European defence spending surge laid bare as BAE expands sixfold to meet NATO targets

Europe's defence industry is enjoying an unprecedented surge in demand as the continent scrambles to meet the NATO commitment, agreed a year ago, to allocate 3.5 per cent of gross domestic product to military expenditure by the middle of the next decade, a target that has acquired new urgency in the wake of Russia's full-scale invasion of Ukraine and mounting anxiety over the reliability of American security guarantees. The extraordinary transformation of the sector is perhaps nowhere more vividly illustrated than at the Hagglunds plant in Sweden, now owned by Britain's BAE Systems, where a decade ago managers were slashing costs merely to keep the factory afloat, yet today the company is expanding its productive capacity five- or six-fold to keep pace with an order book swollen by geopolitical anxiety, according to an analysis published this week by The Economist. Revenues at the Anglo-Swedish defence giant, which manufactures the CV90 infantry fighting vehicle currently in service with Ukrainian forces, have climbed from $211m in 2018 to $1.1bn in 2025 and are now approaching an annual run-rate in excess of $2bn, its chief executive, Tommy Gustafsson-Rask, was reported as saying, a trajectory that underscores the scale of the continent's military rearmament. The Ukrainian military's 21st Separate Mechanised Brigade has even presented the company with a national flag bearing the inscription "Thank you, always", a gesture of gratitude for the firm's logistical and material support during the conflict, reflecting the deepening ties between Europe's defence industrial base and Kyiv's war effort. Yet the flip side of this defence boom has become increasingly visible, most notably at a recent demonstration in Brussels where thousands took to the streets under the banner "Welfare, not war", while in Italy trade unions mobilised some 500,000 people last year in protest against higher military spending, suggesting that the political consensus for rearmament is far from universal across the continent. The Economist's analysis suggests that Europe will inevitably have to confront unpalatable trade-offs if it is to field more capable armed forces, requiring a combination of increased state borrowing, higher taxation, reduced social expenditure, or some mixture of all three, measures that many governments have so far been reluctant to countenance given the prevailing mood of fiscal constraint. A significant number of NATO's European members, the report contends, are unlikely to meet the 3.5 per cent threshold if they persist with their current rates of increase, and this sobering assessment extends even to Britain and France, the continent's two foremost military powers, raising the prospect of acrimonious debates at the NATO summit scheduled for 7-8 July in Ankara. President Trump and his defence secretary, Pete Hegseth, have already directed pointed criticism at European allies, accusing them of enjoying the protection of American security guarantees while simultaneously affording their citizens generous welfare benefits and extended holiday entitlements, a charge that is certain to resurface during the Turkish talks with renewed force. Countries that have come closest to the 3.5 per cent target are, perhaps predictably, those that perceive the gravest threat from Moscow, notably the Baltic states and Poland, with Lithuania having introduced a novel "security contribution" levy and Finland having implemented sharp reductions in healthcare and social service budgets to free up defence funding, according to the report. Fitch Ratings has estimated that eleven European nations are financing at least half of their defence spending increases through higher taxes or spending cuts, and polling conducted by the European Council on Foreign Relations indicates that such measures tend to encounter less resistance in states closer to the frontline, where majorities are prepared to countenance reductions in social provision for the sake of national security. There exists, moreover, a cluster of countries with substantial fiscal headroom - Denmark, Sweden, and Germany - which are planning to reach 3.7 per cent of GDP by 2030, though even these relatively prosperous nations will face difficult choices about the allocation of resources. A more problematic category comprises those states that aspire to the target but possess limited borrowing capacity and low public support for tax increases or welfare cuts, with Britain and France cited as prime examples of this predicament; the United Kingdom, according to The Economist's assessment, finds itself in such straitened circumstances that the defence secretary, John Healey, resigned last month over what he deemed a derisory budget increase, and following further wrangling a modest uplift of 0.1 per cent of GDP by 2030 - bringing the total to 2.7 per cent - was agreed, though analysts remain sceptical that Britain will attain 3.5 per cent by 2035. France, it is suggested, lags even further behind schedule, with Paris planning to raise defence spending only to 2.5 per cent of GDP by 2030, and even that more modest objective would necessitate unpalatable compromises in the form of higher taxes or cuts to other departmental budgets. A further tier of member states appears largely indifferent to the spending imperative, with Spain having secured an exemption to cap its military outlay at 2.1 per cent of GDP, while Portugal, currently spending barely 2 per cent, professes confidence that it will reach the target by 2035 but, the analysis contends, is making no discernible effort to do so. Italy, for its part, previously announced a 39 per cent increase in defence spending to reach 2 per cent of GDP last year, yet the actual growth in expenditure was only 7 per cent, with the remainder attributed to accounting manoeuvres that obscure the true picture of military investment. Compounding these fiscal challenges, however, is the question of how efficiently European nations actually spend their defence budgets, and here the picture is no less troubling, with many countries accused of wasting resources on domestic industrial preferences that perpetuate fragmentation across the continent's arms sector. Europe currently operates twelve different types of main battle tank and manufactures five separate models of howitzer, whereas the United States manages with a single variant of each, a disparity that points to the absence of co-ordination and standardisation that has long bedevilled European defence procurement. Perhaps the most egregious example of profligacy came to light last month when Germany cancelled a shipbuilding programme originally valued at €10bn after the project fell behind schedule and costs ballooned to €18bn, leaving taxpayers to absorb a loss of €2.3bn on frigates that the navy will never receive, a cautionary tale that underscores the scale of the challenge facing European governments as they seek to translate financial commitment into genuine military capability.