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The U.S. has poured more than $120 billion into Ukraine since its war with Russia began three years ago, but with a new administration in Washington, that support is grinding to a halt.
The White House announced this week that further military aid will be paused until President Donald Trump can determine that Ukrainian President Volodymyr Zelenskyy is making a “good faith” effort toward peace negotiations with Russia.
This decision has left Ukraine in a precarious position. Without additional U.S. support, Western officials estimate that the Eastern European country has enough weaponry to sustain its current pace of fighting until mid-2025.
In response, European leaders are taking decisive action, launching an unprecedented military spending spree that is already reshaping global markets.
Germany Takes the Lead in Ramping Up Military Spending
Germany, Europe’s largest economy, is leading the charge, with Chancellor-in-waiting Friedrich Merz vowing that his government will do “whatever it takes” to support Ukraine. He’s even pledged to amend the German constitution to exempt defense spending from the country’s strict fiscal constraints.
The markets have responded positively. German equities are rallying, with the DAX Index up more than 22% so far this year, compared to a loss of over 2% for the S&P 500.
The euro has also rebounded from recent lows, erasing its losses since November’s U.S. presidential election.
EU Unveils $840 Billion Plan to Strengthen Defense
Other European nations are making similar moves. France’s President Emmanuel Macron delivered a stark warning in a televised address on Wednesday, declaring that Europe must be prepared to defend Ukraine without U.S. support. He made it clear that abandoning Ukraine now would only embolden Moscow, stating, “Who can believe that… Russia will stop at Ukraine? Russia has become, and will remain, a threat to France and Europe.”
The Czech government, meanwhile, has announced plans to raise its defense budget to 3% of GDP by 2030, up from its current 2%.
Brussels has responded with an unprecedented $840 billion plan to boost military readiness across the continent. This week, the European Commission laid out a framework to mobilize resources on a scale never seen before.
The bulk of this money will reportedly come from direct national spending, as European Union (EU) leaders have agreed to temporarily lift fiscal rules that limit government deficits. Additional funds will be made available in the form of loans to governments looking to modernize their defense industries.
An analysis by European research firms Bruegel and Kiel estimates that for Europe to establish a truly independent military deterrent against Russia, it will require at least 250 billion euros in annual defense spending. That means deploying tens of thousands of additional soldiers, acquiring thousands of new tanks and infantry fighting vehicles and ramping up production of long-range drones and other advanced military technologies.
European Arms Manufacturers See Record Gains
This wave of spending has fueled a blistering rally in European defense stocks as investors bet on long-term demand for military hardware.
Defense companies have been among the best-performing stocks in global markets this year. Italy’s Leonardo and France’s Thales have seen their shares jump 85%, while Britain’s BAE Systems has climbed close to 50%. Germany’s Rheinmetall, a leading supplier of armored vehicles and artillery systems, more than doubled in value as of Thursday but fell on Friday on news that Russian President Vladimir Putin may be ready to agree to a truce.
Russia’s Military Losses Mount
Europe’s military buildup comes at a time when Russia’s ability to stay in the fight is increasingly being questioned. While it still holds a strategic advantage in nuclear capabilities—Russia has an estimated 5,580 nuclear warheads, the most of any other country—its conventional forces have suffered immense losses.
Russia’s $2 trillion economy is dwarfed by the EU’s GDP, estimated at $20 trillion, and its population of roughly 145 million is significantly outnumbered by the EU’s 450 million. Hundreds of thousands of Russians have left the country since 2022, the largest exodus since the Bolshevik Revolution, further straining the country’s labor force.
On the battlefield, Russia is estimated to have lost over 875,000 soldiers, according to the U.K.’s Ministry of Defence. These losses, coupled with Western sanctions, have made Russia’s long-term military position more vulnerable than it might appear.
China Expands Defense Budget as Pacific Tensions Rise
The arms race is not confined to the West. China has announced a 7.2% increase in military spending this year as it continues its efforts to expand its influence in the Pacific.
Taiwan is under increasing pressure to boost its defense budget to deter a potential invasion from Beijing. Japan, too, has been urged to increase its military spending, though its leaders insist they will not allow foreign governments to dictate their defense budget.
Investors Are Taking Notice
With Washington shifting its focus inward, the post-World War II security order is changing, and Europe must now take greater responsibility for its own defense.
The consequences of this are already playing out in financial markets, as I’ve covered. For investors, I believe this is not just a short-term trend but a transformation of the global defense landscape. As history has shown, when nations prioritize military spending, the market follows.
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