European Defense Spending Surge Opens New Opportunities for Israeli Companies

This week, European leaders convened for an emergency summit with one primary goal: to demonstrate solidarity with Ukrainian President Volodymyr Zelenskyy, a figure who has become central to Europe’s ongoing conflict with Russia. While the focus of the summit was unity and resolve against Russian aggression, a secondary but significant development emerged—the escalating defense spending within Europe, which stands to benefit Israeli defense companies.

The summit highlighted the growing importance of military power in the current geopolitical landscape, with countries like Britain, France, and Poland leading the charge. These nations, responding to the heightened threat from Russia, are ramping up defense budgets and military strength. Notably, Poland has committed to building Europe’s largest army, while countries like Estonia and Latvia are increasing defense spending to 5% of their GDPs. Other European nations, including the Czech Republic, are following suit.

Shifting Markets: Defense Stocks on the Rise

The European commitment to defense spending has had a noticeable impact on defense stocks. Companies like Germany’s Rheinmetall and Britain’s BAE Systems have seen their shares soar, reflecting growing investor confidence in the defense sector. As European countries pledge to significantly increase military spending, Israeli defense companies are poised to benefit from this shift.

Israeli firms like Elbit Systems, Rafael, and Israel Aerospace Industries (IAI) are already seeing an uptick in interest. Elbit Systems, for example, saw a more than 5% increase in its stock price on the Tel Aviv Stock Exchange. This surge is due to Europe’s increasing demand for advanced defense systems, including missile defense, cybersecurity, and surveillance technologies—areas where Israeli companies excel.

The Israeli Angle: Growing European Collaborations

Israel’s defense industry, known for its technological prowess and cost-effectiveness, stands to gain immensely from Europe’s growing defense budgets. Israel’s Elbit Systems, which has a branch in the UK, and Rafael, which holds a stake in the European missile company Eurospike, are prime examples of companies with strong footholds in the European market.

Brigadier General (res.) Pini Yungman, president of defense company TSG, suggests that the increasing European focus on self-reliance in defense could lead to more collaborations between Israeli and European firms. As Europe moves away from reliance on U.S. defense manufacturers, Israeli companies are well-positioned to step in with both technology and expertise.

One example of Israeli-European collaboration is the deal to sell the Arrow 3 air defense system to Germany for $3.5 billion. In addition, Israeli firms are involved in several air defense deals, such as the sale of David’s Sling systems to Finland and a government-to-government agreement with Greece for air defense systems.

In related news, Germany’s next government is set to take bold steps to strengthen its military and economic infrastructure. This week, prospective coalition partners announced plans to loosen Germany's strict fiscal rules to allow for higher defense spending, as increasing doubts about the United States’ commitment to NATO grow. Alongside this, they aim to establish a €500 billion ($533 billion) fund to address the country's aging infrastructure, signaling a focus on both defense and economic stability.

Center-right leader Friedrich Merz, who is working to form a coalition with the center-left Social Democrats, has emphasized the need to “do whatever it takes” to bolster Germany's defense capabilities. Merz pointed to the growing security threats and underscored that Germany, along with the rest of Europe, must act swiftly to enhance its defense readiness.

The plan includes proposals to exempt defense spending exceeding 1% of Germany’s GDP from the constraints of the country’s “debt brake,” a rule that limits borrowing. This exemption would allow the German government to allocate more funds to defense, addressing the urgency sparked by Russia’s ongoing invasion of Ukraine and the shifting U.S. stance on European security.

“We are counting on the United States standing by our mutual alliance commitments, but we also know that the funding for defense must be expanded significantly,” Merz stated, reflecting the concerns regarding Europe’s reliance on American support in an increasingly volatile world.

Merz and other leaders have acknowledged that Europe must move toward achieving greater independence from the U.S. in defense matters, particularly as uncertainty grows about Washington's commitment to NATO. The proposed changes in Germany are part of a larger movement across Europe, where countries are rethinking their defense budgets in the face of mounting global instability.