Economic outlook of many European countries is increasingly hit by challenges familiar to many: stifling bureaucracy, slow permitting processes, resistance to infrastructure projects, high energy prices, weak institutional support for startups, inadequate risk capital, dysfunctional immigration policies, and a lack of applied research in universities. High interest rates, governance inefficiencies, and political uncertainties further dim prospects. With traditional industries like automotive faltering, a pressing question emerges: What can revitalize Europe’s economy?
A new engine for growth?
The Russian invasion of Ukraine has sparked speculation that the defense industry could offer a lifeline. But is this realistic, and is the sector substantial enough to drive meaningful growth across the European Union? Let’s explore.
The idea of replacing automotive components with “radars, artillery, and drones” is compelling. Europe has a strong industrial base, with manufacturing accounting for significant GDP shares in countries like Germany, Italy, and Central Europe, including Czech Republic. The continent also boasts a storied history in arms production, and the Ukraine conflict has fueled a global rearmament surge. Between 2021 and 2023, Europe’s defense sector saw exponential growth, with firms capitalizing on new opportunities. Companies are acquiring foreign entities to bolster expertise, compensating for years of underfunded R&D, and adapting swiftly to modern warfare trends—evident in booming segments like drones and cybersecurity. Crucially, a significant portion of Europe’s defense output is exported as high-value finished products even from those countries, which provide just intermediate goods for the automotive sector.
The momentum is undeniable. Regardless of the Ukraine war’s outcome, Russia’s aggression has triggered a global arms race. Depleted munitions stockpiles, soaring demand, and NATO’s push for member states to meet defense spending targets ensure a robust order pipeline for one to two decades, even in the unlikely event of lasting peace. Europe’s defense industry is riding a wave that shows no sign of cresting.
The limits of substitution
But let’s temper optimism with reality. Europe’s automotive sector, a cornerstone of the EU economy, generates roughly 3.5 to 4 times higher revenue than the defense industry. Automotive contributes significantly to GDP across major economies like Germany, France, and Italy, employing millions directly and indirectly. Defense, despite its growth, remains a fraction of this—estimated at less than 5% of the EU’s industrial output. Economic multiplier effects also favor automotive, where investments tend to ripple more broadly through supply chains and consumer markets. Redirecting capital from automotive to defense could, counterintuitively, result in opportunity costs.
The automotive industry operates in a straightforward B2C model, driven by consumer preferences and purchasing power. Defense contracts, by contrast, are complex, involving protracted negotiations with governments, public tenders, and considerations of maintenance, technological upgrades, and interoperability with allied forces. These factors inflate costs and limit scalability compared to consumer-driven sectors.
Systemic hurdles and political risks
Europe’s defense sector also depends heavily on institutional support. The EU’s fragmented defense market, with varying national priorities, complicates integration. While initiatives like the European Defence Fund aim to foster collaboration, political shifts (such as upcoming elections across member states) could undermine commitments to defense spending or international cooperation. Trust among NATO allies and EU partners is critical, particularly for securing contracts in a competitive global market.
To capitalize on defense opportunities, Europe must overcome significant hurdles: scaling production, securing raw materials, addressing labor shortages through managed migration or upskilling, and accessing investment capital. Yet, ESG regulations, lengthy permitting processes, strained labor markets, and global supply chain tensions (where Europe often plays second fiddle to larger powers like the US or China) limit growth potential. These challenges mirror broader structural issues plaguing the EU economy.
Defense as a piece, not the puzzle
Europe’s automotive industry, meanwhile, is at a crossroads. A decade of unrealistic environmental targets and protectionist measures against imports, particularly from China, has left it vulnerable. Electric vehicle transitions lag, and competitiveness wanes against global rivals. This makes the defense sector’s growth potential all the more critical. It deserves robust EU-level support (i.e. streamlined regulations, faster permitting, and incentives for innovation) to integrate European firms into global defense supply chains.
However, the defense industry cannot replace automotive’s economic weight. Even in an optimistic scenario, defense will remain a niche contributor compared to traditional industries. The EU must address systemic barriers (such as bureaucracy, regulatory inefficiencies, and innovation bottlenecks) rather than pinning hopes on defense as a panacea. Geopolitical tensions may bolster the sector, but they won’t single-handedly save Europe’s economy. Waiting for a miracle would be a wait without end. Instead, the EU needs a comprehensive strategy to modernize its industrial base, foster innovation, and enhance competitiveness across all sectors to secure its economic future.
Written by Aleš Rod