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Europe’s defence awakening: strengthening security amid global shifts
The race to bolster European defence capabilities is well underway. Since the invasion of Ukraine, European leaders have intensified calls for increased defence spending. The continent, long reliant on US security guarantees, is now facing a critical inflection point. Recent moves by the US administration to engage with Russia without consulting its European allies or Ukraine have underscored the urgent need for Europe to take charge of its own defence. This geopolitical reality has forced European leaders to acknowledge that relying on US support is no longer a guaranteed strategy, accelerating discussions on independent military capabilities and funding mechanisms.
Why is European defence spending rising?
For decades, the US has outspent Europe on defence, contributing more than two-thirds of NATO’s[1] overall budget. However, NATO estimates that in 2024, 23 out of 32 members met the 2% GDP[2] defence spending target, compared to just seven members in 2022 and three in 2014[3]. More ambitious goals are being discussed. Poland is leading the way with a 4.12% of GDP defence budget, while discussions at NATO suggest some countries may need to increase spending to 3% or higher1.
Figure 1: NATO allies defence spending following Russia’s invasion of Ukraine
Source: Atlantic Council, WisdomTree. 2024 numbers are estimates. Iceland excluded as it does not have a standing army. Historical performance is not an indication of future performance and any investments may go down in value.
Adding another layer of complexity is the US Department of Government Efficiency (DOGE) initiative, which is beginning to reshape US defence priorities. The shift from cost-plus to fixed-price contracts under DOGE is putting financial pressure on defence companies most exposed to the US, which may see constraints on long-term spending commitments. This could have two contrasting effects: while it may limit US capability to fund European defence through NATO, it could also drive European nations to increase domestic procurement and reduce dependency on US defence systems.
Additionally, emerging security threats, including cyber warfare, artificial intelligence (AI)-driven military technology, and the growing presence of authoritarian regimes, have reinforced the need for increased defence investments. Europe’s reliance on outdated Cold War-era military equipment is another critical factor, pushing leaders to modernise their arsenals.
How will Europe fund its defence expansion?
Ramping up defence spending is a monumental task, especially given high sovereign debt levels across Europe. Yet, leaders are exploring creative solutions to secure the necessary funding. One approach is to reallocate existing European Union (EU) budgets, with discussions centring on repurposing unspent Cohesion Funds and Recovery and Resilience Facility (RRF) loans. However, legal restrictions within EU treaties may limit their direct application to military expenditures.
Another potential route is the issuance of European Defence Bonds, mirroring the successful NextGenerationEU pandemic recovery fund. By pooling resources at the EU level, this could offer a coordinated and cost-effective funding mechanism.
At the same time, private investment and public-private partnerships are gaining traction. Defence contractors and institutional investors are increasingly seen as strategic partners in financing large-scale projects, particularly in weapons systems, cyber defence, and artificial intelligence. Governments may leverage these collaborations to accelerate procurement and technological advancements.
Despite these options, one thing is clear—Europe must find a sustainable funding model to support its defence ambitions without derailing economic stability. Whether through EU-level financing, national budget reallocations, or private-sector involvement, securing long-term defence investment will be paramount in ensuring Europe’s security and strategic autonomy.
Impact on defence stocks: can the strong run continue?
European defence stocks have had a strong run since 2022, driven by surging order books, government contracts, and the realisation that military spending is no longer optional. Over the past year, Europe defence stocks rose 40.8%, outpacing broader European equities (+11.4%)[4]. Defence stocks trade at a historical P/E[5] ratio of ~14x, slightly above the long-term average, though still below peak multiples[6]
There are three key trends fuelling defence stock momentum:
• Backlogs at record highs: European defence contractors are sitting on unprecedented order books, with consensus forecasting 2024-29 CAGRs[7] of ~11% for sales and ~16% for both adjusted EBIT[8] and adjusted EPS[9]. These growth rates compare to just 8%, 11% and 12%, respectively, for the 2019-24 period[10].
Figure 2: European defence sector growth forecast
Source: Company Data, Visible Alpha Consensus, WisdomTree as of 31 January 2025. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.
• Government commitments: with long-term contracts locked in and additional spending likely, demand visibility remains strong.
• EU’s push for strategic autonomy: The European Commission has proposed a European Defence Industrial Strategy (EDIS), aimed at spending at least 50% of procurement budgets within the EU by 2030 and 60% by 2035[11].
Conclusion: a new era for European defence
The European defence sector is entering a new era of investment and strategic autonomy. With rising geopolitical risks and uncertainty over US support, European nations are taking proactive steps to build a more robust and self-sufficient military ecosystem. While funding challenges persist, the momentum behind higher budgets, technological investments, and NATO commitments makes this shift not just necessary, but inevitable.
With the EU backing structural shifts in procurement, defence stocks remain well-positioned, particularly those with exposure to land (for example, ammunition, vehicles) and air (for example, air defence, missiles, drones) domains.
Aneeka Gupta, Director, Macroeconomic Research, WisdomTree
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
[1] NATO = The North Atlantic Treaty Organization (an intergovernmental transnational military alliance of 32 member states).
[2] GDP = gross domestic product.
[3] NATO 2023 Vilnius Summit Declaration.
[4] Bloomberg, Europe defence stocks are represented by the MSCI Europe Aerospace & Defence Index and European Equities represented by MSCI Europe Index.
[5] P/E = price-to-earnings.
[6] Bloomberg as of 31 January 2025.
[7] CAGR = compound annual growth rate.
[8] EBIT = earnings before interest and taxes.
[9] EPS = earnings per share.
[10] Company data, Visible Alpha Consensus, WisdomTree as of 31 January 2025.
[11] European Commission: Joint communication to the European Parliament, the Council as of August 2024.
Stablecoins are digital currencies tied to assets like the U.S. dollar, offering the price stability needed for payments. They maintain their peg by being backed 1:1 by their underlying fiat currency, with issuers holding equivalent amounts in cash and cash equivalents, making stablecoins a digital representation of those reserves. Their market has doubled to over $235 billion, with daily usage nearly doubling in two years.
Why are stablecoins making headlines now?
Due to their clear product-market fit and growing mainstream adoption, stablecoins have become a top priority for regulation, with both industry leaders and policymakers calling for swift action.
On April 4, the Securities and Exchange Commission’s Division of Corporation Finance finally clarified that stablecoins are not securities if backed one-for-one by USD or similar assets and used for payments or value storage. These “Covered Stablecoins” are not marketed as investments, lack profit incentives, and include protections like reserves, making securities law registration unnecessary for issuance or redemption.
The GENIUS Act, introduced in February and advanced by the U.S. Senate Banking Committee in March, marks a major step toward creating a clear legal framework for stablecoin issuance and oversight. This clarity is driving momentum as Fidelity is set to launch its own stablecoin, and Bank of America is preparing to follow it once legislation is finalized.
Globally, the European Union’s Markets in Crypto Assets (MiCA) framework has already come into effect, reinforcing a broader shift toward formal integration of stablecoins into traditional finance. These developments reflect a growing consensus that stablecoins are emerging as essential infrastructure for global payments, treasury management, and digital asset adoption.
What are the benefits of stablecoins?
Stablecoins are digital currencies designed for fast, low-cost, and stable transactions. Since their launch in 2014, they’ve become a go-to tool for online payments, especially cross-border transfers. As they’re pegged to stable assets like the U.S. dollar or euro, they avoid the wild price swings seen in other cryptocurrencies.
They’re accessible to anyone with internet, making them especially valuable in regions with high inflation or limited banking access, like Argentina or Turkey.
With some built on public blockchains, stablecoins offer transparency, letting users track transfers and supply in real time. For institutions, they also simplify treasury management by acting as efficient digital cash that can be deployed instantly.
Who are the major players in the stablecoin race?
Tether (USDT) and Circle (USDC), the two largest stablecoin issuers, collectively hold over $204 billion in U.S. Treasuries, making them the 14th largest holders globally. Their combined treasury holdings surpass those of entire nations, including Norway and Brazil.
USDT leads with $144 billion in circulation; USDC, backed by Coinbase and known for compliance, has become a trusted digital dollar across global finance.
Why stablecoins matter: A revenue engine for blockchains
Stablecoins generate steady revenue for blockchains like Ethereum and Solana by driving transaction fees with each transfer. With trillions in annual volume, they help sustain network activity beyond speculation.
On Ethereum, for example, USDT and USDC transactions are major contributors to daily gas fees. Year to date, Tether ranks #3 and USDC ranks #5 in terms of total gas consumed. Tether and Circle also dominate daily transaction activity on Ethereum, averaging approximately 12 million and 6 million transactions per day, respectively, making them the top two entities on the network by daily transaction count.
Meanwhile, on Solana, stablecoin activity has surged, helping sustain validator rewards and strengthen protocol economics. In addition to the mainstream utility, stablecoins represent reliable, protocol-level cash flow, making them crypto’s killer use case.
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Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
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