Defense and Aerospace Sector Opportunities in Eastern Europe: A Geopolitical Imperative

The defense and aerospace sectors in Eastern Europe are undergoing a profound transformation, driven by escalating geopolitical tensions and a strategic shift toward industrial resilience. As Russia's war in Ukraine continues to reshape security dynamics, European nations are accelerating defense spending and industrial modernization. This trend is not merely a response to immediate threats but a recalibration of long-term strategic priorities. For investors, the region offers a compelling mix of policy-driven growth, EU-backed industrial programs, and emerging technological innovation.

Geopolitical Tensions as a Catalyst for Defense Spending

The war in Ukraine has exposed vulnerabilities in European defense capabilities, prompting a surge in military budgets. Eastern European countries, in particular, are leading the charge. Poland, for instance, has committed to increasing its defense spending to 4.7% of GDP in 2025, up from 4.15% in 2024List of countries in Europe by military expenditures - Wikipedia^[5]. Similarly, Estonia and Latvia have pledged to reach 5.0% of GDP by 2025, with Lithuania following closely at 3.12% in 2024List of countries in Europe by military expenditures - Wikipedia^[5]. These figures reflect a broader European trend: NATO's 2% of GDP defense spending target is no longer aspirational but a baseline. According to a report by Roland Berger, European defense budgets are projected to grow by an average of 3.91% annually through 2030Eastern Europe Defense Market - Size, Trends^[4].

The urgency is further amplified by the need to counter not only Russian aggression but also the rising assertiveness of China and other strategic competitors. As stated by Goldman Sachs, European defense stocks have repeatedly hit records in 2025, driven by both public and private sector investmentsThe Future of European Defense - Goldman Sachs^[2]. This momentum is underpinned by a recognition that defense is no longer a cost but an investment in national and economic security.

EU Programs: Building a Resilient Industrial Base

The European Union has emerged as a critical enabler of this transformation. The European Defence Industry Programme (EDIP), a €1.5 billion initiative, is central to this effort. EDIP aims to consolidate the fragmented European defense industrial base by promoting joint procurement, industrial reinforcement, and innovationEuropean Defence Industry Programme: Council ready to start negotiations with the European Parliament^[1]. A key feature of the program is the “Buy European” principle, which mandates that at least 65% of component costs for funded projects originate from the EU or associated countriesEuropean Defence Fund: over €1 billion for 54 ambitious defence industrial projects^[6]. This policy not only reduces reliance on external suppliers but also creates opportunities for Eastern European firms to integrate into high-value supply chains.

Complementing EDIP is the Security Action for Europe (SAFE) mechanism, which authorizes the EU to raise up to €150 billion in loans for joint defense procurementBuilding European Defense Capabilities for Uncertainty^[3]. SAFE's focus on areas like air and missile defense, drones, and artificial intelligence aligns with the urgent needs of Eastern European nations. For example, Ukraine has submitted proposals under SAFE for the production of drones and missile systems, with the goal of securing long-term contracts through 2030European Defence Fund: over €1 billion for 54 ambitious defence industrial projects^[6]. These initiatives are part of a broader ReArm Europe Plan and Readiness 2030 strategy, which seeks to mobilize up to €800 billion to bolster readiness and resilienceEuropean Defence Industry Programme: Council ready to start negotiations with the European Parliament^[1].

Concrete Projects and Companies: A New Industrial Ecosystem

The impact of these programs is already visible in specific projects and companies. The MARTE and FMBTech projects, funded under the European Defence Fund, are developing a future main battle tank platform involving over 70 industrial players and research organizationsEuropean Defence Fund: over €1 billion for 54 ambitious defence industrial projects^[6]. Similarly, the SRB2 project is advancing a novel suspension system for armored vehicles, building on prior European researchEuropean Defence Fund: over €1 billion for 54 ambitious defence industrial projects^[6]. These initiatives highlight the collaborative nature of the new defense ecosystem, where Eastern European firms are not mere suppliers but core participants.

Ukraine's integration into the European Defense Technological and Industrial Base (EDTIB) is another transformative development. Through the Ukraine Support Instrument (USI), the EU is allocating €300 million to modernize Ukraine's defense industryEuropean Defence Industry Programme: Council ready to start negotiations with the European Parliament^[1]. This includes joint production of artillery systems and drones, with Ukrainian companies like UkrOboronProm and Antonov partnering with EU firms. For instance, the Danish Model—a funding mechanism involving Denmark, Sweden, and Iceland—has already allocated €538 million to Ukrainian defense projects, with Danish experts evaluating and financing local manufacturersEuropean Defence Industry Programme: Council ready to start negotiations with the European Parliament^[1]. Such partnerships not only strengthen Ukraine's capabilities but also create a two-way flow of technology and capital, benefiting Eastern European firms.

Aerospace: A Hidden Frontier

While defense dominates the headlines, the aerospace sector is equally dynamic. The European aerospace and defense market is projected to grow at a compound annual rate of 5.14% from 2025 to 2030List of countries in Europe by military expenditures - Wikipedia^[5]. Eastern Europe is capitalizing on this trend through initiatives like the BEAWARE consortium, which connects aerospace clusters in Western Europe with emerging hubs in Poland, Romania, and the Baltic statesThe Future of European Defense - Goldman Sachs^[2]. Startups such as Zuri (Czech Republic) and Pipistrel (Slovenia) are pioneering electric and hybrid propulsion systems, supported by EU funding mechanisms like the European Defence FundEuropean Defence Fund: over €1 billion for 54 ambitious defence industrial projects^[6].

The EU's redirection of cohesion funds to dual-use infrastructure—such as reinforced roads and bridges—further underscores the strategic importance of aerospace. These investments are not only for military mobility but also for commercial applications, creating a fertile ground for innovation. As noted by Hogan Lovells, the EU's industrial strategy emphasizes “strategic autonomy,” with aerospace and defense as twin pillarsList of countries in Europe by military expenditures - Wikipedia^[5].

Challenges and the Path Forward

Despite these opportunities, challenges persist. The European defense industry remains fragmented, with 14 different main battle tank models compared to the U.S.'s single variantBuilding European Defense Capabilities for Uncertainty^[3]. Regulatory and fiscal reforms are needed to streamline procurement and reduce administrative burdensThe Future of European Defense - Goldman Sachs^[2]. However, the EU's recent appointment of its first-ever Defence Commissioner, Andrius Kubilius, signals a commitment to addressing these issuesList of countries in Europe by military expenditures - Wikipedia^[5].

For investors, the key lies in aligning with companies and projects that are central to these EU-driven initiatives. Firms involved in joint procurement, dual-use technologies, and supply chain integration—particularly in Eastern Europe—are well-positioned to benefit. The region's combination of geopolitical urgency, EU support, and industrial innovation makes it a high-conviction investment theme.