There is certainly no lack of political will. There will be “no shortage of financial resources anywhere to defend freedom," incoming German Chancellor Friedrich Merz said after the Bundestag relaxed the so-called debt brake to allow greater defence spending. And European Commission President Ursula von der Leyen spoke of "the most momentous and dangerous of times" to justify the "ReArm Europe" plan, which could mobilise up to 800 billion euros.
So Europe has recognised that it needs to invest more to defend itself. Bruegel, the think tank, estimates that Europe will have to increase its annual defence spending by at least 250 billion euros. But how do we use these sums strategically and wisely – and how can the financial sector and private capital contribute? Four points are crucial.
1. Europe must strengthen its production and innovation capacity
As many of our armaments as possible should come from Europe in the long term. This is the only way we can be sustainably independent and strategically sovereign. And this is the only way that Europe can also exploit the positive effects for technology and innovation and create jobs in high-technology sectors, as the US technology sector has been doing for decades. Silicon Valley would not have emerged in this form without the long-standing symbiosis between military and civilian research. This is a driver of innovation that we need to make use of too, for the benefit of the whole economy.
2. EU defence industry should exploit economies of scale
To drive research and development, the European defence sector must be able to exploit economies of scale. Of the world's top 10 defence manufacturers, not a single one comes from the European Union. There is too much fragmentation. Within the EU, for example, there are currently twelve different platforms for battle tanks, in the US there is just one. This drives up costs and slows down innovation. A joint, coordinated procurement process in Europe is therefore crucial, as it gives companies planning security – and thus also those who finance them.
3. Public and private funds should be combined
At the same time, we need to efficiently combine public funds with private capital to finance expansion. Banks and investors are ready for this – for example, Deutsche Bank's corresponding loan portfolio amounts to a mid-double-digit billion-euro amount. However, the financing capacity of banks could be used more effectively if it were combined – where appropriate – with public guarantees or similar instruments. During the Covid pandemic, the European Investment Bank was able to mobilise around 186 billion euros in investments with 24 billion euros in guarantees. We should also use this mechanism for defence. Ideas such as a special ‘defence, security and resilience bank’ in the EU are therefore promising.
4. More focus on SMEs and start-ups
Small and medium-sized enterprises (SMEs) are central to the supply chain of the European defence industry – and they are mostly reliant on bank financing. So it is counterproductive if the new Basel III regulations burden lending with additional capital requirements. Reliefs for loans to SMEs are currently limited until 2032 – we should make them permanent. At the same time, we banks should also focus even more strongly on the needs of the industry – for example, we at Deutsche Bank have just set up a special SME team to support the defence sector.
This also includes contacts with potential investors: According to the EU Commission, SMEs in the defence sector would need one billion euros in additional equity capital annually. This is particularly relevant for young, innovative companies. In Europe, however, there is a traditional lack of venture and growth capital, and startups from the defence sector are severely underrepresented in government funding programmes.
This makes it all the more important to unleash the financing power of European savers and international investors through the Savings and Investment Union, i.e. through a common European capital market. According to the think tank New Financial, this could mobilise 12 trillion euros in investment capital for Europe. This would enable many companies to raise capital from equity and bond investors, including in the defence sector.
Germany and Europe are facing major security policy challenges. This makes it all the more important not to neglect the financing issues. Precisely so that we can make the best possible use of taxpayers' money and really strengthen Europe's defence.
This text appeared in the German business daily Handelsblatt as an opinion piece on 28 April 2025.
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There is certainly no lack of political will. There will be “no shortage of financial resources anywhere to defend freedom," incoming German Chancellor Friedrich Merz said after the Bundestag relaxed the so-called debt brake to allow greater defence spending. And European Commission President Ursula von der Leyen spoke of "the most momentous and dangerous of times" to justify the "ReArm Europe" plan, which could mobilise up to 800 billion euros.
So Europe has recognised that it needs to invest more to defend itself. Bruegel, the think tank, estimates that Europe will have to increase its annual defence spending by at least 250 billion euros. But how do we use these sums strategically and wisely – and how can the financial sector and private capital contribute? Four points are crucial.
1. Europe must strengthen its production and innovation capacity
As many of our armaments as possible should come from Europe in the long term. This is the only way we can be sustainably independent and strategically sovereign. And this is the only way that Europe can also exploit the positive effects for technology and innovation and create jobs in high-technology sectors, as the US technology sector has been doing for decades. Silicon Valley would not have emerged in this form without the long-standing symbiosis between military and civilian research. This is a driver of innovation that we need to make use of too, for the benefit of the whole economy.
2. EU defence industry should exploit economies of scale
To drive research and development, the European defence sector must be able to exploit economies of scale. Of the world's top 10 defence manufacturers, not a single one comes from the European Union. There is too much fragmentation. Within the EU, for example, there are currently twelve different platforms for battle tanks, in the US there is just one. This drives up costs and slows down innovation. A joint, coordinated procurement process in Europe is therefore crucial, as it gives companies planning security – and thus also those who finance them.
3. Public and private funds should be combined
At the same time, we need to efficiently combine public funds with private capital to finance expansion. Banks and investors are ready for this – for example, Deutsche Bank's corresponding loan portfolio amounts to a mid-double-digit billion-euro amount. However, the financing capacity of banks could be used more effectively if it were combined – where appropriate – with public guarantees or similar instruments. During the Covid pandemic, the European Investment Bank was able to mobilise around 186 billion euros in investments with 24 billion euros in guarantees. We should also use this mechanism for defence. Ideas such as a special ‘defence, security and resilience bank’ in the EU are therefore promising.
4. More focus on SMEs and start-ups
Small and medium-sized enterprises (SMEs) are central to the supply chain of the European defence industry – and they are mostly reliant on bank financing. So it is counterproductive if the new Basel III regulations burden lending with additional capital requirements. Reliefs for loans to SMEs are currently limited until 2032 – we should make them permanent. At the same time, we banks should also focus even more strongly on the needs of the industry – for example, we at Deutsche Bank have just set up a special SME team to support the defence sector.
This also includes contacts with potential investors: According to the EU Commission, SMEs in the defence sector would need one billion euros in additional equity capital annually. This is particularly relevant for young, innovative companies. In Europe, however, there is a traditional lack of venture and growth capital, and startups from the defence sector are severely underrepresented in government funding programmes.
This makes it all the more important to unleash the financing power of European savers and international investors through the Savings and Investment Union, i.e. through a common European capital market. According to the think tank New Financial, this could mobilise 12 trillion euros in investment capital for Europe. This would enable many companies to raise capital from equity and bond investors, including in the defence sector.
Germany and Europe are facing major security policy challenges. This makes it all the more important not to neglect the financing issues. Precisely so that we can make the best possible use of taxpayers' money and really strengthen Europe's defence.
This text appeared in the German business daily Handelsblatt as an opinion piece on 28 April 2025.
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