Shares of European arms giants have risen significantly on the prospect of increased military spending by European Union countries.
On March 3, shares in Rheinmetall, Germany’s largest defense company, jumped 13.7 percent while Leonardo climbed 16 percent in Milan. France’s Thales surged 16 percent, and Britain’s BAE Systems jumped 14.5 percent.
The gains pushed the STOXX Aerospace and Defence index, composed of European companies linked to military defense, up 1.1 percent, a record high.
Germany’s blue-chip index, the DAX, logged its biggest one-day jump since November 2022 and closed at a record high, alongside Britain’s benchmark index, the FTSE.
“The market is rising on this optimism over defence spending and potential for a peace plan which is not only boosting defence stocks, but it’s also boosting optimism broadly,” said Fiona Cincotta, a senior market analyst at City Index.
President Donald Trump has told European leaders they need to step up military support for Ukraine in preparation for a peace deal with Russia.
Analysts said recent events have “turbocharged” the EU towards higher defense spending.
In March last year, a report from JPMorgan analysts in Proactive Investors, said that the continent’s rearmament cycle would last for at least a decade.
JPMorgan analysts said on Monday that the events of the last two weeks have “turbocharged” their thesis of a European rearmament cycle.
“There are 30 European countries in NATO and we expect many of them will soon commit to much higher defence spending,” they said in a note.
RBC Capital Markets Global Macro Strategist Peter Schaffrik said: “It is an inflection point and Europe realises it needs to do the heavy lifting [on defense and security].”
“The German elections have opened the door for more spending. The whole Zelenskiy-Trump meltdown has fast forwarded everything,” he added.
Francois Savary, chief investment officer at Genvil Wealth Management said Europe is at a critical juncture.
“We are nearing a tipping point if they [European leaders] get their act together,” he said. “My bet is something is going to come, as the pressure is building.”
Led by Friedrich Merz, the CDU has been urged to loosen the debt brake to fund a military upgrade in order to increase defense spending, although such a reform would require two-thirds support in Germany’s parliament.
Deutsche Bank Chief Economist Robin Winkler said a “paradigm shift” was happening in Germany.
The EU believes 500 billion euros ($523 billion) in investments are needed over the next decade, with heavy borrowing expected to fund this spending.
Under its rules, member states are obligated to implement a fiscal policy aimed at keeping the government deficit below 3 percent of GDP and debt below 60 percent of GDP.
Eight of the bloc’s 27 member states, including France, Italy, and Poland, are under formal rebuke by the European Commission for breaching the 3 percent threshold.
During her speech at the Munich Security Conference, Von der Leyen said, “Let there be no room for any doubt, I believe when it comes to European security, Europe has to do more, Europe must bring more to the table, and to achieve this, we need a surge in European defense spending.”
