The emergency summit of European leaders this week had one main goal: To present unity and a show of support for Ukrainian President Volodymyr Zelensky, "one of their own," who was adopted into the European fold after the outbreak of war in 2022, and who was humiliated at the White House over the weekend and then lost US defense aid.
The host of the conference, Britain's Prime Minister Keir Starmer, spoke of a "once-in-a-generation moment." Other leaders said that "Europe has finally woken up" and that the unity of the ranks signals that "no European will surrender to Russian aggression."
In the group photo that closed the conference, the organizers tried to show that they understood that this was an era of force and that military power had now become almost the only currency on the market. In the center of the photo, in the first row, were the leaders of the only two European countries that possess nuclear weapons, Britain and France. Standing next to them was Zelenskyy, who also demonstrated a fighting spirit even in the Oval Office.
On the wings were positioned the prime minister of Poland, the country that aims to build the largest army in Europe, and the president of Finland, who called for not being afraid of a military confrontation with Russia.
Outgoing German Chancellor Olaf Scholz was relegated to the third row. Military power is the name of the game now.
How are global markets reacting to Trump and Zelensky?
Despite the unity of ranks, there is still great variation in the scope of European countries' defense spending and in the general approach to the possibility of armed conflict with another country.
Before the conference convened, and before leaving to meet US President Donald Trump, the British prime minister announced that this was a period in which building military power was the most important thing, and that he was therefore cutting the United Kingdom's international aid budget in order to strengthen its military. The aim is to reach defense spending of 2.5% of the GPP by 2027, with a target of 3% thereafter.
Polish prime minister Donald Tusk is leading a similar line: the threatened country has announced that it intends to build the largest army in Europe by the end of the decade in response to the urgency of the Russian threat. It has doubled its defense spending to 4% of its GDP and launched plans to double its military strength to 300,000 soldiers.
The Baltic states — Estonia, Lithuania and Latvia — are close to 5% of GDP for annual investment in defense and are calling on Europe to join them. The Czech prime minister announced in London that his country's defense spending would increase to 3% of its GDP.
The reaction in the markets indicates that they believe that the penny has dropped in Europe. European defense company shares have been rising and rising for weeks, but with the opening of trading on Monday, they continued to soar. Germany's Rheinmetall rose by 14%. It has completed a 160% rise in the past year, and those who put their money on the weapons manufacturer after the outbreak of the war in Ukraine have seen an eightfold return.
Britain's BAE rose by 14%, Italian company Leonardo by 15%, and French company Thales by 13%. The strong statements of European leaders and EU Commission president Ursula von der Leyen to the effect that Europe must increase defense spending immediately were taken seriously and not as lip service for the sake of maintaining the transatlantic partnership.
Germany comes off the fence on defense spending
What stimulated the rises in defense stocks were the signs that Germany, the largest economy in Europe, was coming off the fence and joining the arms race. So far, Germany has barely reached 2% of its GDP defense spending.
Now, the media are reporting the possibility of the establishment of an extra-budgetary fund for armaments worth between 200 and 800 billion euros for the coming years, which would increase German spending much more.
At the same time, Germany appears to be abandoning its long-standing opposition to joint European debt to finance armament. There are, therefore, two possible avenues that could arise for increased military spending in the coming weeks: independent national declarations of increased defense budgets, alongside the announcement of a pan-European fund (with British participation) worth euro300-500 billion, according to current reports, or even more.
Polish prime minister Tusk tried to express the need for a military union. "500 million Europeans are asking 300 million Americans to protect them from 140 million Russians. If there is anything that Europe lacks today, it is not demographic or economic power, but the belief that we are truly a global power."
How does the European arms race impact Israel's defense companies?
The surge in defense stocks also reached Israel's Elbit Systems, which jumped more than 5% on the Tel Aviv Stock Exchange. As Europe significantly increases defense spending, local defense companies may be among the biggest beneficiaries.
Europe is one of their main markets. Elbit Systems has a branch in the UK, and Rafael holds 20% of European company Eurospike, which markets Spike-type guided missiles. And that's just a small part of the list.
Brigadier General (res.) Pini Yungman, president and deputy CEO of defense company TSG, explains that the markets are pricing in Trump's statements and moves. "The impact is expected to be seen in closer ties between European countries and their industries, while reliance on US companies declines. In his first term, Trump said that a NATO country that did not invest 2% of its GDP in defense would not receive US aid, and this has had an effect on the most powerful countries in Europe."
In his view, following developments on the continent, we can expect to see a wave of collaborations between European and Israeli companies, and Israeli companies establishing branches to deal directly with customers in the relevant countries.
One of the most prominent examples of Israeli-European cooperation is the deal to sell the Arrow 3 air defense system to Germany for $3.5 billion. In this deal, state-owned Israel Aerospace Industries (IAI) took on European multinational corporation MBDA as the contractor to coordinate with the Germans on local infrastructure.
IAI is currently joining forces with Rafael in the Israeli-Greek G2G (government-to-government) deal in which air defense systems to the tune of euro2 billion will be sold to Greece. In the sale of the David's Sling system to Finland, local companies are partners in development.
Israel's defense sector is optimistic. Israeli missile systems are considered advanced and cheap in comparison with the alternatives. In light of their success rate in the war, Israeli air defense systems are also likely to be in demand.
Another factor in favor of Israel's defense industry versus the US lies in the way it operates, Yungman says. Whereas US companies supply a finished product, Israeli companies are able to transfer development and production to other countries.
Daniel Eshchar, CEO of Orbit Communication Systems, which provides airborne and maritime communications solutions, says that when he talks to customers in Europe, he finds that they prefer to work with a European company rather than with an American one. Orbit is therefore working on an acquisition in Germany. "The geopolitical changes are leading to higher requirements and to rearmament," he says.
Eshchar adds that, following the US turning its back on Europe, European countries are starting to come back to Israeli companies. "In Europe, they look at their work with the Israeli companies and realize that during the war, most deliveries took place on time, and the companies showed resilience. By contrast, in the US, they are liable to find themselves in a situation in which, at a stroke, the supply of equipment is cut off."
