HomeEuropean Defence Surge - A Wider EU/US Reversal?
The European defence sector is experiencing a significant surge, driven by geopolitical tensions and shifting alliances. This trend, which began with Russia’s invasion of Ukraine and was further amplified by the Israel-Palestine conflict, has recently gained momentum due to concerns over potential U.S. withdrawal from European defence commitments, specifically the North Atlantic Treaty Organisation (NATO). This shift away from NATO is related to President Trump’s belief that NATO is not contributing the previously agreed-upon funding and has been relying on US funding contributions and military presence in the area for stability. As seen in Figure 1, historically, the U.S has contributed close to 70% of NATO’s total funding, and thus the prospect of reduced NATO support has led to a substantial increase in European defence spending and a renewed focus on building independent military capabilities.
Figure 1.
In NATO’s first meeting in 2014, all members committed to contributing at least 2% of their GDPs on defence by 2025. Over the last decade, the average contribution was below this at 1.6% of GDP. However, with the threat of the US exit, the member states have raised the average to 2.2%. As a result, European defence stocks have soared, with major companies seeing double and even triple-digit gains, such as Rheinmetall, which has increased by over 100% in Q1 2025. The surge in European defence stocks reflects growing concerns about security and potential shifts in US policy towards European defence. This trend may signal the start of a structural bull cycle in the sector, driven by increased military spending and strategic policy shifts toward greater defence autonomy. However, the question remains whether this surge is a short-term reaction or the beginning of a broader shift in EU-US defence as well as wider trade relationship dynamics.
Process and Limitations of NATO Withdrawal
For the United States to officially withdraw from NATO, a complex process involving both legal and political procedures must be followed. According to Article 13 of the North Atlantic Treaty, any member state wishing to leave must provide a “notice of denunciation” to the United States government, which would then inform other NATO members. Following this notification, a one-year waiting period is required before the withdrawal becomes effective. However, recent legislation has added additional hurdles to this process. The National Defence Authorization Act for Fiscal Year 2024, enacted in December 2023, prohibits the President from unilaterally withdrawing from NATO without the approval of a two-thirds Senate super-majority or an act of Congress. This measure, championed by Senators Tim Kaine and Marco Rubio, aims to prevent any president from exiting the alliance without congressional consent. If an administration were to attempt withdrawal without meeting these requirements, it would likely face legal challenges, potentially escalating to the Supreme Court. The court would then need to determine whether the president has the authority to bypass Congress on treaty obligations. Despite these safeguards, some legal experts argue that the law may not be entirely airtight, leaving room for potential executive action to challenge or circumvent these restrictions
Impact on Trade Dynamics
The potential US exit from NATO has had significant repercussions on EU/US trade relations. President Trump’s aggressive tariff policies and the threat of withdrawal from NATO have already created uncertainty in the transatlantic economic partnership. A completed US departure from NATO would likely exacerbate trade tensions, potentially leading to a full-scale trade war. The European Union has prepared retaliatory measures, including reimposing suspended tariffs on US imports and targeting products from Republican states. European Commission President Ursula von der Leyen has this evident when she stated, “The EU will continue to seek negotiated solutions, while safeguarding its economic interests”. While both sides would suffer economic consequences, the EU is less exposed to the US market compared to other trade partners, potentially allowing it to weather a trade conflict better than anticipated. However, the broader implications of reduced security cooperation could undermine investor confidence, disrupt supply chains, and hinder long-term economic collaboration between the US and EU, ultimately harming both economies and global trade stability.
Impact on Europe
A U.S. exit from NATO and the withdrawal of American troops from Europe would have profound implications for European defence and stability. Without U.S. leadership, Europe lacks alternative command-and-control systems, space weapons, and even sufficient ammunition supplies, leaving it exposed to potential Russian aggression for which it is unprepared and would remain unprepared for years. Ukraine’s defence would be severely impacted as American military aid dries up, further emboldening Russia. This shift could destabilize the region, with European nations forced to increase defence spending dramatically and scramble to build autonomous capabilities. Additionally, the absence of U.S. troops would reduce deterrence against Russian and Chinese threats, while European nations might resist allowing the U.S. to maintain influence in Europe, Africa, or West Asia. The vacuum left by the U.S. could accelerate multipolarity, with Russia and China exploiting weakened transatlantic ties. Overall, these developments would undermine decades of security cooperation, potentially destabilizing Europe and reshaping global power dynamics.
However, if we take a different perspective, we can see that the regions’ transition to defence spending will contribute to economic growth. For example, Germany’s economy is set to expand due to changes to its fiscal plan. According to Goldman Sachs analysts, this is based on three elements; “defence spending in excess of 1% of GDP would become exempt from the debt brake, leading to military spending expected to ramp up to 3% of GDP by 2027 and reaching 3.5% after that, the off-budget infrastructure and climate protection fund, designed to last 12 years, would boost spending gradually, raising expenditures by €40 billion above our economists’ pre-election baseline in 2027, and a third feature of the fiscal plan increases the permissible structural deficit German states can run.” These factors are reflective of the wider European region average projected growth of 0.8% GDP for 2025, 1.3% for 2026 and 1.6% for 2027.
Summary and Action
In summary, while the current surge in European defence stocks may represent an immediate trade opportunity, it is likely just the beginning of a more profound and lasting transformation in European defence policy, economic priorities, and transatlantic relations. This evolution could redefine the global security landscape and economic order in the coming years, making it a trend that investors and policymakers alike should watch closely.
Kurtis Castorina Investment Strategy Analyst, Your Future Strategy –
The European defence sector is experiencing a significant surge, driven by geopolitical tensions and shifting alliances. This trend, which began with Russia’s invasion of Ukraine and was further amplified by the Israel-Palestine conflict, has recently gained momentum due to concerns over potential U.S. withdrawal from European defence commitments, specifically the North Atlantic Treaty Organisation (NATO). This shift away from NATO is related to President Trump’s belief that NATO is not contributing the previously agreed-upon funding and has been relying on US funding contributions and military presence in the area for stability. As seen in Figure 1, historically, the U.S has contributed close to 70% of NATO’s total funding, and thus the prospect of reduced NATO support has led to a substantial increase in European defence spending and a renewed focus on building independent military capabilities.
Figure 1.
In NATO’s first meeting in 2014, all members committed to contributing at least 2% of their GDPs on defence by 2025. Over the last decade, the average contribution was below this at 1.6% of GDP. However, with the threat of the US exit, the member states have raised the average to 2.2%. As a result, European defence stocks have soared, with major companies seeing double and even triple-digit gains, such as Rheinmetall, which has increased by over 100% in Q1 2025. The surge in European defence stocks reflects growing concerns about security and potential shifts in US policy towards European defence. This trend may signal the start of a structural bull cycle in the sector, driven by increased military spending and strategic policy shifts toward greater defence autonomy. However, the question remains whether this surge is a short-term reaction or the beginning of a broader shift in EU-US defence as well as wider trade relationship dynamics.
Process and Limitations of NATO Withdrawal
For the United States to officially withdraw from NATO, a complex process involving both legal and political procedures must be followed. According to Article 13 of the North Atlantic Treaty, any member state wishing to leave must provide a “notice of denunciation” to the United States government, which would then inform other NATO members. Following this notification, a one-year waiting period is required before the withdrawal becomes effective. However, recent legislation has added additional hurdles to this process. The National Defence Authorization Act for Fiscal Year 2024, enacted in December 2023, prohibits the President from unilaterally withdrawing from NATO without the approval of a two-thirds Senate super-majority or an act of Congress. This measure, championed by Senators Tim Kaine and Marco Rubio, aims to prevent any president from exiting the alliance without congressional consent. If an administration were to attempt withdrawal without meeting these requirements, it would likely face legal challenges, potentially escalating to the Supreme Court. The court would then need to determine whether the president has the authority to bypass Congress on treaty obligations. Despite these safeguards, some legal experts argue that the law may not be entirely airtight, leaving room for potential executive action to challenge or circumvent these restrictions
Impact on Trade Dynamics
The potential US exit from NATO has had significant repercussions on EU/US trade relations. President Trump’s aggressive tariff policies and the threat of withdrawal from NATO have already created uncertainty in the transatlantic economic partnership. A completed US departure from NATO would likely exacerbate trade tensions, potentially leading to a full-scale trade war. The European Union has prepared retaliatory measures, including reimposing suspended tariffs on US imports and targeting products from Republican states. European Commission President Ursula von der Leyen has this evident when she stated, “The EU will continue to seek negotiated solutions, while safeguarding its economic interests”. While both sides would suffer economic consequences, the EU is less exposed to the US market compared to other trade partners, potentially allowing it to weather a trade conflict better than anticipated. However, the broader implications of reduced security cooperation could undermine investor confidence, disrupt supply chains, and hinder long-term economic collaboration between the US and EU, ultimately harming both economies and global trade stability.
Impact on Europe
A U.S. exit from NATO and the withdrawal of American troops from Europe would have profound implications for European defence and stability. Without U.S. leadership, Europe lacks alternative command-and-control systems, space weapons, and even sufficient ammunition supplies, leaving it exposed to potential Russian aggression for which it is unprepared and would remain unprepared for years. Ukraine’s defence would be severely impacted as American military aid dries up, further emboldening Russia. This shift could destabilize the region, with European nations forced to increase defence spending dramatically and scramble to build autonomous capabilities. Additionally, the absence of U.S. troops would reduce deterrence against Russian and Chinese threats, while European nations might resist allowing the U.S. to maintain influence in Europe, Africa, or West Asia. The vacuum left by the U.S. could accelerate multipolarity, with Russia and China exploiting weakened transatlantic ties. Overall, these developments would undermine decades of security cooperation, potentially destabilizing Europe and reshaping global power dynamics.
However, if we take a different perspective, we can see that the regions’ transition to defence spending will contribute to economic growth. For example, Germany’s economy is set to expand due to changes to its fiscal plan. According to Goldman Sachs analysts, this is based on three elements; “defence spending in excess of 1% of GDP would become exempt from the debt brake, leading to military spending expected to ramp up to 3% of GDP by 2027 and reaching 3.5% after that, the off-budget infrastructure and climate protection fund, designed to last 12 years, would boost spending gradually, raising expenditures by €40 billion above our economists’ pre-election baseline in 2027, and a third feature of the fiscal plan increases the permissible structural deficit German states can run.” These factors are reflective of the wider European region average projected growth of 0.8% GDP for 2025, 1.3% for 2026 and 1.6% for 2027.
Summary and Action
In summary, while the current surge in European defence stocks may represent an immediate trade opportunity, it is likely just the beginning of a more profound and lasting transformation in European defence policy, economic priorities, and transatlantic relations. This evolution could redefine the global security landscape and economic order in the coming years, making it a trend that investors and policymakers alike should watch closely.
Kurtis Castorina
Investment Strategy Analyst, Your Future Strategy
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References
240617-def-exp-2024-en.pdf
NATO Spending by Country 2025
Elon Musk supports US withdrawal from Nato and United Nations: What this means for America and the world – Firstpost
Defense spending to boost German and European GDP growth | Goldman Sachs