
The numbers clearly show that Europe has entered a new defence-industrial cycle.
According to the European Parliamentary Research Service, turnover of the EU-based defence industry reached an estimated €148 billion in 2024, more than 60% higher in nominal terms than in 2021.
Exports reached approximately €48 billion, while direct employment in the sector was estimated at around 500,000 people.
At the same time, demand is expanding rapidly.
EU Member States’ combined defence expenditure was estimated at €381 billion in 2025, almost 63% above the 2020 level. Defence investment approached €130 billion, while equipment procurement exceeded €88 billion in 2024.
The full European Parliament overview provides a useful snapshot of where the industry currently stands:
This growth is visible beyond budgets.
One of the clearest examples is ammunition production.
The European Parliament estimates that EU ammunition production capacity increased from roughly 300,000 rounds per year in 2022 to around 2 million by the end of 2025.
That is a significant industrial acceleration.
But increasing output is not the same thing as creating an integrated industrial base.
Where Europe stands globally
Europe has some of the most technologically advanced defence companies in the world.
Thales, Leonardo, Airbus, Rheinmetall, Saab, MBDA, Safran and Naval Group are only a few examples.
In 2024, 20 companies headquartered in the EU were among the world’s top 100 defence companies, generating approximately €104 billion in defence revenues.
The United States had 48 companies in the same ranking, accounting for roughly US$334 billion in defence revenues. Lockheed Martin alone reported around US$68.4 billion.
The comparison is useful, but it should not simply be interpreted as “European companies are smaller”.
The structural difference goes deeper.
American defence companies operate inside a much larger integrated domestic market, with a common federal customer, common procurement structures and defence programmes capable of generating very large production runs.
Europe has a different model.
Its industrial base grew primarily around national governments, national armed forces and national strategic interests.
That history still shapes the market today.
Why fragmentation persists
The European defence industrial base is fragmented on both sides of the market.
Dimension | Demand Is Fragmented | Supply Is Fragmented |
What drives fragmentation | European countries still define many requirements nationally and procure much of their equipment nationally. | The industrial structure reflects national interests, strategic autonomy concerns and different ownership structures. |
How it appears | Different armed forces may request different configurations, standards, certification requirements, quantities, delivery schedules, support models and industrial participation arrangements. | Production of critical defence equipment exists across much of Europe. Prime producers of 46 critical defence items are located across 23 EU Member States. |
Market structure | Instead of one large European requirement, industry often receives several smaller national requirements. | Much of the largest industrial capacity remains concentrated in a smaller group of countries, including France, Germany, Italy, Spain and Sweden. |
Ownership dimension | — | Governments maintain significant or controlling positions in several strategically important defence companies. Other firms remain strongly influenced by family ownership. |
Why it matters | Fragmented demand reduces potential economies of scale and makes European capability planning and procurement more complex. | Defence companies are strategic industrial assets. Governments care about control over critical technologies, security of supply, domestic production capacity, employment, sovereignty, export policy and military dependence. |
But the same logic can make cross-border consolidation more difficult.
The result is a European market where cooperation is increasing, but national industrial interests remain very strong.
Production capacity is only part of the problem
Since 2022, the discussion around the European defence industry has often focused on one issue:
Can Europe produce enough?
That question remains important.
Years of lower defence expenditure left parts of the industrial base with limited production lines, smaller workforces and supply chains designed for peacetime demand.
Russia’s full-scale invasion of Ukraine forced the system to expand much faster.
But production volume is only one part of industrial readiness.
Europe also needs to answer:
Can countries aggregate demand?
Can companies plan production several years ahead?
Can procurement provide sufficiently large and predictable orders?
Can supply chains support higher output?
These questions shift the discussion from industrial capacity to industrial structure.
A factory can increase output.
A fragmented market is much harder to redesign.
Europe’s remaining capability gaps
Europe produces an exceptionally broad range of defence systems.
European industry covers military aircraft, helicopters, armoured vehicles, artillery, ammunition, naval platforms, submarines, missiles, satellites, electronics, cyber capabilities, autonomous systems and many other areas.
But breadth does not mean complete strategic autonomy.
The European Parliament identifies several areas where the EU still lacks domestic solutions, including:
medium-altitude long-endurance UAVs;
tactical ballistic missiles;
long-range artillery rockets.
These gaps are linked to decades of underinvestment and long-term reliance on the United States in parts of the European security architecture.
This is one reason why today’s defence-industrial policy is increasingly focused not only on spending more, but also on where the money is spent and what capabilities Europe retains internally.
The EU response
Fragmentation is now explicitly recognised as a policy problem.
Several EU initiatives are trying to move European defence towards more collaborative procurement, stronger industrial capacity and deeper cross-border cooperation.
Instrument | Scale / Targets | What It Does | Strategic Direction |
European Defence Industrial Strategy (EDIS) | ≥40% of defence equipment procured collaboratively by 2030; ≥35% of the EU defence market through intra-EU defence trade; ≥50% of defence procurement budgets spent within the European defence industrial base by 2030, moving towards 60% by 2035. | Introduces measurable objectives intended to strengthen European industrial cooperation and reduce fragmentation. The specific policy benchmarks continue to evolve as newer initiatives such as the Readiness Roadmap 2030 are introduced. | European defence policy is moving from encouraging cooperation towards structuring demand around common capability priorities and larger procurement programmes. |
EDIP | €1.5 billion for 2025–2027 | Reinforces defence-industrial readiness; supports common procurement; strengthens European production capacity; increases attention to security of supply. | Its strategic importance is larger than its budget alone. EDIP signals a move towards more common procurement, more industrial coordination and greater attention to security of supply. |
SAFE | Up to €150 billion in loans to Member States for defence investment. | Encourages common procurement and industrial scale. Participating countries are expected, in principle, to procure together, helping create larger orders, increase economies of scale and reduce fragmentation. | SAFE connects large-scale financing with industrial eligibility requirements. For eligible products, components originating outside the EU, EEA-EFTA states and Ukraine generally cannot exceed 35% of the estimated component cost of the final product. |
This makes industrial positioning increasingly important.
Defence companies are no longer looking only at who buys the product.
They also need to understand:
where components come from;
where intellectual property is controlled;
where production takes place;
which supply chains qualify;
and how they fit into European procurement structures.
What fragmentation means for companies
Fragmentation is usually presented as a weakness of European defence.
At system level, it clearly creates inefficiencies.
But for individual companies, the picture is more complicated.
Fragmentation can also create entry points.
A European defence programme may require technologies, components or expertise from multiple countries.
A large prime contractor may need local industrial partners.
Governments may seek additional production capacity.
Common procurement may create new multinational supply chains.
SMEs may enter through specialised capabilities rather than complete platforms.
The strategic question for a company is therefore not whether European defence becomes fully consolidated.
That is unlikely to happen quickly.
The more practical question is:
Where will integration happen first?
Watch areas where several forces are moving in the same direction:
large capability gaps;
increasing national budgets;
EU financial support;
common procurement;
multinational capability programmes;
pressure to increase European production;
supply-chain dependencies;
operational lessons from Ukraine.
These are the areas where structural change is most likely to create industrial opportunities.
For an SME, this means the opportunity may not necessarily be to compete directly with a major European defence company.
It may be to become part of its supply chain.
Or to provide a technology that several national systems need.
Or to become a specialist partner inside a multinational programme.
Or to occupy a capability gap before larger industrial players move into it.
This is why simply tracking defence spending is not enough.
€381 billion of spending does not create one €381 billion market.
It creates dozens of procurement systems, capability programmes, industrial relationships and national priorities.
The challenge is finding where they begin to converge.
