Eighty years after the end of the Second World War, and 34 after the end of the Cold War, Europe is re-arming.
Shocked by America’s friendliness toward Russia and antipathy toward Europe under the second Trump administration, Europe’s leaders are promising previously unthinkable amounts of money both to build up their own militaries and to continue aid to Ukraine.
The European Union plans to provide €150 billion ($163 billion) in loans so countries can buy weapons, and to relax its fiscal rules so they can boost their defense spending by a further €650 billion. (That brings the total to €800 billion, or $865 billion.) Frugal Germany is even reforming its constitutionally enshrined “debt brake” mechanism, so defense spending above 1% of GDP doesn’t count towards the debt ceiling; this could unlock tens of billions in further annual military spending for years to come.
With all this new cash about to become available, and with Europe wary of dependency on U.S. defense companies, lest Washington decide to cut off access, it’s no wonder that European defense stocks have gone stratospheric—prime contractors like France’s Thales and Italy’s Leonardo have both seen their share prices rise by around 85% so far this year, while shares in Germany’s Rheinmetall are up an astonishing 136%.
But a look at the 800-mile-long frontline in Ukraine reveals a reality far removed from that of previous conflicts, where expensive systems like tanks ruled the battlefield. This is a new kind of war that revolves around drones—and a new generation of European defense startups is eager to step in, believing they can deliver the armaments Europe needs better, faster, and cheaper than the lumbering defense contractors of old.
The retreat of the tank
“The whole battlefield has changed,” said Zhenya, a sergeant and drone operator in the Ukrainian army’s 413th Unmanned Systems Battalion, who withheld his surname for reasons of operational security. (He spoke with Fortune via encrypted videocall from an undisclosed location in Ukraine’s eastern Donbas region, where much of the frontline is located.)
Drones have become an increasingly critical component in the Ukraine war since soon after Russia covertly invaded the Donbas to support pro-Moscow separatists in 2014. At first, they were used for surveillance and reconnaissance, giving Ukraine’s military unprecedented and immediate views onto the frontline. Drones took on added importance following Russia’s full-scale invasion of Ukraine in 2022. Due to a critical shortage of traditional munitions such as mortar rounds, the Ukrainians started loading explosives on to first-person view (FPV) surveillance drones, whose remote pilots wear virtual reality goggles to guide the drone to its target.
This was improvisation born out of desperate necessity, but it worked well. In addition to drones that can drop grenades and small bombs, Ukraine also makes heavy use of loitering munitions—essentially drones that hover for long periods over a battlefield before hurtling into a target and detonating. ”Using different loitering munitions and FPV drones showed us that it’s much more effective than most of the outdated weapons,” said Zhenya. “A $400 piece of gear can destroy even the most modern tank on the battlefield.”
Much as the adoption of machine guns and modern artillery created the largely static trenches and no-man’s lands of the First World War, the proliferation of drones has turned the Ukrainian frontline into a kill zone where few can move. Tanks, which are hard to maintain and particularly vulnerable to attack from above, have been reduced to playing the role of long-range howitzers. “Most of the time they never come to close-quarter fighting, because there is a 100% chance of being eliminated,” Zhenya said.
Tactics and technologies are evolving fast. To protect them from drones, Russia started fitting its tanks with ”turtle” shells made of steel sheets and grills; Ukraine responded with ”dragon drones” that melt through those defenses with burning thermite.
Electronic warfare has become critical, with soldiers from both sides now carrying a variety of handheld and vehicle-mounted signal jamming devices, to cut off nearby drones from their operators and GPS satellites. Both sides have recently started using ”fly-by-wire” drones that are tethered to their operators’ equipment by thin fiberoptic cables that can stretch as far as a dozen miles—there is no radio signal for the other side to jam, so they have to be physically stopped.
This is the fluid military context in which Europe, where defense procurement traditionally takes years, must somehow rearm itself with the appropriate weapons systems.
Re-arming at speed
There are varying estimates for how quickly Europe needs to build up its defenses, with much depending on what happens in Ukraine. Multiple experts told Fortune that, if the war were to end now, revanchist Russia—which is already engaging in extensive sabotage and other “hybrid warfare” tactics against the EU—may be able to regain sufficient strength to attack the Baltic states or some other eastern European country within two years. Either way, Danish Prime Minister Mette Frederiksen said Tuesday that Europe must be “totally able to defend ourselves” within three to five years.
To underscore the urgency of the situation, NBC News reported Tuesday that the Trump administration is considering giving up the U.S.’s traditional leadership role in NATO’s European operations. Some interpret this as a step towards the U.S. withdrawing from NATO altogether, leaving Europe without a protective agreement that has allowed it to keep defense spending low since 1949. On Thursday, the Financial Times reported that Europe’s big military powers were now preparing to take over responsibility for most of the alliance’s funding and supply.
U.S. contractors would be the quickest and most traditional route to European rearmament, but concerns over shifting American loyalties are threatening to shut them out. Portugal is reconsidering a planned purchase of Lockheed Martin’s F35 fighter jets, and the European Commission on Wednesday declared that the EU’s new defense spending will come with a “made in Europe” condition, to benefit local economies, ensure long-term security, and make it easier to support Ukraine in the short term.
“It’s no longer impossible to think the U.S. could block either weapon sales or the functioning of certain systems” in scenarios where it wants to force trade or other concessions from Europe, said Giuseppe Spatafora, a research analyst at the EU Institute for Security Studies.
In this context, it is no wonder that European defense-tech companies are on the rise. Largely due to European investment funds’ interpretation of sustainable investment rules, investors have avoided defense until recently. But the Ukraine war and U.S. politics helped the European defense sector to draw a record $5.2 billion overall investment last year, up 24% year-on-year. According to PitchBook, that included $624 million in venture capital, more than doubling 2023’s total. Amsterdam-based Keen Venture Partners this year announced a $135 million fund dedicated to solely to defense startups.
Helsing AI, a German military AI firm with Airbus and Saab partnerships that recently also started making its HX-2 strike drones for Ukraine, raised $486 million last year. (The drones use AI to counter electronic warfare and can operate in swarms.) The French AI darling Mistral has formed a partnership with Helsing and is reportedly looking for more defense deals. Dealroom lists dozens of European defense-tech startups and, while none have raised anywhere near as much as Helsing, many are showing strong momentum—for example, the Estonian low-cost missile developer Frankenburg Technologies just saw its valuation nearly triple to $162 million in the space of three months.
In a white paper published Wednesday, the Commission acknowledged there was an urgent need to strengthen the EU’s military AI and drone capabilities, in particular. “AI-powered military robots are still in early stages of development and there is ample opportunity for Europe to excel in robot weapons and the software required to power them. However, the window of opportunity is very narrow as strategic competitors and rivals are heavily investing in these areas,” the document read.
The question now is whether Europe’s traditional “prime” defense contractors such as Rheinmetall and Thales can produce what is needed in the time required. Smaller players are arguing the primes are too lumbering and bureaucratic, and that the moment for newer, nimbler companies has arrived.
“The big primes are supertankers,” said Florian Seibel, co-founder and co-CEO of the decade-old German drone-maker Quantum Systems, which has so far raised €170 million from investors such as Airbus Ventures, Volkswagen Group parent Porsche SE, Peter Thiel, and Deutsche Telekom’s venture capital arm DTCP.
A new breed of AI-first defense startups
Quantum Systems makes intelligence collection and reconnaissance drones that use mapping algorithms and various sensors to overcome the jamming of satellite navigation connections. They also use AI for target identification and tracking, for detecting sudden changes in the battlefield, and for visual navigation.
Seibel declined to specify which generative AI models Quantum uses, though he added that all AI drone companies are essentially “integrators using off-the-shelf technology” from big American and European AI companies.
Quantum’s Vector drones, which are fixed-wing electric vertical take-off and landing (eVTOL) designs, contain standard Nvidia Jetson AI chips for small devices, though the firm is looking to find other alternatives for customers that want them. Around 500 Vectors are in regular use in Ukraine, mostly but not exclusively by the military, with Zhenya being one of their operators. The surveillance drones cost up to a reported $195,000.
According to Seibel, European defense departments are starting to realize that there are huge cost and capability gaps between drones and the alternatives they can replace. Precision-guided artillery rounds can easily cost $50,000 a pop, while Ukrainian startup Terminal Autonomy is selling its Bayonet one-way strike drone for just a few thousand dollars. (And more makeshift attack drones can be put together even more cheaply.)
Seibel said the any future war would heavily feature drones and robotics, and quite likely other new defense technologies relating to space, cybersecurity, and hypersonic missiles (which Russia debuted in Ukraine in 2023.) “Let’s say, if we spend €500 billion for new stuff in Germany, even if only 1% goes into these new technologies, it would be a huge boost for our ecosystem,” he said, adding that he hoped to see something more in the range of 10% to 20% go to newer defense technologies.
“A very long process”
But money won’t solve Europe’s lack of defense capacity on its own.
There has been a “big shift in speed” in government’s decision-making about procurement, said Morningstar equity analyst Loredana Muharremi, but the bureaucratic procurement process itself—involving competitive tendering and repeated testing and refinement of the equipment to the needs of defense departments—was the biggest risk to implementation of Europe’s rearmament plan. Procurement of new weapons traditionally took three-to-10 years or more, she said, though that has been compressed to one-to-three years in some more recent cases.
Muharremi added that competing national interests could slow things down. “The European defense market is very segmented. Each nation has its own champions,” she said, adding that squabbles over which components come from which country have previously stalled some joint procurement and joint development efforts.
It is likely that Europe’s prime contractors will now rationalize their fragmented defense platforms (that is, base vehicles and facilities that can be augmented for different purposes) to improve economies of scale, Muharremi said, adding that there are 174 of these platforms in Europe, versus fewer than 30 in the U.S. As for newer players, she said it was unlikely that they would get a higher share of defense contracts before 2030. (In the U.S., the Department of Defense mandates than a quarter of all contracts go to small businesses, but Europe, so far, has no equivalent requirement that might help speed money to the new defense startups.)
Seibel—who says he wants Quantum Systems to itself become a prime one day—insists that the primes won’t be able to meet the demand for drones at the necessary speed or cost. Even his own company was feeling price pressure from Eastern European drone makers, he added, explaining that this was a big reason why Quantum is now producing many drones in Ukraine itself. (Its main production hub remains near Munich, though.)
“European defence companies have already significantly invested to expand their production,” said a spokesperson for the Aerospace, Security and Defence Industries Association of Europe. “Where there has been concrete demand, the European defence industry has demonstrated its ability to ramp-up production capacity rapidly.”
“To make major investments in additional production capacities, industry needs long-term procurement contracts,” the spokesperson added. “Once such contracts are placed and firm commitments made, providing required planning certainty, the European defence industry can rapidly ramp-up production further, deliver at pace, and meet European needs.”
From the Ukrainian perspective, the reality of modern warfare requires thinking as cheaply and flexibly as possible.
Andriy Zvirko, chief strategy officer of Ukrainian drone-maker Sine Engineering, warns against relying too much on technologies like AI in drones, suggesting that Ukraine’s experience showed it’s better to have 1,000 “dumb but effective” strike drones than 10 “very smart” drones festooned with complex sensors and AI modules. (Ukraine said this month that it would buy 4.5 million domestically produced FPV drones this year alone, at a cost of around $2.6 billion—that’s around $580 per drone on average.)
“This war has shown that the lifetime of any active weapon is short. After a few months, the enemy can adapt to any technology. If you fuel a lot of money into some very expensive stuff, there is the chance that it will not work in half a year,” said Zvirko.
“If we talk about a big war, something like World War III, it will be a war of attrition. It will be about quantity, not about one silver bullet.”
