Defense Industry Implications of U.S.-European Leadership Shifts

The defense industry is undergoing a seismic shift as U.S. and European leadership reorients procurement strategies and supply chains to address emerging security threats and technological competition. With the Pentagon under Secretary of War Pete Hegseth prioritizing a "warfighting culture" and streamlined acquisition processes, and European NATO allies committing to a 5% GDP defense spending target by 2035, the transatlantic defense ecosystem is recalibrating. These changes create both friction and opportunity, particularly for firms navigating the intersection of innovation, industrial policy, and geopolitical realignment.

U.S. Pentagon Reforms: Speed, Agility, and Commercial Integration

The Biden administration's Executive Order 14179, "Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base," has redefined how the Pentagon procures capabilities. By emphasizing commercial item purchases, Other Transaction Authority (OTA), and Rapid Capabilities Office policies, the Department of Defense (DOD) aims to reduce bureaucratic delays and foster competition under Executive Order 14179. For instance, AI tools are now automating software certification, while generative AI assistants are streamlining acquisition workflows, the order notes. These reforms are complemented by the Fiscal Year 2025 National Defense Authorization Act (NDAA), which mandates the creation of the Joint Federated Assurance Center to standardize hardware and software risk assessments and incentivizes domestic and allied sourcing for critical systems like small unmanned aerial systems (sUAS), as detailed in Key supply chain provisions.

The NDAA also expands opportunities for nontraditional defense contractors (NDCs) and small businesses, allowing them to submit certified cost data for subcontracting work under $5 million and participate in pilot programs for commercial product pricing analysis, a shift the White House guidance highlights. This shift signals a deliberate effort to diversify the defense industrial base and reduce reliance on legacy primes-a move that could benefit tech startups and mid-sized firms with expertise in AI, cybersecurity, and space systems.

European Defense Reforms: Strategic Autonomy and the SAFE Initiative

On the European side, the 2025 NATO Summit in The Hague cemented a commitment to increase defense spending to 5% of GDP by 2035, with 3.5% allocated to core military capabilities and 1.5% to civil preparedness and innovation, as pledged at the NATO Summit 2025. This pledge is underpinned by the EU's Security Action for Europe (SAFE) initiative, a €150 billion loan program designed to fund joint procurements and reduce reliance on third-country suppliers, according to White House guidance. Under SAFE, at least 65% of project costs must originate from EU, EEA-EFTA, or Ukrainian sources, with third-country subcontractors (including U.S. firms) capped at 35% unless bilateral agreements, such as the recent U.S.-EU trade framework, are in place, the guidance explains.

The EU's ReArm Europe Plan, aiming to mobilize €800 billion in defense spending by 2030, further underscores a push for strategic autonomy. However, fragmented national procurement processes and underdeveloped industrial coordination remain hurdles, analysts note. For example, while Denmark has partnered with U.S. firm AeroVironment to establish a drone test center and procure Arctic-capable drones, broader European integration requires harmonizing standards and accelerating multinational contracts, a point explored in Europe's defense tech.

Synergies and Challenges in Transatlantic Collaboration

The alignment of U.S. and European priorities-particularly in areas like AI, drone systems, and space resilience-creates fertile ground for collaboration. U.S. firms such as Raytheon, Lockheed Martin, and Honeywell are already adapting to European content requirements through coproduction agreements, shared intellectual property models, and local manufacturing subsidiaries, the White House guidance observes. For instance, Raytheon's joint venture with Norway's Kongsberg and Northrop Grumman's partnership with Poland's WZL-2 highlight how U.S. technology can be integrated into European projects while meeting regulatory thresholds, as covered in reporting on the EU joint defense program.

However, challenges persist. The EU's preference for domestic suppliers and the absence of a formal U.S.-EU Security and Defense Partnership (SDP) limit full access to SAFE-funded contracts for American firms, legal analysts warn. Additionally, European defense startups-while attracting over $5 billion in venture capital in 2024-still lag behind U.S. counterparts in late-stage funding, creating a gap that U.S. investors could exploit, according to the Europe defense-tech analysis.

Investment Opportunities: Sectors and Strategies

The most compelling investment opportunities lie in sectors where U.S. and European reforms converge:
1. AI and Cybersecurity: Both the DOD's emphasis on AI-driven procurement and NATO's Innovation Fund (NIF) prioritize artificial intelligence and cyber tools, as recent summit analysis highlights. Firms like Palantir and Darktrace, which offer interoperable solutions, are well-positioned.
2. Drone Systems and Counter-Drone Technologies: With Denmark's "drone wall" initiative and NATO's Baltic Sea reinforcements, demand for advanced drones and anti-drone systems is surging - a trend noted in coverage of the EU joint defense program. U.S. firms like Anduril (partnering with Rheinmetall) and European startups such as Helsing are key players.
3. Space Resilience: The DOD's Space Test Platform 2.0 (STEP 2.0) and EU space security initiatives highlight the need for satellite-based capabilities, an area emphasized in the White House guidance. Companies like Maxar Technologies and ICEYE are benefiting from this trend.
4. Supply Chain Resilience: The Joint Federated Assurance Center and the EU's focus on secure sourcing create demand for firms specializing in supply chain risk management and domestic component manufacturing, as detailed in the IQ analysis.

Conclusion: Navigating the New Defense Landscape

The interplay of U.S. and European defense reforms is reshaping the industrial landscape, offering both risks and rewards for investors. While regulatory hurdles and geopolitical tensions persist, the push for innovation, speed, and strategic autonomy creates a unique window for firms that can bridge transatlantic priorities. As the Pentagon and NATO allies recalibrate their supply chains and procurement strategies, the defense sector is poised for a period of dynamic growth-provided investors can navigate the complex web of policy, technology, and geopolitics.