Europe’s Defense Rearmament Reshapes Global Supply Chains
NATO's €381 billion procurement wave has doubled European arms imports, created clear winners among US and Israeli suppliers, and exposed critical vulnerabilities in semiconductor and rare earth dependencies.
European defense investment reached €381 billion in 2025, marking an 11% increase from the previous year and a 63% surge since 2020, as NATO members accelerate procurement in response to the most fundamental security realignment since the Cold War.
EU member states’ Defense expenditure climbed to €343 billion in 2024 before hitting €381 billion in 2025, according to data from the European Council. Defense investments grew 42% in 2024 to reach €106 billion, with projections showing nearly €130 billion in 2025. This represents a structural shift from decades of underspending – NATO allies agreed at the June 2025 Hague summit to a defense spending target of 3.5% of GDP by 2035, with an additional 1.5% for defense-related infrastructure.
The procurement surge has reshaped global arms flows. Arms imports by European states increased 155% between 2015-19 and 2020-24, with Ukraine becoming the world’s largest importer after its imports increased nearly 100-fold, according to SIPRI. European NATO members more than doubled their arms imports, with the US supplying 64% of those imports in 2020-2024, compared with 52% in the prior period.
American Dominance Deepens
The United States held a 43% share of global arms exports in 2020-24, cementing its position as the dominant supplier to Europe’s rearmament. In July 2025, the Pentagon awarded nearly $8 billion in contracts to Lockheed Martin and Raytheon for precision-guided missiles to Finland, Japan, the Netherlands, and Poland under the Foreign Military Sales program, reported IRIA News.
European NATO countries had 472 combat aircraft on order from the US by the end of 2024. Ukraine accounted for 26% of US exports to Europe, with 71% of those transfers being second-hand arms from stocks for quick delivery. The dependence extends beyond platforms – the US supplied 45% of all exports of long-range land-attack missiles with ranges exceeding 250 kilometers.
Raytheon and Lockheed Martin have captured the European air defense market. Poland, Romania, and Spain requested Patriot, SM-3, and Arrow-3 systems, creating a procurement wave for RTX that supplies Tamir, Patriot, and SM-3 missiles along with radar and guidance systems, noted Stansberry Research. Lockheed Martin secured a $9.8 billion contract from the US Army in January 2026 for 1,970 Patriot Advanced Capability-3 interceptors.
Israeli Systems Gain Ground
Israeli defense exports hit record levels, driven by European demand for battle-tested systems. Israel’s defense exports reached $14.8 billion in 2024, with Europe comprising more than 50% of sales, up from 35% in 2023, according to The Times of Israel. The war in Ukraine boosted Israel’s arms exports, including sales of hundreds of old Merkava tanks to Cyprus and Morocco, as well as Israel’s largest-ever single defense deal – a $3.5 billion sale of Arrow 3 Air Defense Systems to Germany and David’s Sling systems to Finland.
In 2024, 54% of Israeli exports went to Europe, with officials in European capitals saying they need systems proven on the modern battlefield that Israel can provide, reported Breaking Defense. Greece is looking at Rafael’s Spyder and Barak MX systems, while Israel has seen radar exports to the Czech Republic and Slovakia with IAI MMR radars used with Iron Dome.
European Industry Struggles to Scale
Despite political commitments to strategic autonomy, European suppliers face production constraints. EU ammunition production capacity rose from around 300,000 rounds per year in 2022 to an estimated 2 million by the end of 2025, according to European Parliament research. Yet Europe needs 1.7 times its current industrial output for core platforms such as aircraft production and faces a labor shortfall of as many as 200,000 skilled workers – 70% of its current industrial payrolls, found Oliver Wyman.
The STOXX Europe Total Market Aerospace & Defense Index gained over 65% in 2025, while the order books of Europe’s eight largest defense companies increased by 15% in 2024, with combined free cash flows climbing to a record €8 billion, reported Datasite. European defense M&A deal value reached $2.3 billion in H1 2025, marking a 35% increase.
Production bottlenecks persist. Poland’s state-owned PGZ initially aimed to produce 150,000 artillery shells annually by 2025, but due to skilled labor shortages and missed deadlines, this target has been postponed to 2028, noted a SUERF policy note.
| Supplier | Share of European NATO Imports | Change from 2015-19 |
|---|---|---|
| United States | 64% | +12 percentage points |
| European suppliers | ~30% | Declining share |
| South Korea | ~3% | Rising volumes |
| Israel | ~2% | Rising volumes |
Semiconductor and Mineral Chokepoints
Europe’s defense buildup exposes critical supply chain vulnerabilities. Twelve strategic defense critical minerals – including gallium, germanium, rare earth elements, and tungsten – are essential for missile systems, military aircraft, ammunition, and semiconductor production, yet the US is fully or almost fully reliant on imports for 9 of these 12 minerals, according to Silverado Policy Accelerator.
China’s concentration of critical mineral supply creates vulnerability, with China maintaining 60% of global rare earth mining production and approximately 90% of processing and refining, reported CSIS. Four minerals central to semiconductor production – gallium, germanium, palladium, and silicon – face heightened supply chain risks due to dependence on China and Russia.
More than 90% of Europe’s critical raw materials and advanced electronic components are imported, with a large chunk from China. Secondary processing represents the most vulnerable point, with specialized facilities required to convert raw germanium into electronic-grade material concentrated in China; export controls implemented in 2023-2024 caused immediate semiconductor manufacturing shortages, noted Discovery Alert.
The defense sector’s semiconductor intensity compounds the problem. Leading-node Semiconductors require over 300 materials, presenting multiple vulnerabilities for adversaries to manipulate supply. Arsenic is essential for gallium arsenide semiconductors crucial for wireless communications devices; the US has been 100% import-dependent for arsenic since 1985, with China supplying 97% globally.
Europe’s $693 billion defense spending in 2026 rests on Supply Chains dominated by geopolitical competitors. China controls processing for the rare earths powering missile guidance systems and the germanium enabling night vision. Russia supplies palladium for electronics. This creates asymmetric leverage: a single export restriction can halt production of weapons systems costing billions. The 2023-2024 germanium controls demonstrated how quickly availability changes – semiconductor fabs faced immediate shortages, forcing contractors to seek alternative suppliers at premium prices while managing delays. No amount of European defense spending can overcome physics: building the refineries to process these minerals to military-grade specifications takes years and requires environmental controls few nations possess.
What to Watch
Three factors will determine whether Europe’s rearmament translates into genuine strategic autonomy or deeper dependence.
First, industrial capacity expansion. Equipment availability and military capabilities are expected to improve more visibly as deliveries from recent orders accelerate in 2026 and 2027, according to McKinsey. Current budget plans indicate growth is expected to remain elevated in 2026, suggesting a sustained push to bolster European defense capabilities, reported Stars and Stripes. Watch whether ammunition production meets targets and whether skilled labor shortages ease.
Second, critical mineral diversification. A future US strategy should emphasize multilateral coordination to friend-shore processing capacity, substitute critical mineral suppliers, and stockpile for defense and economic security needs. The 1.5% of GDP earmarked for defense-related infrastructure by 2035 could fund processing facilities, but construction timelines measure in years.
Third, transatlantic dynamics under a second Trump administration. Allies agreed in 2025 to Trump’s demand that 5% serve as NATO’s new formula by 2035, with Trump stating in his State of the Union that allies agreed to pay 5% rather than 2%. Whether Washington prioritizes allied procurement from US suppliers or accepts European industrial champions will shape market structure through 2030.
The procurement wave is real – total NATO defense spending including the US reached around $1.6 trillion in 2025. But translating euros into operational capability requires solving production bottlenecks and mineral dependencies that money alone cannot fix. The next 18 months will reveal whether Europe’s defense industrial base can absorb the largest investment surge in a generation.