Europe is buying an army faster than it can build one

European NATO members increased military spending faster in 2025 than in any year since 1953, reaching 864 billion dollars (SIPRI, 2026). At the Hague summit last June, the alliance agreed to a new target of spending 5 percent of GDP on defense by 2035, 3.5 percent of which would be allocated to core military capabilities, retiring the 2 percent floor that had stood for over a decade. Unlike earlier pledges, these commitments are hard to walk back. By reforming its constitutional debt brake, Germany has exempted all defense spending above 1 percent of GDP from its borrowing cap, lifting the fiscal constraint that had held its military back since the Cold War. Berlin plans to spend 144.9 billion euros on defense in 2027 and aims to reach the 3.5 percent core target by 2029, which is six years ahead of schedule (Financial Times, 2026). Sweden has also set aside more than 170 billion kronor in additional defense funding through 2030, its largest buildup since the Cold War, with the goal of reaching 3.5 percent of GDP by the end of the decade.

The money is spread unevenly across the continent. Poland, Norway and Denmark already spend above 3 percent of GDP, with Finland and Sweden close behind. Meanwhile, Italy, Spain and France lag well short of the new target (NATO, 2025). The buildup is heaviest in the north and the east, closest to Russia, where the threat is felt most directly and where governments can also afford to act. These are also the countries whose orders flow most directly to their own national champions, Saab in Sweden, Kongsberg in Norway, and Rheinmetall as Germany rebuilds.

The hard part is not deciding to spend the money but rather turning it into delivered equipment. Rheinmetall, the German group that has come to symbolize the rearmament, reported first-quarter revenue of 1.9 billion euros, below expectations of 2.3 billion. However, it maintained its full-year guidance of 40 to 45 percent revenue growth (Financial Times, 2026). The shortfall did not come from weak demand but rather from approved budgets that were not quickly converting into signed contracts. This occurred after German procurement slowed during an election period and a large artillery contract was sent back for procedural review.

Slow procurement is only a visible part of the problem. After three decades of steadily shrinking its defense industry, Europe simply does not yet have the capacity to produce. Rheinmetall produced around 70,000 artillery shells in 2022 and aims to produce roughly 1.5 million by 2030. However, explosives and propellants remain scarce across the continent. New factories take two to three years to become operational, and skilled workers are difficult to find after a generation of decline. No matter how much governments want to spend, output can only grow as fast as industry can keep up.

The same tension between order book and delivery runs through Sweden's Saab. At the end of the first quarter, the Swedish company had a backlog of orders worth 274 billion kronor, equivalent to about three and a half years of sales and spread across a large number of programs (Bloomberg Intelligence, 2026). These include Gripen fighters for Colombia and Thailand, GlobalEye surveillance aircraft for France, and submarines for Sweden with Poland likely to follow. Other orders include electronic warfare systems for Germany's Eurofighter fleet. Ukraine has expressed interest in 100 to 150 Gripen aircraft, and Saab is competing to supply Canada with up to 58 aircraft. Gripen output runs at about 15 aircraft per year. The planned increase to 25 or more aircraft per year will take years and billions of dollars in investments. New facilities will not be available for some time.

The obvious question for investors is what a ceasefire in Ukraine would mean. Defense shares have repeatedly fallen 4 to 6 percent in a day on nothing more than rumors of negotiations. An end to the war would, of course, be more welcome than a change in share price. However, the buildup does not depend on the war continuing. The Hague commitments, the German debt brake reform and the Nordic spending plans are based on the long-term assessment that Russia's posture would not change. Defense planners have also noted that a ceasefire would allow Moscow time to recover rather than provide a reason to hold back. Genuine peace would still weigh on these shares in the short term, but it would not alter the decade of contracted demand already sitting in the order books.

The coming months will reveal how much of the spending will materialize. July's quarterly results will show whether backlogs are converting into revenue on schedule. The NATO summit in Ankara in early July should reveal whether members are turning the 5 percent pledge into concrete national plans. Several large contracts remain undecided, Ukraine's Gripen order, Poland's submarine purchase, and Canada's fighter jet selection. These contracts will show whether new orders will replenish the book as quickly as deliveries accelerate. Europe's rearmament is a settled matter. The question is whether its industry can produce at the pace that its governments are now willing to pay for.