The Great Shift in global defense landscape

Trump’s defense priorities are best understood through a transactional lens focused on international stability. Consequently, its partners within the NATO will have to pay more for their defense while the United States represent two third of the alliance’s spending in defense.5% is the new 2%. During its June 2025 summit, the NATO countries commit to invest 5% of GDP on defense by 2035, including 3.5% on core defense requirements and 1.5% on defense- and security-related investments like infrastructure and industry.To finance this additional defense spending, the ReArm Europe plan would allow to raise defense investment up to €800 bn over the next four years. While borrowing at the national level and enhancing facilities in existing institutions are the most straightforward options, European countries must also mobilize private capital.The defense spending increase could increase EU GDP by around 0.6% by 2028 and by around 1.6% by 2035. With the highest fiscal space, Germany is projected to experience the most significant benefits. France should leverage its status as a global weapons leader and could experience a GDP boost by +0.1-0.2% per year, while Poland should address its reliance on non-EU suppliers. The United Kingdom may also strengthen its ties with the European Union.With the US retreating from guaranteeing global security, Asian policy makers will also have no choice but to raise defense spending, especially against the backdrop of China's rapid increase in spending and capability. This shift in defense is also an opportunity for South Korea which could emerge as a credible alternative to US supplies and capture additional European demand.Despite strong momentum in the defense equity market, significant execution risks remain in the short-term, prompting concerns that valuations have risen too far too quickly. Regarding the credit market, investment opportunities exist despite the current premium but require remaining selective.