By Shares of European defense companies surged on Monday as investors bet that governments across the continent would significantly ramp up military spending.
The rally was led by German arms manufacturer Rheinmetall, which jumped 14% in Frankfurt, while UK-based BAE Systems soared 16% in London and Italy’s Leonardo climbed 10% in Milan.
Rolls Royce was up 5.7%.
The stock surge followed reports that Germany’s CDU/CSU and SPD parties, currently in coalition talks, are considering creating two special funds to finance defense and infrastructure spending.
As Europe’s largest economy, Germany’s potential defense splurge could have far-reaching implications for the sector.
The broader Stoxx Europe aerospace and defense index, which hit record highs last month, continued to rise amid growing expectations that European governments will take on greater responsibility for the continent’s security.
Trump-Zelensky Oval Office spat sparks European defense urgency
The renewed focus on military spending comes in the wake of a tense meeting between US President Donald Trump and Ukrainian President Volodymyr Zelenskyy last Friday.
Trump’s refusal to provide security guarantees to Ukraine has heightened concerns that European nations must act independently to deter future Russian aggression.
In response, UK Prime Minister Keir Starmer convened a summit of European leaders in London on Sunday, calling it a “once-in-a-generation moment for the security of Europe.”
The meeting underscored the growing urgency among European nations to bolster their defenses amid shifting US foreign policy.
“The events over the last days made it clear to European leaders that they need to raise defense spending significantly going forward,” said Tomasz Wieladek, an analyst at asset manager T Rowe Price.
UK, France, and Ukraine to draft peace plan
Despite Trump’s stance, Starmer insisted that any peace plan for Ukraine must have American backing.
He revealed that the UK, France, and Ukraine would work together to present a proposal to the US aimed at securing a durable peace.
Starmer also announced a $2 billion funding package for Ukraine, which includes more than 5,000 air defense missiles.
He outlined four key principles for securing a lasting peace- continued military aid to Ukraine and economic pressure on Russia, Ukraine’s full participation in any peace negotiations to guarantee its sovereignty, strengthening Ukraine’s defensive capabilities to deter future invasions, and assembling a “coalition of the willing” to enforce peace, potentially involving European military deployments.
Deployments possible without US backing, but will peace last?
A growing number of European leaders are now discussing the possibility of deploying forces to Ukraine independently of the US.
UK Armed Forces Minister Luke Pollard suggested that European military intervention could be necessary to enforce a peace agreement.
“Military deployments are possible,” Pollard said in an interview with Times Radio.
“But the point is, we want a durable and lasting peace… If the US isn’t involved, we will struggle to get that durable peace.”
He emphasized that European leaders are wary of any temporary ceasefire that could allow Russia to regroup and launch further attacks.
Markets respond to geopolitical shifts
The geopolitical tensions and expectations of increased defense spending lifted major European stock indices.
The UK’s FTSE 100 rose 0.46% to 8,850 points, Germany’s DAX climbed 0.88%, and France’s CAC gained 0.69%.
Italy’s main stock index edged slightly lower, declining by 0.1%.
As Starmer prepares to brief UK lawmakers following his meetings with Trump and European leaders, investors and policymakers will be closely watching how European nations navigate the new geopolitical landscape.
With military spending poised to rise sharply, Europe’s defense industry is set to play a central role in shaping the continent’s security strategy.
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