Ensuring the economic development of Europe and the well-being of its citizens is the primary objective for European leaders. At the same time, two years into the war in Ukraine and 75 years since the creation of NATO, Europe is adapting to a new reality when it comes to defense and security. Doing so with efficiency and effectiveness is essential to protect the lives and livelihoods of European citizens, while still allowing for investments into other priorities such as education, technology, healthcare, and the net-zero transition.
Government stakeholders of European countries, the European Union, and NATO could be faced with difficult trade-offs in the coming years on how to allocate funding effectively between competing defense priorities: replenishing critical supplies quickly; investing in recapitalizing fleets of equipment for newer models; increasing availability of equipment while incentivizing innovation in the defense supply base; and integrating new technologies into the armed forces.
For the defense industry, where many players are already ramping up production, it is only the beginning of a journey that will require greater manufacturing efficiency, velocity, and capacity. It is also a balancing act between their local and sovereign responsibilities and remaining globally competitive. European countries have already committed to increasing their defense postures and have started to appropriate the corresponding funding. According to McKinsey estimates—based on announced spending plans—defense budgets are expected to increase by a cumulative €700 billion to €800 billion between 2022 and 2028.
In a globally intertwined world, security goes beyond armed defense. It can encompass industrial and supply chain resilience; the long-term physical and cyber integrity of critical infrastructure; strengthening digital sovereignty; securing global trade routes and food supply; and mitigating the effects of climate change on national security.
In this compendium, we will share some of our recent research as well as put a spotlight on approaches to the underlying enablers of European security and defense. Within this analysis, three themes emerge that merit concurrent consideration by decision makers.
- How to attract and retain talent: The European defense industry is inherently linked to the commercial aerospace industry, with many players—especially in the supply chain—present in both sectors. In both of these, the challenges are similar: the demographics of their people pyramids and their ability to attract and retain talent. Across the industry, 30 to 35 percent of the manufacturing and engineering workforce are 50 years of age or older. Approaches that worked in the past, which were based on experience and tenure, may no longer be effective to attract and retain the number of employees who possess the right skills and passion for the industry.
- How to achieve scale and pace: The European defense industry is characterized by a substantial fragmentation of both supply and demand, as well as an insufficient capacity and velocity for defense equipment production. For example, the armed forces of European countries operate a complex portfolio of defense equipment. This can hinder interoperability, a greater potential for pooling, sharing scarce training and support resources, as well as achieving greater economies of scale through larger programs. On the supply side, European defense companies will likely need to drive comprehensive operational change programs and adopt modern and integrating manufacturing methods widely in place in other industries.
- How to innovate: Venture capital investment in defense technologies more than doubled between 2019 ($4.2 billion) and 2022 ($11.0 billion). Three areas require new technological capabilities and attract most of the investment: disaggregated platforms, fast and resilient networks, and cutting-edge technologies. While start-ups are well placed to attract the right type of innovative talent and harness the disruptive power required, they often suffer from the mismatch between the private capital funding cycle and defense budgets. Creating incentives for defense innovation is as important a priority for the future of European security as rebuilding defense capabilities and responding to new challenges such as the nexus of security and climate change.
The compendium marks the starting point of a series of publications on the new defense and security environment with which Europe is faced. We will explore these three critical themes through our own latest independent insights, enriched by viewpoints from key leaders in the sector.
