Rearming Europe: A New Era Begins

In a bold move to redefine its defense capabilities amid escalating geopolitical threats, the European Union has unveiled the REARM Europe plan. This ambitious initiative, following reduced U.S. support for Ukraine, marks a significant shift toward European strategic autonomy and the modernization of its defense industry. Additionally, it responds to NATO’s call for increased defense spending.

Historically reliant on U.S. military support through NATO, Europe now appears to be prioritizing investments in its own defense infrastructure while addressing industrial fragmentation. The European Commission is encouraging member states to increase defense spending by 1.5% of GDP, which would unlock €650 billion in fiscal space over four years. Furthermore, the EU plans to establish a €150 billion defense instrument through joint borrowing, enabling the European Commission to issue bonds and provide loans to member states.

This five-point strategy also aims to channel EU current budget resources into defense-related projects. But since this is not an international relations blog, let’s focus on the economic implications of this major development.

Firstly, it is important to highlight the critical role of private capital in this transformation. Not only does it enable defense companies to rapidly expand manufacturing capacity, but it also bridges the gap between innovation needs and the limited public funding historically available in Europe. For instance, in 2025 alone, the European Investment Bank managed to mobilise $2 billion for global security initiatives through collaboration with private investors.

As mentioned earlier, the EU is considering issuing bonds to finance defense spending—a move essential for the continent’s rearmament. However, this wave of new debt could also trigger inflation, as it is not backed by budget surpluses. This situation closely mirrors the COVID-19 crisis, during which a similar amount of debt was issued.

Cutting spending elsewhere would be politically difficult, which leaves us with few alternatives, creating uncertainty among investors. Concerns over long-term repayment could also lead to a sell-off of these bonds, with investors shifting toward goods, real assets, or alternative currencies. 

Which brings me to my last point: how could investors take advantage of this situation?

As with any period of financial uncertainty, investors tend to turn to inflation hedges as a means of protection and preserving purchasing power. So, what are these hedges? First and foremost, there’s gold—the most reliable inflation hedge—since its value typically rises when currency values decline due to inflation. Similarly, real estate tends to appreciate or at least maintain its value during inflationary periods. Lastly, commodities also serve as strong hedges.

I did not mention cryptocurrency, which has often been considered a modern hedge against inflation, because its performance has been declining.

More importantly, let’s not forget that Europe is about to invest €800 billion into its military, with significant allocations toward advanced fighter jets, missile defense systems, naval fleets, and cybersecurity. This presents a prime investment opportunity. Among these “defense” stocks, we find Rheinmetall, BAE Systems, Kongsberg Gruppen, Lockheed Martin,and Safran.

Overall, while this rearmament plan is potentially leading to a surge in inflation, it also represents a great investment opportunity.