Europe spent three decades behaving as if major war on the continent was increasingly unlikely. The peace dividend allowed governments to redeploy money from tanks to welfare systems, while defence industries learned to live with lower volumes and slower procurement cycles. Russia’s actions in Crimea and Ukraine have dismantled that assumption. The threat curve moved sharply upwards and defence budgets followed; on NATO’s eastern flank, defence burdens of around four to five per cent of GDP are no longer unusual. This is not a blip but a structural repricing of European security.
Author: Dr Ferenc Antal
Once defence budgets move from roughly one to more than two per cent of GDP, the question ceases to be only about policy. It becomes an economic and financial problem: where is the money spent, what kind of industrial base does it support, and how is the capital to build that base organised and repaid over time? In other words, deterrence begins to depend on capital allocation.
From procurement to an ecosystem
Europe’s first reaction to the new threat curve was almost entirely about procurement. Air‑defence systems, ammunition, armoured vehicles and drones could be bought abroad; at limited scale, this was often the fastest and most rational way to close capability gaps. Over time, however, the same spending revealed deeper weaknesses. Stocks were depleted faster than they could be replenished, production bottlenecks appeared, and importing critical systems in large quantities started to look risky from a security‑of‑supply perspective.
The policy instruments that followed reflect this learning. The European Defence Fund (EDF) rebuilds collaborative research and development. ASAP (Act in Support of Ammunition Production) focuses on ammunition and missile bottlenecks; EDIRPA (European Defence Industry Reinforcement through common Procurement Act) encourages joint procurement; EDIP moves towards enduring industrial readiness and common capacity; and SAFE brings in EU‑backed loans to support investment and joint buying. Under EDIP (European Defence Industry Programme), the first European Defence Projects of Common Interest (EDPCIs) – from drones and counter‑drone systems to maritime, space and eastern‑flank surveillance – signal that certain capabilities are now understood as shared strategic assets rather than national prestige projects.
Taken together, these instruments tell a simple story. Europe is trying to move from a patchwork of national factories and ad hoc joint purchases towards an industrial ecosystem in which research, production, stockpiling and maintenance are planned at European and allied level. That shift is necessary if higher spending is to translate into durable military effect. It is also what turns deterrence into a capital‑allocation problem: building and sustaining such an ecosystem requires long‑term, patient capital and a clear view of demand.
When public balance sheets are no longer enough
The threat curve has continued to rise, and so have deterrence requirements. Commitments such as spending at least two per cent of GDP on core defence – and, in some cases, three and a half to five per cent on wider security – push defence burdens to levels that are hard to finance from public budgets alone without eroding fiscal discipline or competitiveness. National treasuries still have to fund health care, pensions and infrastructure; the EU still has to respect its fiscal rules; and NATO remains an alliance of states answerable to voters.
If this were a short rearmament, governments might absorb the shock. But the present cycle is long‑duration. It requires continuous procurement, industrial expansion, workforce training and stockpile management over decades rather than years. In such a setting, relying solely on public balance sheets is not only fiscally risky; it is economically inefficient. It ties up scarce capital in ways that crowd out other investment and weaken the very economies that need to sustain deterrence.
Deterrence conversion efficiency and private capital
This is why the way capital is organised matters as much as the amount being spent. Percentages of GDP are inputs, not outcomes. One billion euros can finance a small number of highly complex platforms or a much larger number of simpler systems; the deterrent effect depends on whether those systems can be produced, maintained, replaced and integrated into a responsive supply chain. A useful way of thinking about this is deterrence conversion efficiency: the ability to convert financial resources into sustainable military effect.
Seen through that lens, the core problem is not a lack of spending but a lack of structured capital. Europe needs a defence‑industrial ecosystem in which public and private money are combined so that factories run at economically healthy utilisation, supply chains are diversified, and losses can be replaced at acceptable speed. That cannot be achieved if national budgets try to carry the entire burden while banks and investors remain at the margins.
Deloitte’s defence‑financing work and European Commission surveys show that around forty per cent of defence SMEs report access to finance as difficult or very difficult, with multi‑billion‑euro gaps in both equity and debt. These companies sit in the middle of supply chains that primes and governments cannot do without, yet they face concentrated government demand, long procurement cycles and higher regulatory and reputational barriers than firms in civilian sectors. Public policy has started to respond: the NATO Innovation Fund adds a multi‑sovereign venture‑capital layer for deep technologies; EDF supports collaborative research; SAFE uses the EU’s balance sheet to provide long‑term loans; and the European Investment Bank (EIB) increasingly works through commercial banks to finance industrial scale‑up and supply chains.
The EIB’s recent decisions to triple its intermediated‑financing envelope for defence‑supply‑chain SMEs and to use a Deutsche Bank facility to unlock additional working capital are important not primarily because of their absolute size, but because they show how public institutions can change the risk–return equation for lenders instead of replacing them. Private capital is responding as well: private‑equity and venture activity in European defence has accelerated markedly since 2022, and banks such as BNP Paribas have begun to frame defence lending as a strategic, ESG‑compatible part of their business rather than an exception to be minimised.
Institutions and responsibility
Brussels, London and NATO increasingly recognise that deterrence now depends on how well this mixed capital structure is organised. The UK’s Defence Investment Plan explicitly treats procurement reform, long‑term demand visibility and private investment as parts of the same story. EDPCI and EDIP link capability priorities with industrial capacity and financing. NATO’s Ankara Defence Industry Forum coupled a Call to Action on private investment with initiatives such as Drone Edge, tying specific capability projects to multi‑year funding commitments.
The proposed Defence, Security and Resilience Bank (DSRB) sits at the end of this trajectory. It would apply multilateral development‑bank logic to defence: build a highly rated balance sheet, raise long‑term funding on favourable terms and use loans and guarantees to support sovereign projects, defence companies and commercial‑bank financing. Canada’s effort to assemble a founding group of NATO and partner countries, and the debate about whether the bank can achieve a triple‑A rating, show how far the conversation has moved. Deterrence is no longer seen only as a matter for defence ministries; it is increasingly understood as a question of how allied balance sheets and private capital can be organised for security purposes.
Conclusion: organised capital for sustainable deterrence
Looked at in sequence, Europe’s defence story over the past decade follows a clear arc. The threat curve rose; the spending curve caught up; policy instruments moved from emergency procurement to ecosystem‑building; and the sheer scale of the cycle has exposed a financing gap that neither national budgets nor traditional defence lending can close alone.
Member states, the European Union and NATO now carry a larger responsibility to coordinate and support the bankability of the defence industry, to share knowledge between planners, industry and finance, and to make regulation more industry‑ and bank‑friendly while moving as fast as the security environment requires. The required military capacities are already visible in national plans and NATO documents, and the fiscal charts show that the budgetary burden is high enough that states cannot responsibly provide all the necessary capital on their own.
The task in the next phase is therefore not simply to keep spending at or above two per cent of GDP. It is to organise demand, industry and finance well enough that each euro committed to defence is converted into scalable production, resilient supply chains and sustainable military capability. That cannot happen without systemic private‑capital participation. Deterrence is increasingly a capital‑allocation problem. It needs a balance sheet – and institutions willing to take responsibility for how that balance sheet is used.
Find the full analysis on Dr Ferenc Antal’s LinkedIn page!
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References
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- Deloitte Hungary (2025). Defense Industry Financing 2025.
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- European Commission (2026). Commission proposes five joint defence projects to strengthen
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- European Investment Bank (2025). Tripling financing for banks supplying Europe’s defence industry.
- Government of Canada (2026). Support for the Defence, Security and Resilience Bank.
- IMF (2026). World Economic Outlook, April 2026, Chapter 2: Defense Spending.
- NATO (2026). Defence Expenditure of NATO Countries 2014–2025.
- NATO (2026). Call to Action to increase private investment in defence.
- Reuters (2026). Nine countries commit to global defence bank, Canada says.
- SIPRI (2026). Trends in World Military Expenditure, 2025.
- UK Ministry of Defence (2026). The Defence Investment Plan.
- IISS (2026). Russia’s UAV Campaign Over Europe.
