European defense companies

1. Why Europe’s defence companies suddenly matter

Since 2022, European governments have materially increased defence budgets — EU member states’ spending rose from roughly €240bn in 2022 to estimates above €360bn in 2025, pushing spending toward or above NATO’s 2% guideline and creating a “defence supercycle” that underpins demand for arms, air‑defence and munitions ^{[1] [4] [6]}. That fiscal shift has not only driven procurement but changed investor sentiment: aerospace & defence indices and many individual stocks have posted double‑digit gains as markets price prolonged higher budgets and order flow ^{[2] [3]}.

2. Who the major European players are and what they sell

Large, diversified firms anchor the sector — BAE Systems remains Britain’s largest defence company, Italy’s Leonardo and Germany’s Rheinmetall are central to land, naval and air programmes, and Sweden’s Saab and France’s Safran feature in niche high‑tech systems and avionics — all cited repeatedly by analysts and press coverage as sector leaders ^{[3] [1] [4]}. These groups combine traditional platforms (tanks, ships, aircraft) with growing exposure to air‑defence, missiles, electronic warfare and sustainment services that governments prioritise in the near term ^{[6] [4]}.

3. Financial picture: order books, cash flow and market appetite

The eight largest European defence firms saw order books rise around 15% in 2024, and combined free cash flow climbed to record levels above €8bn, which has in turn fuelled M&A and equity market interest as valuations rose — the STOXX Europe Aerospace & Defence index delivered strong returns in 2025 ^[2]. Reuters reporting and market briefs show episodic uplifts tied to geopolitical developments and US policy shifts, underscoring investor sensitivity to headline risk but also to structural demand ^{[3] [7]}.

4. Structural limits and political frictions that temper the boom

Despite stronger budgets, Europe’s industry remains fragmented by national procurement preferences, regulatory complexity and protectionist tendencies that blunt scale economies and delay cross‑border consolidation — a point emphasised by Goldman Sachs and other analysts as a key headwind to faster industrial consolidation and innovation ^[8]. Financial institutions and ESG investors are reassessing exposure to defence, but reputational questions and national champions’ political ties create regulatory and ethical obstacles that could restrict some capital flows ^[2].

5. The innovation layer: startups, supply chains and hidden agendas

A vibrant startup scene — more than 230 defence‑oriented European startups identified by market researchers, with hotspots in London, Berlin, Vernon, Madrid and Munich — is supplying drones, sensors, software and AI tools that incumbents need to modernise, creating acquisition and partnership pipelines for larger firms ^[5]. At the same time, public actors and prime contractors have an implicit agenda to onshore capacity (ammunition, missiles, shipbuilding), which explains bank and EIB financing support and state-backed funds that favour domestic industrial resilience over pure market returns ^{[2] [9]}.

6. Risks and what to watch in 2026

Key risks include the political durability of elevated budgets, supply‑chain bottlenecks, and regulatory barriers to cross‑border consolidation; conversely, catalysts to monitor are large procurement programmes, planned IPOs (e.g., interest in Czech firms), and analyst “positive catalyst” watches for companies such as MTU Aero Engines, Babcock and Leonardo that could drive near‑term stock moves ^{[6] [10] [9]}. Market commentary also flags potential for continued M&A as firms and banks mobilise capital to build scale, but the outcome will depend on national political choices and export rules that remain unpredictable ^{[2] [8]}.