Totality Deep Dive: The European defence supercycle

European defence activity is increasingly shaped by industrial capacity, ammunition availability and the broader shifts in Europe’s security environment. What once functioned as a slow-moving budget category has become a live test of Europe’s ability to manufacture the hard-power inputs required for sustained conflict.

Ammunition, missiles, energetics, sensors, radar and air-defence systems are increasingly viewed through the lens of strategic and industrial capability, given the long lead times and production requirements involved. Supply chains are operating on timelines measured in years, not months, and pricing increasingly reflects constraints in chemistry, electronics and industrial depth, rather than sentiment.

The critical idea is that Europe’s defence sector is shifting from a “procurement cycle” to a strategic industrial capability: a supply-constrained supercycle driven by ammunition shortages, missile depletion, and the end of the peace-dividend era.

This Totality Deep Dive for December 2025 is for general informational purposes only and reflects aggregated market data and publicly available research. It does not consider any reader’s specific financial situation or objectives and should not be used as a basis for investment decisions.

1. Why Europe is rearming now

Whether in the Red Sea, Eastern Europe or Indo-Pacific, the past two years have exposed a truth that Europe has spent decades avoiding: the continent is not insulated from a deteriorating global security environment. Europe is short of ammunition, air defence capacity, and the industrial depth required to sustain high-intensity conflict.

For the first time in decades, the continent is being forced to rebuild not just its inventories, but its industrial foundations: energetics plants, missile-integration lines, radar-assembly facilities, shipyards, ammunition forges and upstream chemical supply.

This is not a temporary response to a single conflict, but a long-cycle industrial mobilisation that will reshape Europe’s strategic and economic landscape for the decade ahead.

This industrial reset is also being influenced by uncertainty around the long-term trajectory of US security commitments. Recent debates in Washington over NATO funding, support for Ukraine and forward-deployed forces have underscored the need for greater European self-reliance. While the US remains central to NATO, these discussions have encouraged European governments to expand domestic production capacity, strengthen stockpiles, and adjust fiscal rules to support sustained procurement.

In the Red Sea, European ships have over the past 18 months been drawn into real-time intercept operations as Houthi drones and missiles target commercial shipping. These engagements are sustained, complex and highly resource-intensive, and require systems, sensors and missiles that Europe does not currently produce at scale.

In Ukraine, daily artillery consumption remains between 4,000 and 7,000 shells: levels that exceed Europe’s effective annual output. At the same time, rising tensions in the Taiwan Strait have increased global demand for European radars, sensors and guidance components, exposing further limits in production depth.

2. Europe's war economy: the ammunition and missile crunch

Conflict is won in the factories before it is won in the field. Nowhere is this clearer than in Europe’s widening ammunition gap, a structural mismatch between what Europe produces and what modern battlefields consume.

Before Russia’s February 2022 invasion of Ukraine, combined European output of 155mm shells sat near 230,000 per year. By 2023, production reached approximately 300,000. In early 2024, the European Commission claimed the continent could produce 1 million shells per year, but deeper industry reporting suggested real capacity closer to 600,000, constrained by shortages of energetics, propellants and specialised forging capacity.

Against this sits Ukraine’s operational reality: a requirement for 4,000–7,000 shells per day, or 1.5–2.2 million shells per year. Europe’s 2025 production target barely meets Ukraine’s annualised consumption alone.

Missile inventories across Europe have also been drawn down by recent Red Sea intercept operations and ongoing support to Ukraine. Systems such as the Infrared Imaging System - Tail/Thrust Vector Controlled Surface Launched (IRIS-T SLM), the Norwegian Advanced Surface-to-Air Missile System (NASAMS), the Common Anti-Air Modular Missile (CAMM) and the Missile d’Interception de Combat et d’Autodéfense (MICA) have all seen increased utilisation, and procurement has accelerated as a result. But output remains constrained by shortages in energetics, propellant chemistry, seeker electronics, microprocessors and hardened radio-frequency (RF) components.

The gap between European ammunition output and battlefield consumption remains the clearest illustration of its industrial imbalance.

Even if European Union (EU) meets its 2 million shells per year target in 2025, Ukraine’s annualised demand (circa 1.8 million shells per year) nearly equals that, leaving little margin for NATO stock replenishment.

3. Mapping Europe's defence supply chain

Europe’s defence build-out is best understood as a living ecosystem, with each layer dependent on the one beneath it.

a. Upstream: energetics, propellants and critical materials

Energetics plants which produce explosive compounds, propellants and charges are among the most constrained industrial assets on the continent. They require hazardous-materials certification, blast-containment infrastructure and operators with years of specialised training. Scaling these facilities takes at least three years.

Alongside energetics sit forged components and specialty alloys used in shell casings and missile airframes. Production is concentrated in a handful of facilities across Germany, France, the Nordics and Eastern Europe.

b. Midstream: sensors, guidance and electronic warfare

This is where Europe is strongest. Saab, Hensoldt, Thales and Leonardo anchor the continent’s high-end defence electronics capability in:

• AESA radars.
• Infrared seekers.
• Mid-course guidance systems.
• EW suites.
• Ground-based surveillance arrays.

These are now among the most in-demand components of Europe’s rearmament cycle. Yet even this segment faces bottlenecks in regard to advanced semiconductors, RF components, and hardened microelectronics.

c. Downstream: missiles, platforms and integrated systems

This layer brings the system together:

• IRIS-T, MICA NG, CAMM, NASAMS.
• Skynex and RBS 70 NG launch platforms.
• CAESAR artillery.
• Naval-air defence integration.

European manufacturers can scale these systems, but production slots are full into 2028–2030. Lead times are lengthening, and many firms are being forced to choose between domestic contracts and export clients.

4. The 2025-2030 orderbook boom

Defence budgets have risen sharply across the continent, particularly in Germany and Poland, creating a multi-year fiscal base for industrial expansion. The continent’s defence sector is rising in tandem.

Sweden’s EUR 900 million IRIS-T order, Denmark’s EUR 6 billion multi-system air-defence package, Germany and Switzerland’s ESSI commitments, and France’s Mistral and MICA NG resupply are not routine procurement cycles, but represent long-cycle rearmament. Of the countries cited in the chart above, Poland shows the steepest budget growth (from approx. EUR 12 billion in 2020 to more than EUR 40 billion in 2025).

Orderbooks now stretch into 2028, 2029 and 2030, giving manufacturers visibility typically associated with utilities and infrastructure, not defence contractors. Rheinmetall, Saab, Thales and BAE Systems are all reporting record backlogs:

• Rheinmetall: Surged from EUR 24.5 billion in 2021 to EUR 63 billion in 2025 (+157%).
• Saab: Grew from EUR 9.5 billion to EUR 17.2 billion (+81%), driven by Gripen and GlobalEye programs.
• Thales: Steady rise to EUR 52 billion, supported by defence and cybersecurity contracts.
• BAE Systems: EUR 92 billion backlog in 2025, fueled by GCAP and submarine programs.

Air-defence orders highlight the scale of acceleration: Sweden, Germany/Switzerland, Denmark and France have all placed large multiyear packages for IRIS-T, NASAMS, MICA NG and Mistral 3 systems. There are a number of key insights in this regard:

• Record-value deals signal urgency: Denmark’s EUR 6 billion tri-system contract (NASAMS, IRIS-T SLM, MICA VL) dwarfs other deals, showing a push for layered air defence.
• ESSI is driving collaborative procurement: Germany and Switzerland’s EUR 680 million IRIS-T SLM deal under ESSI highlights Europe’s move toward joint frameworks for interoperability.
• Nordic nations are scaling medium-range defence: Sweden’s EUR 900 million IRIS-T SLM purchase reflects the Nordics' focus on integrated GBAD amid heightened regional threats.
• France is diversifying with naval and short-range systems: France’s EUR 600 million contract for VL MICA NG, Mistral 3, and SIMBAD RC shows emphasis on multi-domain defence beyond ESSI.
• A clear trend towards multi-layered strategies and interoperability: Procurement spans short-range (Mistral, MICA) to medium-range (IRIS-T, NASAMS) systems, aligning with NATO’s integrated air defence strategy.

5. The structural themes driving Europe's defence cycle

• The ammunition renaissance: Ammunition is Europe’s defining bottleneck and one of its strongest long-cycle investment drivers.
• The air-defence imperative: Layered air-defence systems—IRIS-T, CAMM, NASAMS, MICA, Patriot etc—are now at the centre of European procurement.
• The rise of sensors and electronic warfare (EW): Modern conflict begins with detection, not destruction. Europe has global leadership in radar and EW, and demand is rising.
• Naval and maritime air-defence integration: The Red Sea crisis accelerated naval-air defence upgrades, benefitting Thales, Kongsberg, MBDA, Leonardo and Saab.
• Reindustrialisation: New energetics plants, missile-integration lines, forging capacity and radar factories are being built across the continent.

6. The risks that could slow Europe's defence cycle

• Budget dynamics: Germany’s strict debt brake has long capped defence outlays, but Berlin relaxed these fiscal rules earlier this year to sustain higher military spending. This supports multi-year visibility for contractors such as Rheinmetall and Hensoldt, even if broader fiscal pressure persists.
• Supply-chain fragility: Energetics, microelectronics, forging capacity and skilled labour remain structurally constrained. Expanding production depends on bottleneck components (e.g., powders, primers, microchips) that cannot be scaled quickly.
• Execution risk: Delivery cycles remain long, and factories are running at unusually high utilisation rates. Any disruption, such as equipment failure, regulatory delays, or material shortages, can push schedules out significantly.
• Geopolitical volatility: Escalation accelerates demand and stretches capacity; de-escalation may soften political urgency and slow contract timelines, even if long-term rearmament trends remain intact.

7. The investor upshot

Europe’s defence industry is entering a multi-year investment cycle driven by three structural forces: i) the rebuild of ammunition stockpiles, ii) the expansion of industrial capacity across energetics, microelectronics and missile integration, and iii) a shift in EU procurement from annual budgets to multi-year contracting.

For investors, the key point is visibility. Order backlogs at major European defence primes are now measured in years, not quarters, with replenishment contracts running alongside new capability programs. Policy catalysts—from the EU’s ASAP industrial-capacity scheme to Germany’s relaxation of its fiscal rules—further anchor the capital-expenditure cycle.

However, the outlook is not linear. Geopolitical volatility is now a defining feature of the sector: escalation accelerates demand; de-escalation may soften political urgency. Supply-chain constraints remain binding across the ecosystem. These dynamics won’t reverse the structural trend, but they will influence tempo.

8. Where defence equities fit in portfolio thinking

Defence equities typically sit within the broader Aerospace and Defence segment of the industrials sector. Historically, they have behaved as semi-cyclical stocks sensitive to budget cycles and global growth. Since 2021, however, their behaviour has diverged from this pattern: the sector is increasingly driven by structural procurement programs, rather than by short-term economic conditions.

From a portfolio perspective, defence names often display these trends:

• Backlog-driven earnings visibility: Revenues are linked to multi-year contracts rather than spot demand.
• Event sensitivity: Geopolitical developments can drive short-term volatility.
• Policy exposure: Fiscal changes, export controls and procurement frameworks matter more than typical macro signals.
• Idiosyncratic risk drivers: Program delays, regulatory approvals and supply-chain disruptions strongly affect outcomes.

As a result, defence stocks may evolve from their traditional role as cyclical industrials into a more structurally driven segment. For investors, the important point is not related to allocation, but rather in understanding the distinct set of forces—such as industrial policy, defence budgeting, and geopolitical tension—that shape how this sector behaves relative to broader equity markets.

9. Conclusion

Europe is undergoing the largest defence industrial mobilisation since the Cold War. Ammunition shortages, missile depletion and geopolitical pressure have forced a structural shift from a procurement model to an industrial-capability model.

For markets, the key insight is clear: Europe’s defence industry is transitioning from a cyclical sector into a structural one.

A clear way to visualise this shift is the relative performance of defence equities versus global equities. Since 2021, the STOXX Europe Total Market Aerospace and Defense index has materially outperformed the MSCI World index. Note how the divergence between these two indices accelerates after key catalysts—Russia’s invasion of Ukraine, the launch of the EU’s ESSI procurement scheme, and finally the EU ASAP industrial-capacity program.

This reinforces the central point: Europe’s defence sector is no longer trading like a cyclical, but rather like an industry undergoing structural transformation.

10. Market instruments in focus

European defence primes:

• Rheinmetall (RHMG.XETR)
• BAE Systems (BA.XLON)
• Saab AB B (SAABb.XOME)
• Thales (TCFP.XPAR)
• Leonardo (LDO.XMIL)
• Kongsberg (KOG.XOSL)
• Airbus (AIR.XPAR)
• Dassault Aviation (AM.XPAR)

Radar, sensors and electronic warfare:

• Hensoldt (HAG.XETR)
• Indra Sistemas (IDR.XMCE)

Upstream industrial and component suppliers:

• Safran (SAF.XPAR)
• MTU Aero Engines (MTX.XETR)
• Aalberts (AALB.XAMS)
• SKF AB B (SKFb.XOME)
• Senior (SNR.XLON)
• Hexagon AB B (HEXAb.XOME)

Chemicals, materials, industrial gases, and energetics inputs:

• BASF (BAS.XETR)
• Solvay (SOLB.XBRU)
• Umicore (UMI.XBRU)
• Evonik (EVK.XETR)
• Linde (LIN.XETR)
• Chemring Group (CHG.XLON)

Naval and maritime beneficiaries:

• ThyssenKrupp (TKA.XETR)
• Rolls-Royce (RR.XLON)
• Fincantieri (FCT.XMIL)
• NKT (NKT.XCSE)

Defence ETFs:

• iShares Global Aerospace and Defence UCITS ETF (DFND.XPAR)
• HANetf Future of Defence UCITS ETF (NATO.XPAR)
• WisdomTree Europe Defence Acc UCITS ETF (EUDF.XETR)
• VanEck Defense UCITS ETF (DFNS.XLON)
• Invesco Aerospace and Defense ETF (PPA.ARCX)
• State Street SPDR S&P Aerospace and Defense ETF (XAR.ARCX)

‍Mention of specific securities or instruments is for illustration only and does not constitute an offer, solicitation, or recommendation to trade. Examples of ETFs or equities are available globally; these are referenced for educational purposes only.

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Sources: European Commission ASAP programme releases; NATO “Defence Expenditure of NATO Countries” annual reports; SIPRI Military Expenditure Database; European Defence Agency Defence Data publications; Reuters battlefield reporting; RFE/RL ammunition-production investigations; official government procurement announcements (Germany, Sweden, Denmark, France).

Data inputs reference: EU ammunition-output disclosures (European Commission); Ukraine artillery-consumption ranges (Reuters, RFE/RL); national defence-budget series (NATO, SIPRI, EDA); order-book figures from public company filings (Rheinmetall, Saab, Thales, BAE Systems); air-defence contract values from official ministry releases; STOXX; MSCI. Chart data used herein reflects illustrative directional indexing derived from these public datasets for comparative analysis—it is not live or historical price data.

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Disclaimer: This publication is intended for informational purposes only. Figures represent historical observations and should not be interpreted as financial advice, recommendations, or forecasts. Past performance is not indicative of future results. All information is believed to be accurate at the time of publication but is subject to revision without notice. This Totality Deep Dive was produced by Totality Market Strategist Aaron Zanchetta.