Aside from potentially lower policy rates, two key factors could offset some of the impact of the trade war on the economy and manufacturing.

Firstly, long-awaited additional German investments that aim for stronger defence and infrastructure improvements – including transport, (clean) energy and digitisation – could support EU manufacturing demand from 2026 onwards.

Secondly, the European Commission’s plan to ‘rearm’ Europe and to unlock extra defence spending is set to boost industrial growth, though it remains uncertain as to whether the €800bn mentioned by the Commission will be fulfilled. According to the plan, this could potentially unlock €650bn if countries allocate an extra 1.5% of GDP to defence, raising average EU defence spending to 3.5% of GDP. In addition to the planned €150 billion in joint European defence loans, the European Commission is also considering shifting the existing €392 billion in the ‘cohesion fund’ for regional development to strengthening the defence capabilities of member states.

Defence spending rises steeply

EU defence spending has already been on the rise in recent years. In just four years, it increased by more than 30% to 1.8% of GDP. There’s limited upside here for manufacturing, as a relatively large share of the goods will be imported.

Since the Russian invasion of Ukraine, roughly 80% of the EU’s defence procurement has gone to non-EU firms. Europe-wide, imports of major arms have increased by 155% between the 2015-2019 and 2020-2024 periods. One reason for this is limited European production capacity. The market for military equipment is also fragmented, lacking unified European standards and procurements, relying instead on national ones.

An increased drive for action could lead to a faster build-up in production capacity

Harmonised EU defence strategies and collective investments have to be rolled out and procurement contracts have to be signed before defence output can really soar. The increased drive for action resulting from greater awareness of international threats and the lack of confidence in once steady continental partnerships could lead to a faster build-up of production capacity. The current long-term industrial overcapacity and collective willingness to invest can also serve as a catalyst here.