EU defense market explained for Ukrainian companies

In 2025, Europe's defense sector was a mosaic of 27 separate national markets. A common "European" approach exists more in theory than in practice. Despite decades of integration attempts, the fundamental issue remains: strategic defense decisions are made at the state level. Sovereignty, national procurement traditions, and vested industrial interests continue to prevail, even amid Russia's full-scale war against Ukraine and a sharp increase in defense budgets — the highest since the Cold War.

Tim Lawrenson, a consultant on the European defense market and an associate researcher at IISS, reported this in his Novyny.LIVE column.

The deteriorating security situation has forced Europe to openly acknowledge what was previously considered uncomfortable: U.S. security guarantees are no longer unconditional. Therefore, European countries must take on more responsibility for their defense. This is not a temporary reaction to the war in Ukraine. Even a ceasefire or "freezing" of hostilities could lead to a period of increased risk with Russia, which will have the largest armed forces in Europe, with real combat experience, and an expanded defense industrial base. In such a world, increasingly dominated by power and transactional geopolitics, the EU's economic weight and regulatory influence lose credibility without real military capability.

The key novelty of 2025 is the transformation of the EU's role. Brussels is no longer limited to regulating the internal market; it is now actively using financial instruments and fiscal rules to stimulate defense spending and influence demand structure. As part of the Readiness 2030 plan, the European Commission intends to mobilize up to €800 billion in additional defense resources. The strategy relies on two components: a new SAFE loan facility of up to €150 billion and expanding national defense budgets to 1.5% of GDP by invoking an "escape clause" in EU fiscal rules. The Commission estimates that the second component could provide approximately €650 billion in additional spending.

The war in Ukraine has truly changed things

The most noticeable changes are the scale of budgets and the level of political attention given to defense. Discussions of increasing spending to 3-3.5% of GDP, which seemed radical until recently, are now considered serious benchmarks. At the same time, many Western European countries still have a gap between tough rhetoric and real solutions.

Countries closer to Russia's borders are demonstrating much more decisive action, while caution prevails in the west of the continent. The scale of the defense capability gaps, combined with political and economic constraints, has overwhelmed some governments, sometimes leading them to delay decisions. While NATO has quickly adapted its planning to the realities of high-intensity warfare, national budgets and programs—especially in Western Europe—have been slower to reflect the alliance's updated requirements.

Meanwhile, the EU's role is growing rapidly. New financial instruments are emerging, such as the EDF, ASAP, EDIRPA, SAFE, and EDIP. Additionally, a protectionist approach is intensifying under the slogan of "strategic autonomy." The war has also intensified discussions about the balance between traditional platforms and new technologies. In this context, useful ideas are spreading alongside simplifications and myths.

Many countries have launched defense procurement reforms aimed at expediting procedures and opening the market to SMEs and new players. However, experience from previous years shows that most of these reforms have not yielded the expected results. While the European Commission is promoting deregulation packages, the complexity and excessive procedural nature of EU programs continue to be significant barriers for newcomers.

Concurrently, a significant positive shift has emerged: a more profound realization that domestic engineering expertise and industrial capacity are essential for deterrence. Dependence on imports or unreliable partners is increasingly recognized as a strategic risk, prompting many countries to invest in expanding and modernizing defense production. These steps should have been taken much earlier.

How EU instruments work and why they do not break the system

The EU has developed a variety of instruments, including the European Development Fund (EDF), Permanent Structured Cooperation (PESCO), the European Security and Defense Policy (ESDP), the European Defense Industrial Development Program (EDIDP), and the European Defense Industrial Competitiveness and Technology Program (EDICT). SAFE, the EDF, and the EDIP will play a key role in the coming years, with SAFE being particularly crucial over the next two to three years. SAFE is a five-year loan program designed to accelerate investment, procurement, and support for Ukraine from 2025 to 2030, with funding of up to €150 billion available.

These instruments are gradually affecting certain market segments, but before the launch of SAFE, their impact was minimal. ASAP and EDIRPA were the EU's initial direct steps to finance production expansion and joint procurement. However, with funding of €500 million and €300 million, respectively, they could not radically change the market.

Thus far, these mechanisms have not stimulated large-scale industrial consolidation. Conversely, governments are becoming increasingly sensitive to controlling national defense and industrial capabilities. Despite statements of support for small-to-medium enterprises (SMEs), the largest and most established companies are likely to continue dominating because defense procurement remains complex, and the military prefers proven suppliers with a strong track record and robust intellectual property.

NATO in this ecosystem

For most European allies, NATO standards and objectives remain a basic reference point. At the same time, the Alliance does not dictate how states should achieve these targets. This allows for the combination of EU mechanisms with national or non-European procurement. Since 2022, NATO has increased its focus on industrial issues; however, its financial leverage remains limited due to its relatively small joint budget.

The Updated Defense Production Action Plan 2025 highlights bottlenecks in production, components, and materials, and relies on the DIANA innovation ecosystem and the €1 billion NATO Innovation Fund. This results in a division of roles of sorts: NATO identifies needs while the EU increasingly influences funding and procurement rules.

What does this mean for Ukraine?

Third countries have access to the European defense market, but this access comes with regulatory barriers, security of supply requirements, and an emphasis on "technological sovereignty." Ukraine, however, is in a unique position. The EU has formally declared its intention to integrate Ukrainian industry into the European defense base, a goal already enshrined in regulations.

The European Defense Industrial Development Program (EDIDP) will provide €1.5 billion in grants from 2025 to 2027, €300 million of which is earmarked for the Ukraine Support Instrument. However, the "Buy European" rule stipulates that at least 65% of components must originate from the EU, associated countries, or Ukraine, which creates additional supply chain restrictions.

SAFE, in turn, shifts the focus from political "support" for Ukraine to contractual demand. The most realistic approach for Ukrainian companies is to participate in consortia, subcontracting, and co-production rather than entering the European market directly.

Seven checks before entering the EU market

The first check: do not equate the "European market" with the European Union market. The EU comprises 27 states that develop and purchase weapons independently. The United Kingdom, Switzerland, Ukraine, and Norway are outside the Union. Ukraine and Norway, however, are in a more privileged position because they have access to certain EU financial and programmatic instruments.

The second check: soberly assess the role of Brussels in investment decisions. While the European Commission's influence has grown significantly, national defense budgets are also increasing. This increases the temptation for governments to act autonomously and prioritize their industries.

The third check: understand the real scale of the "new money" generated by EU initiatives. The paradox of Readiness 2030 is that the SAFE loan instrument strictly ties cooperative purchases to preferences for European producers, while the fiscal component can bring much larger amounts to national budgets without similar restrictions.

The fourth check:  do not underestimate the complexity of participating in EU programs. Despite the stated simplifications, the regulatory requirements remain cumbersome, legally intensive, and slow to implement. At the same time, however, there is a potential advantage for smaller companies. Formalized procedures and competition can reduce the influence of "insiders" if a company is willing to obey the rules and endure a lengthy process.

The fifth check: assess the openness of individual countries to procurement from third countries. While most governments claim to be transparent, almost all countries with their defense industry support domestic producers as much as possible.

The sixth check: determine what portion of the declared budgets is available for new procurement. Large figures can mask limited flexibility; some states have minimal free resources, while others operate with "new money" for contracts and partnerships.

The seventh check: to consider how cautious the ministries of defense are towards unfamiliar suppliers. Dependency risks, security of supply requirements, and long-term commitments influence conservative purchasing behavior, even when an alternative product is cheaper or has proven effective in combat. The war in Ukraine has further exacerbated sensitivity to supply chain vulnerabilities because defense procurement typically involves decades of operation and modernization.

Two things to remember about Europe as a defense customer

There are two key conclusions:

First, there is no unified European defense market. European countries act largely independently, only agreeing to cooperate when it meets their interests. Each country has its priorities, historically developed capabilities, budgets, spending rates, and procurement procedures. States with developed defense industries support their producers, and some markets are nearly closed to outside competitors if there is a viable local alternative.

Second, the deteriorating security environment and the United States' clear signal of a shift in strategic focus mean that European defense spending will continue to grow. A peace agreement or ceasefire in Ukraine could cause some governments to reconsider their spending pace, but eventually, there is little room for reduction. The European defense market will continue to grow, and the winners will be those who adapt most quickly to demands regarding procedures, localization, and trust in partnerships.

Ultimately, the question is not whether the market will expand. The key question is who can learn and adapt procurement to the reality of high-intensity warfare in Ukraine today faster in the face of evolving threats.

Read more:

• Why Europe's defense industry is learning from Ukraine
• How money enters miltech — legal setups that work