Newscasts - Europe’s defense challenges
19/02/2026 07:27
Click the following link to watch video: https://share.newscasts.refinitiv.com/link?entryId=1_mcakf78s&referenceId=1_mcakf78s&pageId=Newscasts Source: 'Reuters - Business videos' Description: A summit in Munich revealed the continent’s anxieties over defense as transatlantic ties fray and new threats rise. In this Viewsroom debate, Breakingviews columnists discuss whether an 800 bln euro response is sufficient. Short Link: https://lseg.group/4rZ71Sb Video Transcript: The views expressed on this podcast are those of the participants, not of Reuters News. Every February, the Munich Security Conference becomes the hot ticket for policymakers, bankers, and politicians. This year, attendees, which also included the usual pack of defense geeks and drone enthusiasts, discussed how Europe will fund its rearmament. And you might all remember last year, US Vice President JD Vance signaled that Europe was really going to go it alone when it comes to funding its own defense. So, there is the war in Ukraine. There is Trump's threats to invade Greenland. Plenty to talk about and plenty to think about how they're going to spend EUR800 billion worth of defense funds wisely. So, all of this is in this week's Viewsroom. It's Aimee. And it's Jonathan. And this is the Viewsroom, your weekly podcast that dives into the knottiest issues in business, corporate finance, and economics. And Aimee, it's interesting because I feel like so many of our podcasts recently end up revolving around what is the transatlantic relationship, how does the US Administration view its ostensible European allies, and what are the strain points and stresses there. And this is a big one, right? I mean, Donald Trump has defined his entire term by overturning what was previously a somewhat cozy relationship between the US and Europe. You look at it and it's almost like a direct 180 from the Biden administration's theory of change, which was putting together these international blocs to fend off a rising China or to mobilize for the defense of Ukraine. To say that then turning from there to we could invade a NATO ally is something of a change. That's a little bit of an understatement. You know, a lot of Europeans, I think what I find really remarkable whenever I'm back on the continent, is people are freaked out. Like I feel like in America, it's easy because you think of this as a thing that's happening abroad. It's something that you think, this is never going to happen. There's never going be this big breakup. It feels like minds really, really are focused over there, right? I think that's absolutely right. I think it's really interesting as well. There's been some like head-turning moments for me where Germany talking about rearming, like, which I think was such a moment for Europe. Because they obviously, given the history, that was not on the cards I think for anybody. I mean, I have relocated to Ireland. I'm in London at the moment, but Ireland is talking about defense spending and it's a neutral country that has never talked about this before. They're now talking about investing in ships that will be basically going out and patrolling to make sure that the cables between the US and Ireland aren't tampered with or sabotaged. So, I think you're right. I think everyone is talking about this. And we are very fortunate because George Hay, the EMEA Editor of Breakingviews, who also is quite a defense enthusiast himself, was in Munich. And so, he got basically a sense of what everyone is thinking and feeling, and we definitely want to hear from him. And we also have Pierre Briancon, who is based in Berlin and has also been focused a lot on the war in Ukraine, as well as defense stocks. So, Pierre, George, you are very welcome. Hey there. Good to be here. So, George, we started the podcast, I mean, talking about really how- I mean, I think a lot of people didn't really know much about the Munich Security Conference before last year. It now has become this very big news event for lots of people. So, what was the vibe like last week when you were there, given that it was obviously people were a bit shook up after JD Vance the previous year? Yes, well, as you say, that was a kind of standout moment from last year and it was one of a bunch of things last year that made Europe really take defense seriously and feel like it had to. And yes, there was a lot of kind of trepidation ahead of the equivalent speech this year, which was by Marco Rubio, the Secretary of State. And in the build-up to that, there were some fairly punchy speeches by the German Chancellor Merz and Macron, French President. And the general gist was, "We've got the message, we are going to- you know, we are already doing it. We are committed to our own defense," and all that kind of stuff. I mean, the Rubio speech was- I mean, you could certainly say it was a politer version of what Vance said. It kind of went relatively easy on the kind of slagging Europe off for being anti-democratic, or whatever, and obsessed with climate stuff and things like that. I mean, he did say that Europe is in a climate cult, which was nice. But generally, I think he emphasized the whole idea of partnership between the US and Europe a bit more- a bit less- the whole thing was a bit less kind of certainly less insulting than last year, but it was probably marginally more constructive even if the underlying message is fairly similar. Right, so Europe is in a cult, but some of my best friends are cultists, that kind of vibe. Well, indeed. No, but like, it's interesting, right, because we are dealing with materially different circumstances leading into this year versus last year. And Aimee mentioned it in the introduction. We now have this gigantic pot, this EUR800 billion pot, standing ready to be deployed for defense priorities. I don't know if, Pierre, maybe you could give us a little bit of background about how substantial a shift that is, and what that actually means in practical terms, because we also have an ongoing crisis in the battlefield that is teaching Europe where its priorities need to be, right? And brings a lot of lessons for Europe's defense as well. I think the shift is permanent. So, it's not just a bump on the road. The EUR800 billion you mentioned, which is for the total of European NATO countries, about half of which, by the way, will be spent by Germany. Gives you an idea of who's paying for what in the current European effort. I think the Europeans, which is very clear and becoming clearer by the day, are convinced that it's time to split from the US and so the link with the transatlantic link is no longer geopolitical, if you want, but technological. So, you have some countries still depend heavily on American technology to defend themselves. The F-35 jet fighter plane which is equipping both Britain and Germany is a very good case in point where both countries are trying to weave themselves off that technological dependency. And so, it's not a bump in the road, meaning that you see those defense share prices coming down or even falling significantly every time there's some kind of rumor that the Ukraine peace or truce deal is around the corner. Of course, we've heard that like maybe 25 times in the last three months. But this is pointless. The European defense effort does not really depend on the outcome of the Ukrainian war. It comes from the realization by Europeans that there's a major threat on their eastern flank, and that they cannot count on the US to really come to the rescue if things get really serious. So, you still have a technological dependency. The financial, not so much, even fiscally challenged countries like France, for example, are actually in a better fiscal situation than the US, if you take a public debt load and a fiscal deficit. And so, the money will be there. And the challenge is how best now to spend that money, and whether Europe will be able or not to devise a common strategy, starting with a common doctrine, defining who your enemies are, where the threats are. What emerged from Munich also, it seems to me, but George can address this, is that there's the generalization of the idea that there is no longer Europe or the EU as a bloc. You're going to have different alliances, different coalitions, different coalition of the willing's, as British PM Keir Starmer calls them, depending on which country is ready to advance and to do some things. We should no longer talk about the EU as such because countries like Britain and Norway of course are plenty, really take part in that defense effort and Europe by the way still has members who are not members of NATO, and who are neutral countries such as Ireland which Aimee mentioned and Austria. And so, you can have very varying changing the shifting shape coalitions, but I mean the direction of travel is pretty clear and the money will be there. And again, the big challenge is how do you go about it to form a joint- really a joint defense effort? And, George, can I pick you up on that, just because one thing I was sort of curious about is we've talked about this EUR800 billion, but what do you spend that on? What is the- I mean, if you think about modern warfare, I suppose the danger is that you fund these companies that exist in Europe, but actually you're not preparing for the war of the future. At Munich, what were the things that people were saying or discussing or getting excited about basically the new technologies for war? Well, there was a huge number of drone companies, space companies, like startups, all sorts of startups. I mean, this is the first time I've been to Munich, but I was reliably informed that in previous years, you haven't had this kind of ecosystem of defense tech startups who are kind of part of the conversation as well, kind of capping around the sides. There are a lot of- a lot of them there, but the central question is really important. The how to spend it issue is pretty much the key issue in European defense, because as Pierre says, it's less likely that the money won't be there, it kind of is there. The how to spend it issue has a number of different things. But first of all, to what extent do you spend it on tanks and guns and kind of correcting the decades long under-investment and getting land forces up to speed? Which they do need to be. But on top of that, you can see in Ukraine, it's basically a lot of the casualties have been caused by drones, and what you don't want to do is just kind of over-invest in traditional stuff to the exclusion of all that. So that's a key thing. But I think probably the other aspect for how to spend it issue is kind of doing it in a competitive way. Not just giving it to a bunch of pre-existing national champions. Now, a lot of people- there's an increasing cottage industry of people slagging off Rheinmetall, which is the German national champion. And it's true that it has kind of- you can see its market capitalization has kind of grown six-fold, seven-fold in the last year or so. And, it's got this huge kind of backlog of work kind of going over, I think basically they have EUR10 billion of revenues and they've got an order book of about EUR120 billion. So what people are saying and the concerns they're raising are, if- what you probably don't want to do is just get all this EUR800 billion, or however much is going to go to Germany, and just shove it into Rheinmetall. Because what will happen then is you might get like EUR300 billion Rheinmetall rather than a EUR70 billion or EUR80 billion Rheinmetall, but what- Right, and then you kind of recreate the pathologies of the US defense sector with the big primes and then going with that a bunch of anecdotes about how none of the forces are remotely prepared for a drone warfare, right? Exactly, and possibly even kind of worse than that, because the worst case scenario would be if you get a series of national champions all kind of swollen with this new cash, all who are not necessarily be able to produce what they need to produce as quick as if you had a whole load of different players doing it. And what you'll also probably find is when you get kind of anti-competitive situations like that, you're more likely to have higher prices, and then everything will cost more anyway, and then you'd have to go back to the European taxpayer to ask for more money. So that's kind of what people are concerned about. Right. I do wonder because the market should be telling us something about what expectations are in terms of how much is that going to happen. You mentioned Rheinmetall's extraordinary parabolic growth and its market cap. Pierre, you've been looking across how the market is valuing other defense stocks out there and whether it does seem like there's an assumption that there's going to be this concentration to the winners? Well, Rheinmetall is trading at, last time I checked, around 40X this year's earnings. Other Europeans, I mean, the big players, the Thales and Leonardo, BAE Systems, around 25X, 25X to 30X, something like that. I don't know if that's justified or not. I mean, this is different. I don't really think that at the moment the Europeans' concern should be concentration or anti-competition. If anything- and we know that because Europe has much too many fighter jets, much too many tanks, much pretty much anything, missiles, types of missiles and even ammunition, sorts of, as compared to the US. Rationalizing that and concentration would be a good thing because Europe doesn't need 17 different types of tanks. And second, the competition is brought precisely by the technology firms that Aimee and George were talking about, which you very much see within each country, where each established player is really seriously challenged by upcoming- well, usually startups, but not only that, also by competitors and traditional competitors who are entering new fields. Rheinmetall is trying- Pierre, could we have some names of these companies? Are there any ones you can think of? Yes, there was a significant contract for drones, a tender for drones. A drone contract that the German government has launched recently, and everyone was expecting Rheinmetall to get it because that's, as George called it, the national champion. And Rheinmetall didn't get it. And the other competitors were two German startups, Stark and Helsing, and Stark, against all odds, got the contract. And Stark has other problems which illustrates one of Jonathan's questions is that one of its investors is Peter Thiel. And the defense minister- the German defense minister is raising concerns about the role that Peter Thiel is playing in the company, which illustrates the difficulty - and we're going to see more and more of that - of not only American firms, but European firms with American investors will have to compete in another field, which is good or bad, I'm not sure which is which, but this will happen in the next. You're going see more of this. So, for the moment, I think you still have- yes, there's so much money, in Germany by the way, because France has promises, but hasn't yet dedicated a lot of money to spend. And Britain is constrained by this fiscal situation, just like France a little bit. But the challenge would be more, are European governments ready to go outside their own, to award contracts, to sign procurement contracts with companies that are not French for the French or German for the Germans? That's probably more the challenge that we're going to face in the next. If you want to build a European defense, in theory, contracts should go to the best product or the best- and nationality within Europe should not be a concern. That point that Pierre's making there is the key point, really, because the difference between the US and Europe is, in the US, you do have a lot of big defense companies, but they're kind of competing with each other in one single market. Now, there is a single market in the European Union, but if each individual country awards all of their cash to- defense cash to one national champion, which is siloed in each individual country, then it will be harder and they don't reward contracts to big companies in other European states, then you will have a suboptimal situation. And clearly what you prefer is for them to award to whoever the most efficient, whoever the best player is, and then that money will get spent in much more efficient way. Got it. So, Europe finally has scale on the public funding side and is just about, I guess, finding a way of dispersing that cash that meets the scale challenge as opposed to just falling back into provincialism, which I think is probably the issue that everybody has complained about with regards to the EU for decades now. But that being said, that's as good a place as any to wrap it. George, Pierre, thank you so much for joining us on the Viewsroom. Thank you. Cheers. 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