Reeves Vows to Cut Red Tape for Defence Deals as Ukraine Pledge Boosts Stocks

Chancellor Rachel Reeves is set to announce a major shakeup of procurement rules for the defence sector at a fireside chat later today, as Ukraine-related interest in defence stocks ramps up. Reeves is expected to call out governments of all stripes for "ducking and dodging" the decisions needed to bolster the UK's industrial base and unleash its potential to defend the country. The proposed changes she will mention at the manufacturing-focused event are set to include reviewing single-source contract rules that govern the majority of defence contracts to incentivize faster delivery, and learning lessons from the successful and rapid procurement of arms for Ukraine, the Treasury said.

The rally in defence stocks comes as the three-year-old war in Ukraine 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 defence giants — including the British defence contractor BAE Systems, the German arms manufacturer Rheinmetall and the Italian aerospace and defence specialist Leonardo — hit record highs on Monday. The sector's surge has helped push 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 defence 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."

As Reeves vows to cut red tape for defence deals, investors are bullish on the prospects of increased defence spending and the potential boost to defence stocks. However, the long-term sustainability of such spending and its impact on public finances and the broader economy remain to be seen. With geopolitical tensions high and the war in Ukraine ongoing, the defence sector is likely to remain a focus for investors and policymakers alike.