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European defense expenditure reached a record $864 billion in 2025, a 14% surge driven by Russia's war in Ukraine and shifting US security guarantees under the second Trump administration. Yet behind the headline numbers from the Stockholm International Peace Research Institute (SIPRI) lies a strategic vulnerability: while order backlogs at Rheinmetall (€63.8 billion) and BAE Systems (£83.6 billion) hit all-time highs, actual ammunition production—though tripled since 2022—still falls short of wartime replenishment needs. This analysis explores the gap between Europe's political commitments and the industrial realities of scaling defense manufacturing, and what this means for transatlantic security architecture and global power dynamics in 2026.
Record Spending: The Numbers Behind the Surge
SIPRI's 2025 military expenditure data, released in April 2026, confirms that European NATO members collectively spent $864 billion—the highest level since the Cold War. Germany crossed the 2% of GDP threshold for the first time since 1990, spending $114 billion (up 24%), while Poland allocated 4.5% of GDP, the highest among NATO allies. The EU defense spending surge was fueled by Russia's full-scale invasion of Ukraine and growing doubts about US security commitments under President Donald Trump's second term.
Global military spending hit $2.887 trillion, marking the 11th consecutive year of growth. However, US spending fell 7.5% to $954 billion due to the absence of new Ukraine supplemental appropriations—a decline SIPRI researchers caution is likely short-lived, with over $1 trillion already approved for 2026. Meanwhile, Russia allocated an estimated $190 billion (7.5% of GDP) and Ukraine spent $84.1 billion (40% of GDP).
The Hague Commitments: Ambition Meets Reality
At the June 2025 NATO Summit in The Hague, allies adopted a two-tier defense spending target: at least 3.5% of GDP for core military expenditures by 2035, with an additional 1.5% for security-related spending including cyberdefense and supply chain resilience—totaling 5% of GDP. All 32 member states except Spain committed to the plan, with national roadmaps due by mid-2026.
Meeting the 3.5% core target alone would require European NATO members to spend over €630 billion annually by the early 2030s, according to European Defence Agency estimates. The EU's ReArm Europe plan, with €150 billion in loans under the SAFE program, aims to accelerate joint procurement, but 19 member states have subscribed so far.
Industrial Capacity: The Production Gap
European defense production has tripled since 2022, according to a Financial Times investigation using satellite imagery of 150 facilities across 37 companies. Approximately 7 million square meters of new industrial capacity have been added for ammunition and missile production. The EU's Act in Support of Ammunition Production (ASAP) program, with a €500 million budget, targets an annual output of 2 million 155mm shells by end of 2025.
Yet the gap between political ambition and industrial output remains stark. In 2024, the EU pledged one million artillery shells to Ukraine but delivered only about 300,000—a shortfall that exposed three decades of under-investment. Prices for a single 155mm round surged from $800 in 2021 to over $3,200 by mid-2024. The European ammunition production shortfall forced the Czech-led initiative to source over 500,000 rounds from non-NATO producers like South Korea and South Africa.
Rheinmetall and BAE Systems: Record Backlogs, Limited Output
Rheinmetall reported a record order backlog of €63.8 billion in 2025, up 36%, with sales rising 29% to €9.9 billion. CEO Armin Papperger stated the company is "well prepared for rapidly changing global conditions." However, production capacity remains constrained: Germany's domestic defense orders doubled between 2025 and early 2026 while output barely rose.
BAE Systems posted an order backlog of £83.6 billion, with sales of £30.7 billion (up 10%). The company increased 155mm shell output 16-fold from a new Welsh facility, but industry-wide, defense demand is growing five to six times faster than industrial output, according to Air Street analysis. European primes still prioritized $5 billion in dividends and buybacks in 2025, while ESG frameworks continue to treat defense as reputational risk rather than strategic necessity.
Transatlantic Implications: A New Security Architecture
The second Trump administration's National Security Strategy signals a shift away from shared threat perceptions with NATO allies, focusing more on EU overregulation than Russian aggression. The transatlantic security alliance future now hinges on Europe's ability to demonstrate credible self-defense capacity. The Atlantic Council argues that Europe should build a new security architecture based on coalition and consortium models, while maintaining a central role for Ukraine.
Bilateral defense agreements are proliferating: the UK-France Lancaster House 2.0 treaty and the UK-Germany Kensington Treaty deepen cooperation, while the EU's Defence Roadmap, unveiled in October 2025, identifies nine priority areas including air/missile defense, drones, and AI. By Q1 2026, capability coalitions with lead nations will be established, aiming for 40% joint defense procurement by end of 2027.
Expert Perspectives
"The political argument over increasing defense spending has largely ended—European NATO members pushed total outlays toward €380-400 billion with over twenty countries raising budgets, many by double digits. But a critical production gap remains," notes an Air Street analysis of Europe's defense landscape entering 2026. "Europe's defense industry was built for post-Cold War decline management, not surge capacity."
SIPRI researchers have also raised transparency concerns over NATO's new 5% GDP target, warning of potential "creative accounting" as member states seek to meet benchmarks without genuine capability improvements.
FAQ
How much did Europe spend on defense in 2025?
European NATO members spent a record $864 billion in 2025, a 14% increase year-on-year, according to SIPRI data released in April 2026.
What is NATO's new defense spending target?
At the June 2025 Hague Summit, NATO allies committed to spending 5% of GDP on defense by 2035, with a floor of 3.5% for core military expenditures.
Why can't Europe produce enough ammunition despite record spending?
Three decades of under-investment hollowed out Europe's defense industrial base. Retooling factories takes 2-3 years, and demand is growing 5-6 times faster than output. Supply chains for propellants, explosives, and precision components remain constrained.
How has US policy affected European defense efforts?
The second Trump administration's reduced focus on European security and shift toward competition with China has accelerated European rearmament, but also created uncertainty about long-term US security guarantees.
What is the EU doing to close the production gap?
The EU's ReArm Europe plan includes €150 billion in loans for joint procurement, the ASAP program targeting 2 million shells annually, and a Defence Roadmap aiming for 40% collaborative procurement by 2027.
Conclusion: From Ambition to Output
Europe's defense paradox is clear: record financial commitments have not yet translated into proportional industrial output. As the 2026 global security outlook takes shape, the continent must move from political declarations to factory-floor reality. The next 12 months will be critical: NATO's national roadmaps are due by mid-2026, and the EU's capability coalitions must begin delivering. Without tangible increases in ammunition production, platform availability, and supply chain resilience, Europe risks having the most expensive hollow force since the Cold War.
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