European defense stocks soared on Monday after the region’s leaders vowed to take on “the heavy lifting” of defending Ukraine from Russia. The rally comes as the three-year-old war appears set to move into a new stage after an Oval Office blowup on Friday put President Volodymyr Zelensky of Ukraine on the outs with President Trump.
Shares in Europe’s defense giants — including the British defense contractor BAE Systems, the German arms manufacturer Rheinmetall and the Italian aerospace and defense specialist Leonardo — hit record highs on Monday. The sector’s surge has helped pushed the Stoxx Europe 600, a benchmark once dominated by luxury stocks, to new heights as well.
But behind the investor enthusiasm lies the question: Can Europe, facing high debt loads, chronically low growth and looming tariffs imposed by Trump, afford more military spending?
Ending the Russia-Ukraine war carries a high cost. Prime Minister Keir Starmer of Britain rolled out a four-point plan over the weekend at a gathering of European leaders and Mr. Zelensky.
Mr. Starmer’s proposal includes an Anglo-French “coalition of the willing” to defend any eventual deal for Ukraine, which could mean “boots on the ground and planes in the air.” Britain also lent 2.26 billion pounds ($2.86 billion) to Ukraine to help bolster its military forces.
Even before the summit, however, credit agencies had warned about Europe’s finances. For example, increasing the military spending of NATO members to 3 percent of their G.D.P. — which is still short of the 5 percent that Mr. Trump wants — could force European governments to make unpopular spending cuts that weaken social safety nets, Fitch Ratings has warned.
Other political options include loosening fiscal rules to allow for greater defense spending, rerouting unspent post-pandemic recovery funds to military buildup and raising taxes.
Borrowing would carry a hefty cost, too. Yields on European bonds ticked higher on Monday, a sign that investors were becoming worried about potential growth in public spending at a time when the region’s economy is slowing and its competitiveness is faltering. Analysts are divided on whether such commitments could muddle the European Central Bank’s plans to cut interest rates; the central bank meets later this week.
The stakes are high. Failure to help Ukraine could eventually push European nations into accepting a deal that favors President Vladimir Putin of Russia. That could test the bloc’s cohesion, analysts say — but might be welcomed by those interested in seeing a divided Europe.
“Trump, Putin (and possibly Elon Musk?) all seem to dislike the European Union,” Holger Schmieding, an economist at the German bank Berenberg, wrote in a research note on Monday. “They would prefer to deal one-by-one with a panoply of minnows and middling countries than with a union that represents the second biggest market in the world.”
