Europe must boost defence industry, says report

A new report from the International Institute for Strategic Studies (IISS), Building Defence Capacity in Europe: An Assessment, warns that European NATO members face a challenging path in rebuilding their military capabilities to meet growing threats, particularly from Russia.

Launched at the IISS Prague Defence Summit, the report underscores the need for a sustained commitment to reversing years of underinvestment, particularly in light of lessons drawn from Russia’s full-scale invasion of Ukraine in 2022.

The report states that “rebuilding European defence capability in the face of the Russian threat is a complex, long-term undertaking which will require sustained political and financial investment by European NATO-member states.” Since the 2022 invasion, NATO has significantly increased its focus on deterrence and readiness, and European members have been working to address capability shortfalls across their defence-industrial bases. However, after “decades of neglect and underinvestment,” many critical gaps remain unaddressed, with progress being “mixed” at best.

Reflecting on recent efforts, the report observes that European defence spending has surged nearly 50% since 2014, but it cautions that this funding mainly compensates for years of past underinvestment rather than indicating robust future readiness. As the report highlights, “the recent surge in spending has effectively only brought spending levels up to where they would have been if defence had received consistent investment since 2009.”

Moreover, the report stresses that achieving stability in funding is critical, stating that “the use of non-core budgetary funds to supplement defence and bolster acquisitions creates issues for transparency and undermines the security of long-term funding.”

An area of concern is whether European NATO allies will be able to deliver the “long-term support – financial and otherwise – needed over the coming decades to lead to lasting change.” Defence industry constraints are evident, with key sectors struggling to meet current demand. The report underscores the need for stable financial support, as a lack of predictability in funding “limits industry’s ability to invest with confidence.”

While there has been a rise in private-sector involvement, regulatory hurdles and environmental, social, and governance (ESG) standards have complicated defence-sector investments. The report suggests that success would be bolstered if governments work to “‘normalise’ investment in defence, particularly at the venture-funding or small and medium-sized enterprise (SME) level.”

The report’s conclusions also touch on supply-chain resilience and security, observing that Europe’s defence industries are transitioning from “just-in-time” to “just-in-case” stockpiling strategies, but this shift has faced challenges. With European countries increasingly dependent on foreign suppliers for critical materials like gallium – essential for military systems – there is renewed focus on “onshoring and friendshoring” to reduce reliance on external sources. Additionally, the defence sector could benefit from broader European goals related to climate and digital resilience, particularly if these efforts align with investment in rare-earth recycling and secure sourcing.

Ultimately, the report casts doubt on whether recent gains will translate into lasting transformation, noting that “the jury is still out as to whether major European NATO allies will indeed provide the long-term support” necessary to close these capability gaps. While acknowledging positive trends, the report suggests that only with sustained and stable financial and industrial commitments will Europe be positioned to ensure its defence resilience in the face of future threats.

Read the report here.