Cutting Europe’s €800 billion Gordian knot: Five catalysts to transform defense

(24 pages)

The commitment to increase defense spending to 3.5 percent of GDP by 2035, amounting to over €1 trillion, underscores the scale of this endeavor. This white paper draws a parallel to the Gordian knot, emphasizing the need for bold and decisive actions to cut through the complexities and deliver effective solutions. Key data highlights include the projected increase in defense spending from 2.4 percent of GDP today to 2.9 percent by 2030, reaching approximately €800 billion, and the potential creation of up to 1.2 million new jobs across Europe due to production increases to meet additional equipment spending.

To achieve these goals, the paper proposes five key catalysts: adopting multispeed procurement approaches tailored to different types of acquisition, building an industrial base ready to scale in response to crisis demands, mobilizing collaboration to expand capacity and drive innovation, fast-tracking and localizing the supply of critical raw materials, and prioritizing the availability and upgrading of legacy military equipment. By bridging government ambition with effective industrial execution, Europe has the opportunity to turn urgency into renewal, strengthening its security, driving economic growth, and advancing its technological leadership.

The war in Ukraine has altered the security landscape in Europe, underscoring the need for its nations to adapt their defense strategies and capabilities. This conflict has particularly demonstrated the importance of scaling the industrial base, rapid innovation, agile supply chains, and the effective and efficient integration of advanced technologies, such as drones, which have proven to be game changers on the battlefield. It has been over three and a half years since the full-scale invasion of Ukraine, and the rapid advancement of civilian technologies, especially AI, is changing the character of warfare.

In response, Europe’s NATO members have fundamentally shifted their strategic posture and are making a commitment—unprecedented since the end of the Cold War—to strengthen their defense capabilities and readiness to increase deterrence. By 2035, they have committed to increasing core defense spending to 3.5 percent of GDP¹“Defence expenditure and NATO’s 5% commitment,” NATO, August 27, 2025. Europe aims to spend 5 percent of its GDP by 2035 on defense and security: 3.5 percent for core defense plus 1.5 percent for wider security, such as Critical National Infrastructure.—equivalent to over €1 trillion.²IMF database, IMF Datamapper, accessed on October 21, 2025. Europe’s NATO members will have a GDP of $30 trillion in 2030 (approximately €25 trillion) in current prices (no IMF forecasts beyond 2030). A 2 percent annual GDP growth from 2030 to 2035 would give a GDP of around €28 trillion. 3.5 percent of this GDP would be €1 trillion, based on IMF forecasts adjusted for 2 percent year-on-year inflation. Based on a balanced acceleration toward this 3.5 percent target and current ramp-up rates, spending is likely to increase from today’s 2.4 percent of GDP³The 2.4 percent defense budget as a share of GDP is sometimes 2.3 percent, depending on exchange rates. to 2.9 percent by 2030, or roughly €800 billion. This represents a significant acceleration, as defense budgets have already doubled since 2019, growing by nearly €250 billion.⁴“Defence expenditure of NATO countries (2014-2025),” NATO, June 3, 2025. Over the next five years, they are set to rise by an additional €300 billion (Exhibit 1).

Exhibit 1

Of the projected €800 billion in total defense spending in 2030, €335 billion is expected to be allocated toward equipment and equipment-related R&D, while the remaining €465 billion will cover personnel, military infrastructure, maintenance, and operations. The growth in equipment-related spending is particularly significant: It is forecast to be nearly nine times higher—almost €300 billion more—than the €37 billion spent in 2014.⁵In inflation-adjusted terms, it is an approximately 6.5 times increase. It will also be €165 billion more than in 2025, nearly doubling in just five years.⁶The €335 billion spending on equipment is 3.9 times (rounded to four times) more than the €85 billion average, 2020 to 2024. Furthermore, it means that by 2028, Europe is projected to exceed the 2025 level of the United States’ equipment spending (Exhibit 2).⁷Long-term implications of the 2025 Future Years Defense Program, Congressional Budget Office, November 2024; “Defence expenditure of NATO countries (2014-2025),” NATO, June 3, 2025. The United States’ spending on equipment for 2025 is approximately $300 billion (30 percent of the total defense budget), which is around €250 billion, depending on the exchange rate—meaning that European NATO is due to spend €85 billion more in 2030 than the United States in 2025 (around €60 billion more when accounting for inflation).

Exhibit 2

Meeting the investment ambition to rebuild European deterrence will require a marked increase in industrial output. Today, the value of European defense industry output sold within Europe is approximately €100 billion annually, while the forecasted demand for equipment in 2030 is around €335 billion. This means there is an opportunity for European industry to expand production by up to €235 billion per year.⁸Approximately €200 billion per year in today’s prices, assuming 2 percent annual inflation from 2025 to 2030. The alternative is for Europe to bridge this delta by buying from outside the region. If Europe continues to import at the current rate of 40 percent, it will mean spending around €130 billion of the equipment budget overseas, with €200 billion allocated to homegrown production.⁹Progress and Shortfalls in Europe’s Defence: An Assessment, IISS, September 2025; 2024 facts & figures, ASD, 2024. Since February 2022, 53 percent of Europe’s contracted defense procurement value has been allocated to European systems. When accounting for the European value-added embedded in imported platforms (estimated at 7 to 8 percent), the effective share of domestic European consumption increases to approximately 60 percent. This aligns with data from ASD showing that in 2023, European defense firms generated €160 billion in revenue, with roughly €100 billion consumed domestically. Other sources have estimated a 70 to 80 percent import dependence, although these estimates were often based on narrower EU-only data sets.

The potential benefits of increased equipment spending extend beyond the defense sector. Based on available data, and assuming no changes to productivity,¹⁰For instance, import ratios remain constant. the additional €165 billion in annual equipment spending could create up to 1.2 million new jobs across Europe—over 0.5 million in direct operations (on top of the 0.6 million already employed in the defense sector) and more than another 0.6 million in associated supply chains.¹¹Assumes a 2 percent inflation rate, year-over-year, from 2025 to 2030. Additional jobs would also be created in related industries, such as construction and cybersecurity, to support the growth in wider defense spending. For context, around 0.7 million people are employed in direct operations in the German automobile industry.¹²Market developments in the automotive industry: Slight decline in workforce, VDA, August 20, 2025. However, while the opportunity may be clear, it comes at a challenging time: Europe is losing one million workers per year due to aging demographics,¹³European Labour Authority, “The skills we need for the jobs we want,” European Employment Services, April 28, 2025. This is an EU-specific statistic, but it is indicative of aging demographics across Europe’s NATO members as a collective. making it increasingly difficult to ramp up industrial capacity and fill these new roles.

As such, Europe will need to identify potential employees to serve the needs of the defense industry, along with associated reskilling and retraining programs. This will be made easier if there is close coordination among governments, educational institutions, and industry to align skills development with emerging technological and production demands. While defense spending has the potential to drive employment and prosperity, success will depend on the ability of the industrial base to scale quickly enough to retain as much spending as possible within the continent while also strengthening economic resilience.¹⁴McKinsey analysis—modeling employment data across all of Europe’s NATO members for more than 60 sectors, assuming the defense sector is analogous to the machinery and equipment manufacturing sector. Some research, such as Garrett-Peltier’s “Job Opportunity Cost of War” (2017), argues that defense spending leads to only 70 percent of the jobs that are created by the same level of investment in other adjacent sectors, such as infrastructure. In this more pessimistic scenario, the extra €165 billion of equipment spending would create 0.9 million new jobs.

The scale of the increase in defense spending is particularly striking, especially when compared to other major public investment initiatives. For context, the incremental defense spending of this decade, compared to 2021 levels, will total almost €2.5 trillion—roughly equivalent to Italy’s current GDP.¹⁵IMF database, IMF Datamapper, accessed on November 3, 2025. However, this surge in investment comes after three decades of reduced budgets, during which Europe experienced what is often referred to as a “peace dividend,” which was over €7 trillion.¹⁶“Innovation and efficiency: Increasing Europe’s defense capabilities,” McKinsey, February 28, 2024. A more than €7 trillion delta to the average defense spending in NATO Europe from 1960 to 1992 (as a share of GDP), and an approximately €1.4 trillion delta to the 2 percent of GDP target since 1992 on an individual country level. As a result, military forces were downsized, equipment and ammunition inventories declined, and much of the active military equipment was subjected to wear and tear. Meanwhile, industrial capacity—including infrastructure and workforces—contracted and aged. More recently, a significant portion of Europe’s military inventory has been donated to support Ukraine.

This scale of change—redeploying funds, building industrial capacity, and expanding new workforces—is not without historical precedent, at least in times of war. For example, Ukraine has increased its defense industrial output more than 30-fold since 2022,¹⁷Oleksandr Kozenko, Simultaneous Special Session 1: Defence innovation solutions for future challenges, 22^nd Asia Security Summit: The Shangri-La Dialogue, May 31, 2025, papers. Ukraine’s defense industry is projected to grow from around $1 billion in 2022 to $35 billion by 2025. and the United States expanded its defense spending as a share of GDP nearly 30-fold between 1940 and 1945.¹⁸Price Fishback, “World War II in America: Spending, deficits, multipliers, and sacrifice,” VOX EU CEPR, November 12, 2019. Defense spending rose from 1.4 percent of GDP in 1940 to over 37 percent in 1945. Additionally, the United States increased its defense spending by two and a half times between 1979 and 1987, a period that partially coincided with military buildup under the Reagan presidency.¹⁹World Bank. The United States’ defense spending rose from $127 billion in 1979 to $322 billion in 1989 (current prices). Today, the overarching goal of investing in defense capabilities is to establish credible deterrence, ensuring that Europe can avoid reaching the point where military intervention measures become necessary.

Transforming every aspect of the defense system is a complex undertaking. Europe has set itself the challenge of strengthening its defense capabilities in a way that bolsters deterrence, ensures security, and fosters the conditions for long-term peace and stability. The next section explores some of the most pressing challenges in achieving this transformation.

Economically, defense is a unique activity: Large forces are created, and vast sums are spent to build military capabilities and societal resilience, with the aim of achieving credible deterrence so that these capabilities never have to be deployed. The effectiveness of these investments depends on sustained societal support,²⁰“To prevent war, NATO must spend more,” NATO, December 12, 2024; Katya Adler, “Nato must switch to a wartime mindset, warns secretary general,” BBC, December 12, 2024. For example, NATO’s secretary general has emphasized the importance of a society-wide response to achieving deterrence: “Norway is an absolute leader when it comes to a whole-of-society approach … We need the whole of society to be involved.” political will,²¹“To prevent war, NATO must spend more,” NATO, December 12, 2024; Mark Rutte: “When we put our minds and political will to it, there is nothing we cannot do.” and the adoption of the latest technology to maintain an advantage over potential adversaries. Though governments fund these efforts, their success ultimately hinges on industrial power and innovation (Exhibit 3).

As the Draghi report²²Mario Draghi, The Draghi report on EU competitiveness, European Commission, September 2025. on European competitiveness highlights, success will require reforming the underlying mechanisms that drive investment, innovation, and cross-border collaboration. Indeed, the past offers a cautionary tale: Europe’s historical approach to industrial policy and defense investment has often resulted in inefficiencies, delays, and missed opportunities to achieve greater strategic independence. Fragmented decision-making, slow and non-standardized certification processes, and limited private funding have affected Europe’s ability to translate ambition into action. Structural barriers—such as differing national priorities and protracted regulatory processes—could affect the region’s ability to achieve its ambitious goals, leaving critical gaps in both defense readiness and economic competitiveness.

Europe’s starting point presents a mixed picture. With over two million military personnel, NATO Europe is one of the world’s largest combined military alliances. Yet, these forces are widely seen as lacking the investment, stockpiles, and interoperability needed to deter or sustain large-scale conflict.²³Armida van Rij, “To defend Europe, the UK–EU reset should prioritize defence industrial cooperation,” Chatham House, February 5, 2025. Addressing these gaps while maintaining peacetime societies requires engaging a complex network of actors, each playing a critical role—a challenge we refer to as the Gordian knot of European defense.²⁴The Gordian knot is a metaphor for an extremely complex problem. It originates from an ancient myth where Alexander the Great “solved” the challenge of untying an intricate knot by cutting through it with his sword, symbolizing bold and decisive action to overcome seemingly insurmountable obstacles. This knot comprises six interdependent issues: defining the future battlefield, accelerating procurement, scaling industrial capacity, mobilizing capital, fostering innovation, and addressing workforce gaps. Each issue is formidable on its own, but together they represent a transformation of unprecedented scale and complexity—a challenge for the next decade. We describe each of these issues below and then offer recommendations on how to start cutting through the knot: via five concrete, immediate areas of action.

First, in today’s rapidly evolving geopolitical and technological landscape, it is widely accepted that the way militaries will address conflict in the future has changed.²⁵Jack Watling, The Arms of the Future: Technology and Close Combat in the Twenty-First Century, Bloomsbury, 2023. However, NATO’s military forces—shaped by different legacies and starting capabilities—are unlikely to simply replicate the innovative approaches taken by Ukraine. This divergence has created a critical gap in conceptual thinking, leaving governments unable to finalize unified plans for force development, define the capabilities required, or determine which equipment to prioritize. Without this conceptual underpinning, the adoption of innovation and the pace of modernization will likely falter.

Second, three decades of reduced defense spending have given rise to bureaucracies designed to prioritize financial accountability and procurement risk reduction—often at the expense of acquisition speed and military efficiency. While these systems have their strengths, adapting them to strike a balance between innovation, speed, and efficiency in procurement has proven to be a complex challenge. In parts of Europe where urgency has been highest, such as countries purchasing equipment and ammunition for Ukraine, alternative bodies and processes—rather than conventional approaches—have often been used. This underscores the challenge of reforming entrenched systems to meet the demands of the rapidly changing defense environment.

Third, over the past decades, the defense industry has adapted to the demands of its customers, operating with limited engineering and manufacturing capacity and minimal flexibility. Compounding this, the tendency of defense ministries to place small-scale orders has led to inefficiencies and low-productivity processes and facilities. Historically, periods of increased orders or critical demand have been short-lived, often leaving capacity investments to become stranded assets once demand subsides. As a result, many defense contractors remain cautious, balancing share buybacks and reinvesting retained earnings into capacity expansion. Today, industry faces an urgent need to scale capacity, improve productivity, build resilient supply chains, and innovate ways of working to meet the challenges ahead—all while remaining cautious about overproduction in a still uncertain environment.

Europe also faces a critical question about the level of self-sufficiency it can realistically achieve in defense. In many areas of defense technology, Europe lags behind or faces substantial gaps. In most cases, fragmentation across products, technologies, and engineering investments holds Europe back and increases system costs. These fundamental challenges in defense industrial strategy have historically proven difficult to resolve. As a result, Europe has relied heavily on imports, and a significant share of the additional public funds allocated to defense could flow outside the region. To address these challenges, scaling the defense industrial base in a way that enhances innovation, capacity, productivity, and European strategic independence will be the critical enabler of effective European deterrence.

Fourth, funding and capital are essential to support government orders, expand industrial capacity, and build much-needed stockpiles. While European NATO governments have committed to the 3.5 percent defense spending target,²⁶“The Hague Summit Declaration,” NATO, June 25, 2025. While some countries, such as Spain, have so far rejected the plan to spend 5 percent of GDP on defense—3.5 percent on core defense plus 1.5 percent on wider security—the general, collective European NATO commitment is extant. the pace of spending growth varies significantly across countries. The aforementioned tendency to issue short-term or sub-scale purchasing contracts further complicates efforts to underwrite investments. Mobilizing all forms of capital, including fostering clarity and confidence among investors, will be crucial to securing long-term capacity growth.

Fifth, creating an innovation ecosystem that works is crucial to ensuring that European NATO forces have a real edge in the rapidly changing environment of modern conflict. While private capital investors, such as private equity and venture capital, are critical enablers already making a difference, more is needed. For example, the US Army’s recent announcement of a plan to use private capital firms, such as Apollo, Carlyle, and KKR, to drive a $150 billion infrastructure overhaul across areas like computing and rare earth processing, demonstrates how innovative approaches can be employed to tackle long-standing challenges.²⁷“US army taps private equity groups to help fund $150bn revamp,” Financial Times, October 21, 2025. Success will require many changes, such as: learning from ongoing innovation in live conflicts, clear demand signals from defense front-line forces and procurement agencies, access to growth capital (to follow early-stage investments), incentives for traditional industry to source from innovators and invest their own capital in R&D, rapid adoption, experimentation, and new approaches to replace stockpiling for rapidly changing technologies. All this must happen alongside the enduring need to secure and scale supply chains for already existing products and services. There are already leading examples in Europe of innovator scaling and collaboration between traditional and new players. However, compared to the scale of the challenge, much more is needed.²⁸Ryan Brukardt and Dale Swartz, “Creating a modernized defense technology frontier,” McKinsey, February 12, 2025.

Finally, human capacity underpins every aspect of this transformation. In Poland alone, military forces are planned to grow by hundreds of thousands, with other countries, such as Germany, also planning expansions.²⁹Jan Cienski and Wojciech Kość, “Poland seeks access to nuclear arms and looks to build half-million-man army,” Politico, March 7, 2025; Guardian staff and agencies, “Poland plans military training for every adult male amid growing European security fears,” The Guardian, March 8, 2025. Poland aims to increase the size of its armed forces from just over 200,000 today to 300,000—and even up to half a million, when including reservists. Sabine Siebold, “Exclusive: Germany’s army needs to more than double in size, commander says,” Reuters, September 11, 2025. Federal Minister of Defense Boris Pistorius announced that Germany would need up to 60,000 additional troops. Lieutenant General Alfons Mais also stated that Germany may need an additional 100,000 troops—45,000 by 2029 and another 45,000 by 2030. Altogether, total military growth across Europe could exceed one million personnel (including reserves). At the same time, meeting the industrial demands of expanded defense production could require an additional 1.2 million workers in direct operations and associated supply chains. However, like other sectors, defense faces challenges related to declining birth rates and difficulties filling semi-skilled manual roles (common to both defense and non-defense industrial sectors). Addressing this workforce gap represents a major challenge for Europe’s defense ambitions.

In short, Europe’s defense transformation is a vast and complex endeavor that requires every part of the ecosystem to evolve in parallel. The question is no longer whether this change is necessary, but whether Europe can marshal the resources, talent, and ingenuity to deliver on its ambitions. If Europe fails to take the Draghi report’s recommendations seriously, it risks undermining its own bold efforts.

If Europe were required to simultaneously decide how to fight in the future, reform defense procurement processes, build industrial capacity, align R&D and manufacturing efforts across the continent, and deploy €800 billion all in one step, the task would seem insurmountable. However, that is not the case. Progress can be made quickly in every area: Leaders with ambition can learn, set examples, and deliver on strengthening the continent’s deterrence. In all these efforts, the best must not become the enemy of the good. Success will depend on governments, industry, innovators, and capital providers adapting their risk appetites and working together to cut the Gordian knot of European defense.

Given the complexity and level of collaboration needed to fully cut through the Gordian knot described above, we identified five catalysts to focus on today that could help accelerate the modernization and growth of European deterrence.

Notably, they all involve government and industry working together, and most envisage a role for capital providers to accelerate capacity building.

1. Adopt a multispeed acquisition model
2. Build a scalable industrial base held at readiness
3. Unlock collaboration to drive industrial capacity and innovation
4. Fast-track and localize the supply of scarce raw materials
5. Prioritize availability and upgrades to legacy platforms

1. Adopt a multispeed acquisition model

Our research³⁰McKinsey on Defense Acquisition, to be published shortly. highlights the value of governments adopting a multispeed acquisition system that tailors procurement strategies and processes to the nature and criticality of each capability. Ukraine’s experience demonstrates how genuine urgency can lead to agile and flexible models that radically shorten the path from design to deployment. While these models lack the controls that most countries would apply in peacetime—and some financial inefficiencies are inevitable—they still offer valuable lessons (Exhibit 4).

Many European countries have adopted similarly fast and flexible models to acquire military equipment and ammunition for provision to Ukraine, often completing these acquisitions much faster than the processes they use to equip their own forces. The opportunity for Europe lies in structured differentiation within acquisition processes: creating fast-track pathways and tailoring the level of accountability to the nature and urgency of the procurement.

Not all equipment procurement requires the same level of rigor, time, or risk tolerance. A flexible procurement model can optimize acquisition timelines, costs, and operational effectiveness by aligning the approach to the type of system being acquired.

To implement this approach, programs need to be categorized by type and risk, with approval and contracting processes tailored accordingly. Flexible mechanisms, such as rapid prototyping, joint working groups, and early collaboration, are essential. Crucially, governments could tolerate higher levels of risk in smaller, less critical systems in exchange for speed and innovation.

Exhibit 4

Regardless of the procurement model chosen for each equipment item, a clear allocation of responsibilities and authorities is essential to prevent confusion. Transparent and streamlined decision-making processes help drive faster action. Some governments are already taking steps in this direction. For example, Canada recently established a new Defence Investment Agency (DIA) to modernize procurement by centralizing expertise and decision-making.³¹“Backgrounder: Defence Investment Agency,” Government of Canada, October 2, 2025.

Governments could:

• Create differentiated acquisition pathways based on speed, oversight, and risk tolerance, while also reflecting the system’s criticality and function
• Empower rapid prototyping and field experimentation through streamlined approvals and flexible contracting
• Accept higher managed risk in lower-tier programs to accelerate learning, iteration, and deployment

Industry could:

• Design modular, software-defined systems that enable ongoing upgrades and continuous capability refresh
• Collaborate early with government teams to advise on rapid acquisition models and shorten decision cycles
• Apply agile development and testing practices to deliver affordable, adaptable solutions at speed

2. Build a scalable industrial base held at readiness

Military capability rests on industrial power, and large-scale conflicts have consistently demonstrated the importance of resupply and continued innovation at scale.³²“Freedom’s Forge,” AEI, May 2012. Freedom’s Forge by Arthur Herman outlines how the private sector and ingenuity played a pivotal role in the United States’ success during World War II. Europe needs a resilient defense industrial base that can quickly and comprehensively respond to crises. Even in peacetime, a core component of deterrence is the belief—among both allies and adversaries—that Europe can quickly replenish its resources and adapt to changing circumstances.

As such, true resilience is not just about producing millions of munitions and thousands of vehicles, ships, and planes today; it is also about the ability to scale up production as needed. In areas where technology is still developing—such as small drones—scalable capacity will be more relevant than stockpiles. In others—such as legacy munitions and high-consumption assets—a combination of stockpiles and rapid scalability will still be needed.

Creating this robust, sovereign defense supply chain—with a mix of defense-specific, dual-use, and convertible civilian facilities—presents a challenge for both government and industry. Public and private actors will need well-developed emergency plans that can rapidly switch off commercial production and turn on defense production, including through cross-sector mobilization. This manufacturing capability requires clear contracting models, designed by governments, to define who pays, how much, and how capacity is maintained during peacetime.

There is also an opportunity for industry to establish itself as a key partner to governments. By proactively engaging in this effort, industry can help shape the future defense ecosystem while ensuring its capabilities are fully utilized in times of need.

As industrial readiness improves, Europe’s next challenge is to build deeper collaboration and innovation networks to accelerate technological diffusion across the continent.

Governments could:

• Map switchable production lines and identify their potential defense applications
• Define clear contract frameworks to secure surge capacity and compensate for idling or dual-use capabilities
• Commit to longer-term contracts, alongside clear, realistic ramp-up schedules, to incentivize up-front investment in critical capabilities

Industry could:

• Collaborate with governments by sharing data on production capacities and proposing surge contingency plans and wartime operating models
• Invest in readiness to strengthen the ability to secure surge contracts during crises by raising capital, retooling production lines, and ensuring workforce readiness
• Expand into global export markets to allow external demand to sustain higher production rates—spreading fixed costs and stabilizing production chains

3. Unlock collaboration to drive industrial capacity and innovation

Europe’s ability to scale production depends on industrial collaboration across sectors. Building a resilient defense economy requires pooling resources, sharing know-how, and engaging adjacent industries, such as automotive, electronics, and heavy manufacturing. Targeted collaboration can compress timelines, reduce costs, and strengthen collective deterrence.

By deepening collaboration, Europe can create an ecosystem that is resilient and globally competitive. Building trust and transparency between governments, industry, and capital providers can turn latent, fragmented capacity into collective strength—resulting in an enduring advantage for European defense.

Governments could:

• Embed joint R&D milestones in major programs so there is joint iteration across the value chain—ensuring interoperability and the spread of new technologies
• Create regional clusters that physically co-locate primes, small and medium-size enterprises, and tech firms around specific capability needs
• Tie funding to collaboration through outcome-based grants that reward consortia—not individual firms—when shared milestones are achieved

Industry could:

• Form regional consortia that pool specialist capabilities—such as propulsion, sensors, and software—and bid jointly for European programs
• Adopt modular design standards that make components interchangeable across partner platforms, accelerating production and upgrades
• Establish shared databases and joint test beds with other sectors—such as automotive and robotics—to synchronize planning and adapt commercial technologies for defense

4. Fast-track and localize the supply of scarce raw materials

Europe’s ability to scale production depends not only on the strength of its industrial base but also on its ability to access critical raw materials and intermediate products. Securing the first mile of production—including raw materials, chemicals, energetics, and rare earths—is an indispensable enabler of ramp-up capability.

Over the past decades, much of Europe’s foundational capacity—from specialty metals to high-grade energetics—has been offshored or downscaled due to cost pressures and environmental concerns. Limited domestic production of explosives and propellants, such as TNT and nitrocellulose, has left European supply chains less resilient. While there are ongoing TNT projects, such as those in Sweden and Finland, it will take over two years for them to be completed.³³The Defense Post, November 7, 2025. Without these base materials, even the best production plans could falter.

Accessing rare earths and other critical raw materials involves challenges that extend beyond mining, including separation, refining, and processing. While the European Union’s Critical Raw Materials Act³⁴Critical Raw Materials Act, European Commission. provides a useful framework, Europe needs to establish mechanisms to meet potential surges in demand.

Governments could:

• Set ambitious national targets tied to a clear strategy, including those for critical foundational materials, which should be viewed as part of defense infrastructure
• Rebuild domestic production with environmental safeguards
• Establish supplier-mapping task forces and joint regional stockpiles to mitigate first-mile vulnerabilities

Industry could:

• Repurpose existing chemical plants to capture new demand
• Reshore production to reduce supply chain vulnerabilities
• Collaborate across industries to share costs and risks

5. Prioritize availability and upgrades to legacy platforms

Building new platforms takes time. Therefore, delivering credible readiness in the near term should not depend solely on what European governments procure next, but on how effectively they maintain, upgrade, and utilize the systems already in their inventories. Updating legacy systems, improving interoperability and interchangeability, and refreshing key components can deliver noticeable operational gains with current resources. In short: “make it work and make it relevant,” focusing on the current force and strengthening enablers such as reliability, command-and-control, data integration, updated sensors and effectors, and, as far as possible, a shift to “software-defined capabilities.”

Continuous upgrades ensure existing systems remain operationally relevant—often long past their original out-of-service dates. Better spare parts availability, reliability-driven maintenance, and component standardization can significantly improve force readiness and availability. These measures can keep current core platforms operational, extend their deployable lifespans, and ensure their relevance through subsystem modernization.

At the same time, targeted upgrades can help prioritize modifications to deliver the greatest impact for the resources invested. Governments and industry alike could evaluate the cost-effectiveness of potential upgrades by focusing on the highest-value outcomes, such as improved performance, scalability, and interoperability, while avoiding overengineered or bespoke solutions that are costly and slow to implement. This approach shifts the mindset from “new equals better” to “fit-for-purpose and many is better,” ensuring that modernization emphasizes scalable improvements rather than bespoke, slow, and overengineered solutions (Exhibit 5).

The Patriot air defense system demonstrates the value of continuous innovation over designing entirely new systems, proving that targeted modernization can deliver leading-edge capabilities without the need for complete replacement.

Exhibit 5

As software becomes increasingly central to delivering battle-winning capabilities, European governments, defense ministries, and industry should increasingly view upgrade programs as integral to capability development. By adopting this approach, European defense organizations can ensure that their legacy platforms remain relevant today and in the future.

Governments could:

• Prioritize modifications that deliver the greatest impact for the resources invested, while fast-tracking procurement for maintenance, repair, and operations
• Roll out pay-for-availability contracts through performance-based agreements that incentivize industry to ensure platforms remain operationally available
• Leverage international partnerships to accelerate upgrades by collaborating with allies to co-develop upgrade packages for widely used and exquisite platforms

Industry could:

• Invest in R&D to develop modular upgrade kits for legacy platforms
• Explore opportunities for non-traditional players to contribute to upgrades
• Partner with disruptors to modernize legacy platforms

Europe stands at a pivotal juncture in its defense transformation journey. There is a shared determination to turn commitment into capability and ensure that renewed investment strengthens both military security and industrial competitiveness.

The challenges are multifaceted and interdependent, forming a complex Gordian knot that Europe must cut through to achieve its defense ambitions. Success will require confronting these challenges head-on with decisive, swift actions that transcend borders and sectors—spanning both public and private domains.

As this white paper has outlined, delivering readiness at scale will depend on bold decisions, shared responsibility, and a willingness to rethink long-standing practices. At McKinsey, we remain deeply committed to helping translate urgency into lasting renewal, supporting Europe not only in meeting the challenges ahead but also in shaping the future with confidence, resilience, and purpose.

Disclaimer: This white paper aims to provide actionable steps for stakeholders, building upon and complementing the White Paper for European Defence − Readiness 2030³⁵White paper for European Defence − Readiness 2030, European Commission. and similar analyses.

Total defense spending and equipment procurement

The projections are derived from a top-down input-output macroeconomic model calibrated to IMF GDP forecasts and NATO expenditure data, combined with bottom-up analysis of country-level defense plans and procurement programs.

The projections for total defense expenditure and equipment spending are consistent with the McKinsey analysis outlined in Mission Verteidigungsfähigkeit: Implikationen für die deutsche und europäische Verteidigungsindustrie [Mission Defense Capability: Implications for the German and European Defense Industry] (2025), which includes both proprietary analysis and publicly available data from NATO, IMF, and national sources. The scenario modeling assumes a “balanced acceleration” toward increased defense spending, incorporating country-specific military ambitions, such as those established at the NATO summit in June 2025, as well as fiscal constraints, including national defense budgets, public debts, budget deficits, and credit ratings.

While the NATO target of 3.5 percent of GDP for defense spending by 2035 represents a collective ambition, 2030 serves as the mid-point reference year in the trajectory toward this target. Many of Europe’s NATO countries are progressing more gradually than others due to financial limitations. Indeed, despite the €150 billion in loans provided by the European Commission under “Readiness 2030,” and the associated relaxation of fiscal rules, the specific fiscal realities of each country remain a decisive factor. Equally, some European NATO countries, such as Germany, are planning a more ambitious growth path for their defense spending. Others, such as Poland, are already spending above the 3.5 percent of GDP target—and are projected to continue doing so.

Taking all of these country-specific plans into account leads to defense spending of €800 billion for Europe’s NATO members in 2030, equivalent to 2.9 percent of GDP. The GDP figures are based on IMF projections (2025) and assume a 2 percent annual inflation rate from 2025 to 2030. All values are presented in nominal terms throughout our analysis.

Projections for equipment spending are derived from reporting of procurement programs initiated for the period from 2024 to 2030. The equipment projections also benchmark European spending against that of the United States, using publicly available data from NATO.

Jobs

McKinsey analyzes the projected incremental €165 billion in annual equipment spending in 2030 compared to 2025, applying it to the firm’s proprietary analytical tool. This tool models input-output employment data for over 60 sectors across each of Europe’s NATO members, linking additional financial investment to job growth. It leverages the latest available industry employment data from the Aerospace, Security and Defense Industries Association of Europe (ASD) to determine the employment baseline and uses the manufacturing, machinery, and equipment sector as a proxy for defense-related job growth. The model also accounts for inflation by applying an annual rate of 2 percent from 2025 to 2030 and assumes that other factors, such as relative import levels and productivity, remain constant.

Industrial output

McKinsey incorporates the latest available industry data on revenues and exports from ASD (2024) and also considers reporting from the International Institute for Strategic Studies (IISS), such as those stating that, since February 2022, 53 percent of European procurement contracts have gone to European systems. The analysis also incorporates assumptions about value added to imported equipment (estimated at around 7 percent).

McKinsey also notes that other reports, including those referencing the European Defence Industrial Strategy, suggest that “Europe” imports approximately 80 percent of its military equipment.³⁶“European Defence Industrial Strategy,” European Parliament, accessed on November 5, 2025. These estimates are often based on a time period marked by significant investment in fighter aircraft—with a high import share—but over longer periods, the average import levels were lower than 80 percent. Furthermore, it is important to note that this figure specifically refers to the European Union, rather than all of Europe’s NATO members, and therefore excludes leading national defense industries such as those of the United Kingdom, Norway, and Türkiye. These reports are also often based on data from early 2024 or earlier; however, over the past 18 to 24 months, Europe’s defense industrial base has significantly ramped up production.