European Defence Integration in Focus: The 2025 EDF Calls and Flagship PESCO Projects

Strategic Background

European security has entered a new era of urgency. Russia’s war against Ukraine shattered post-Cold War assumptions and spurred a historic increase in defence efforts across the EU. Member states are drastically hiking budgets and reversing long-standing policies – Germany, for example, reached 2% of GDP on defence in 2024, making it Europe’s largest spender. According to NATO and EU data, EU members’ combined defence expenditure rose to about €326 billion in 2024 (≈1.9% of GDP) – a 79% real increase since 2014. This “Zeitenwende” has extended beyond budgets: Europe has sent unprecedented military aid to Ukraine and is urgently replenishing depleted stockpiles. The central question now is whether Europe can translate this spending surge into long-term capability gains and reduce its reliance on external protectors.

Calls for EU strategic autonomy have intensified amid this threat environment. Brussels views bolstering European defence industrial capacity as essential to ensure Europe can “defend itself without the United States as the ultimate backstop” if needed. In her second term, European Commission President Ursula von der Leyen has often spoken of building a “defence union”, and in 2024 she even proposed creating the EU’s first dedicated Defence Commissioner. The rationale is that greater European self-reliance complements NATO by strengthening the European pillar: NATO and EU leaders have explicitly converged on defence priorities, signing a third Joint Declaration in 2023 to deepen cooperation. The United States, which once fretted about EU defence initiatives duplicating NATO, has shifted to a more supportive stance. In fact, Washington and Brussels launched a U.S.-EU Security and Defense Dialogue in 2022, and the U.S. in 2023 signed an administrative arrangement with the European Defence Agency to facilitate cooperation. Notably, American allies USA, Canada and Norway have even joined a flagship EU defence project (PESCO’s Military Mobility) aimed at easing troop movements across Europe. This marks a symbolic breakthrough: NATO partners are now plugging into EU frameworks, underscoring that EU defence integration is seen as reinforcing transatlantic security rather than undermining it.

Another driver of urgency is uncertainty over the future U.S. commitment to Europe. Analysts warn that a more inward-looking Washington (for example, a future administration prioritising the Indo-Pacific or driven by “America First” sentiments) could leave Europe exposed. EU policymakers cite this risk to justify accelerating EU defence initiatives now, while transatlantic unity is strong. “Europe would be in trouble” if it had to face a major threat alone today – hence the push to develop indigenous capabilities. In sum, heightened threat perceptions, the strategic autonomy agenda, and NATO-EU convergence have made instruments like the European Defence Fund (EDF) and Permanent Structured Cooperation (PESCO) top priorities. The EDF – the EU’s fund for collaborative defence R&D – and PESCO – the treaty-based framework for joint capability development – are central tools for strengthening Europe’s capacity to act. Europe’s leaders view these initiatives as vital to not only meet the immediate crisis but also to build a more cohesive and capable European defence posture for the long run.

Capability and Technological Trends

The 2025 calls of the European Defence Fund reveal the EU’s capability priorities for the coming years. The European Commission’s newly adopted EDF Work Programme 2025 allocates €1.065 billion across 33 R&D topics (in 9 thematic and 2 non-thematic calls). These funded topics target a broad spectrum of high-priority technologies and military capabilities. Notably, the largest single funding block – €192 million – is devoted to Ground Combat, reflecting lessons from Ukraine about the importance of land capabilities. This includes developing counter-battery sensors to locate enemy artillery, modular ground vehicles with “green” propulsion, networked air-land combat systems, and affordable drone-based munitions. Such investments aim to boost European armies’ firepower and mobility on a modern battlefield dominated by drones and long-range fires. The Air Combat category is another major focus (€103 million), funding projects for collaborative air combat (e.g. teaming of manned fighters with drones) and an enhanced pilot environment (likely next-generation cockpits, AI decision aids, or helmet systems). This aligns with Europe’s broader effort to develop a future air combat system and unmanned wingmen concepts.

Other EDF 2025 priorities span every domain. Space-based defence features prominently: €115 million is earmarked for an ISR satellite constellation and on-orbit servicing capabilities to strengthen space resilience. Naval and underwater warfare projects will receive about €99 million combined, targeting a “Digital Ship” naval combat cloud, hybrid propulsion for warships, stand-off anti-submarine weapons, and autonomous underwater surveillance networks. Advanced sensors (both passive and active) get €58.5 million, including multi-band 4D radars and new infrared detectors to improve threat detection. Cyber defence and military communications are another emphasis (roughly €54 million for cyber alone), with projects to harden autonomous systems against hacking and to enhance joint cyber operations capabilities. There is also dedicated funding for simulation and training tools (€43 million) such as live-virtual-constructive training interoperability and design frameworks for aerial systems, recognising the need for improved joint training environments. In the air domain, the EDF calls complement national programs by supporting enabling technologies for next-generation aircraft. For instance, a project on “collaborative air combat” could contribute to swarming drones or manned-unmanned teaming concepts relevant to Europe’s sixth-generation fighter efforts.

Crucially, the EDF 2025 also sets aside resources for disruptive innovations and SMEs. About €43 million is reserved for “non-thematic” open topics to spur “great-depth” disruptive technologies (potentially quantum sensors, new materials, AI, etc.). An additional €67 million is in calls exclusively for small firms and research spin-offs, under the new EU Defence Innovation Scheme (EUDIS). This scheme will, for the first time, allow grants that provide financial support to start-ups (cascade funding) and even permit Ukrainian entities to participate. The clear message is that Europe seeks to harness its full innovation ecosystem – including non-traditional defence players – to stay ahead in emerging tech like artificial intelligence, quantum computing, and biotech. The EDF’s focus on defence medical response (e.g. autonomous battlefield evacuation and medical countermeasures) and chemical-biological-radiological protection is another notable trend (with €35 million dedicated), likely influenced by CBRN threat concerns and battlefield casualty care lessons from recent conflicts.

In parallel, flagship PESCO projects are targeting many of the same capability areas, signaling coherence between EU funding priorities and collaborative development programs. For example, the European MALE RPAS (Eurodrone) project – a PESCO initiative to build a medium-altitude, long-endurance unmanned aircraft – addresses Europe’s critical gap in strategic UAVs for ISTAR (Intelligence, Surveillance, Target Acquisition, Reconnaissance). The Eurodrone, coordinated by Germany, France, Italy and Spain, has been deemed so essential that the EU provided a direct €100 million development grant under the precursor EDIDP program. This UAV will give Europe its own capable drone for surveillance and strike, reducing reliance on U.S. or Israeli systems. In the land domain, PESCO’s “Counter Battery Sensors” (CoBaS) project, led by Poland, aims to deploy advanced artillery detection radars – a capability urgently highlighted by the Ukraine war’s ferocious artillery duels. Similarly, “EuroArtillery” (a now-completed PESCO project) and a new Indirect Fire support initiative sought to harmonise European 155mm artillery and rocket systems. In the naval realm, the European Patrol Corvette (EPC) project brings together France, Italy, Spain, and Greece to co-develop a new class of modular warships for the 2030s, intended to be a common platform for multiple EU navies. This not only exploits economies of scale but also advances interoperability in maritime operations. The “Digital Ship” and naval combat cloud concepts funded by EDF will likely feed into such naval projects, enabling distributed sensors and better fleet coordination. Meanwhile, PESCO’s “Maritime Unmanned Systems for Mine Countermeasures” project is delivering autonomous underwater vehicles for mine hunting – an innovation also reflected in EDF’s underwater domain calls.

European cooperation is also pushing into high-tech air and missile defence. One prominent PESCO venture is “TWISTER” (Timely Warning and Interception with Space-Based Theater Surveillance). Led by France, TWISTER aims to develop a multi-layered missile defence system with a space-based early warning component, addressing the rising threat from advanced missiles (including hypersonic glide vehicles). This complements EDF investments in 4D multi-band radars and space situational awareness, laying the groundwork for a future European missile shield. Another is the “Integrated Multi-Layer Air and Missile Defense” (IAMD) system project, which seeks to network together European air defence assets into a coherent shield. In the air combat domain, PESCO’s “Air Power” and “Future Air-to-Air Missile” projects support next-gen combat air capabilities, while “Next Generation Small RPAS” focuses on compact drones for reconnaissance and targeting. The PESCO “Strategic Air Transport for Outsized Cargo” (SATOC) initiative, spurred by Europe’s reliance on a limited number of large transport aircraft, is exploring a new solution for heavy airlift of tanks and helicopters. Across these examples, a pattern emerges: EU-level efforts are prioritising networked, digital and green technologies to give European forces a qualitative edge. Whether in secure communications (the ESSOR software-defined radio, a PESCO project that received €37 million EU funding), positioning and timing (the EU Radio Navigation Solution PESCO project tying into Galileo and EDF support), or human-AI teaming (EDF’s call on “human-AI dialogue systems”), the emphasis is on interoperability and innovation. Many of these programs explicitly address shortfalls revealed by recent conflicts. For instance, demand for affordable drones and counter-drone systems has surged after Ukraine – hence EDF funding for “drone-based affordable mass munitions” and PESCO launching a Counter-UAS project. The alignment of EDF 2025 topics with PESCO flagship projects therefore signals a holistic attempt to equip Europe’s militaries with next-generation capabilities – from space-based sensors down to the soldier on the ground (e.g. EDF’s support for next-gen soldier system demonstrators under the Force Protection call).

Industrial and Procurement Implications

The EDF and PESCO initiatives are reshaping Europe’s defence industrial landscape, promoting unprecedented levels of cross-border collaboration and supply-chain integration. Under the EDF, only collaborative projects are eligible – consortia must include at least three entities from three different member states. This requirement (mirrored from the precursor EDIDP program) has had a powerful effect: it incentivizes companies across Europe to form partnerships to bid for funding, breaking down the traditional single-nation procurement model. As a result, major EU defence R&D projects now typically involve dozens of firms, large and small, from multiple countries. In the 2022 EDF awards, for example, SMEs made up about 43% of the participating entities in funded projects – a reflection of how the EU programs are opening supply chains and encouraging prime contractors to include niche high-tech suppliers from across the Union. This is reinforced by policies like higher EU co-funding rates for PESCO-linked projects: a consortium developing a PESCO project can get a 10% funding bonus from the EDF. The logic is clear – Brussels wants to foster joint development of common equipment. If multiple countries collaborate from the design stage, they are more likely to procure the end product together, achieving scale economies and interoperability.

Concrete impacts of this new approach are already visible. The Eurodrone UAV and ESSOR secure radio projects mentioned earlier are prime examples: both are PESCO collaborations that received direct EU financing given their strategic importance to the European Defence Technological and Industrial Base (EDTIB). This helped align national stakeholders and get these projects off the ground. Likewise, the PESCO EU Radionavigation Solution (EURAS) – Europe’s effort to develop an independent military Positioning, Navigation and Timing capability – has been supported by EDF-funded industrial cooperation to ensure its technical success. Such linkages mean the traditional separation of national programmes is fading at the R&D stage. We are seeing the rise of pan-European development teams: for instance, a French radar company, a German sensor SME and an Italian electronics firm might jointly develop the 4D radar technology funded by EDF, with support from their governments. Over time, this should lead to more standardised platforms and components that can be jointly procured. It also strengthens the European defence industry’s competitiveness. Rather than 3–4 duplicative national products fragmenting the market, EU initiatives aim to yield one top-tier European product – which can then better compete globally (or at least reduce dependence on U.S. imports). An internal Commission review noted that if member states can coordinate requirements and investments through PESCO/EDF, it mitigates the notorious fragmentation and home-bias in European procurement. In other words, these tools help aggregate demand and avoid each country reinventing the wheel.

From an industrial strategy perspective, European defence firms are adapting to this more integrated environment. We have started to see cross-border mergers and specialization moves that mirror EU priorities. A case in point is German giant Rheinmetall’s €1.2 billion acquisition of Spain’s ammunition manufacturer Expal Systems in 2023, aimed at bolstering Europe’s ammunition production capacity. This came as the EU launched a plan to jointly procure 1 million artillery shells for Ukraine and European stocks – a demand too great for any single nation’s industry, hence consolidation was needed. By buying Expal (with its 11 production sites across Europe), Rheinmetall not only expanded its own business but also created a more resilient multinational supply network for ammunition, a commodity now recognised as strategically critical. Similarly, France’s Nexter and Germany’s KMW joined forces under a holding (KNDS) a few years ago anticipating joint projects like the Main Ground Combat System; Italy’s Fincantieri and France’s Naval Group formed the short-lived “Naviris” alliance for warships, and new cooperative ventures are likely to follow as joint naval and air programmes progress. PESCO’s European Patrol Corvette project, for example, has prompted French, Italian and Spanish shipbuilders to coordinate designs. Industrial consortia are thus increasingly being built around European programs rather than just national ones.

Another effect is a growing culture of standard-setting and interoperability built into development. Many PESCO projects have as a deliverable not only a piece of hardware but a common standard or doctrine. For instance, PESCO’s “Military Mobility” project (led by the Netherlands) is not hardware at all but a framework to harmonise regulations and infrastructure for rapid troop movement across Europe – yielding agreements that benefit all participants. In the same vein, the EU Training and Simulation Centre (PESCO) or the EU Cyber Academia project develop common training curricula and platforms for multiple countries. These “soft” outputs ensure that when equipment is procured, operational compatibility is already baked in. The EDF complements this by funding the underlying tech enablers (e.g. common simulation environments, federated cyber ranges). The net result is a more integrated European defence industrial base, where companies from different countries work together from inception, and militaries plan to adopt solutions together. This represents a shift from past decades, where fragmentation led to “low order numbers and technological gaps” in Europe’s defence market.

Of course, challenges remain. National interests and protectionism have not disappeared – countries still tend to favor domestic suppliers for big contracts. But the EU’s financial incentives are gradually chipping away at these barriers by making collaboration the cost-effective choice. If a member state insists on a purely national system, it forgoes EU co-funding and potentially faces a higher unit cost and interoperability problems later. The pressure to cooperate is especially high for smaller countries that cannot afford full development on their own; EDF funding gives them a stake in larger projects. Moreover, Europe’s urgent capability gaps are forcing collaboration in practice. No single country alone can quickly establish capabilities like a pan-European ISR satellite constellation or a continental secure communication network – these need pooled resources. The EDF’s injection of over €1 billion per year into cooperative R&D is therefore a game-changer for industry. It comes on top of rising national budgets, meaning companies have more R&D projects but are encouraged to pursue them jointly. We are also seeing traditional defence primes partner with high-tech startups, often across borders, to inject innovation. For example, the Munich-based AI defence startup Helsing received a €209 million venture round in 2023 led by U.S. investors, but also strategic investment from Saab (Sweden), and has contracts to supply AI capabilities to multiple European militaries. This kind of cross-border industry cooperation – big Nordic defence firm meets German AI software house – was rare in the past. It is now increasingly common under the auspices of initiatives like the EDF (which, through EUDIS, even created a Defence Equity Facility under InvestEU to co-invest in defence SMEs). In summary, Europe’s defence industrial strategy is shifting toward joint development, shared production, and a more networked supply chain, as catalyzed by EDF and PESCO. The aim is not just political unity, but also to ensure Europe’s rearmament delivers value for money and strategic autonomy, rather than each country’s extra spending simply bidding up prices in a fragmented market.

Financial and Economic Dimensions

The current defence push in Europe is reverberating through financial markets and government balance sheets alike. Public defence outlays are rising steeply, prompting reallocations and new funding mechanisms. EU officials have floated innovative financing schemes – for instance, a proposed €150 billion EU loan facility (the “SAFE” plan) to help member states fund joint defence procurement by 2030. This would be analogous to EU’s post-Covid recovery loans, leveraging the Union’s credit rating to give capitals cheaper funds for big-ticket defence purchases. While under discussion, it underscores how defence is no longer a taboo in European fiscal policy. Indeed, the European Commission is adjusting its budgetary rules (like potentially exempting certain defence expenditures from deficit calculations) to accommodate the needed military investments. At the EU budget level, the European Defence Fund itself – at €7.9 billion over 2021–27 – is modest, but its success could set the stage for a larger fund in the next Multiannual Financial Framework. Additionally, common procurement initiatives such as the EDIRPA (short-term procurement fund) and the ASAP Act (support for ammunition production) inject EU money into filling critical gaps (e.g. ammunition, air defence interceptors), leveraging economies of scale. The broader economic impact is that defence is becoming a growth sector in Europe, after decades of post-Cold War decline. Governments are redirecting budgets to military procurement, R&D, and recruitment – with major programs like fighter jets, air defences, and digitalization of forces in the pipeline. This is potentially stimulative for economies, especially in high-tech manufacturing and engineering, but also raises questions of sustainability and trade-offs (buttressing defence vs. funding other priorities).

On the private capital side, defence has rapidly turned from a niche or shunned sector into a hot investment theme. Defence stocks and ETFs have been strong outperformers in 2022–2025, as investors bet on sustained higher military spending. For instance, two of the top five best-performing non-leveraged ETFs in 2025 are defence-focused: the STOXX Europe Aerospace & Defense ETF (ticker EUAD) is up about 62% year-to-date in 2025, and the U.S.-focused Global X Defense Tech ETF is up 47%. These funds have significantly beaten broader market indices, reflecting bullish sentiment on defence firms’ earnings prospects. The STOXX Europe Defense index, launched in 2023, has in back-calculations climbed roughly 50% in the first part of 2025 alone and more than doubled over three years. Drivers include the sizeable increases in European defence budgets, NATO countries racing to replenish and upgrade equipment, and a clear political commitment to rearmament and next-gen defence technologies. Share prices of Europe’s prime contractors have rallied accordingly: for example, BAE Systems stock has risen 63% since the invasion of Ukraine in early 2022, and Germany’s Rheinmetall saw an even more dramatic surge (its share price nearly tripled in 12 months during 2022–23 amid new orders and an improved outlook). Investors who once avoided arms manufacturers are now reconsidering. The war in Ukraine has triggered a rethink of ESG (Environmental, Social, Governance) investing principles regarding defence. As BAE’s CEO observed, many ethically minded funds “wouldn’t meet us” pre-2022, viewing defence as incompatible with ESG – but now some see supporting defensive military capabilities as a social good. The ethical calculus has shifted towards a more balanced view that national and collective security underpins the conditions for sustainability. Big European contractors that work with NATO governments are increasingly being “accommodated” by ESG-oriented investors, whereas truly controversial weapon categories (e.g. antipersonnel mines or chemical weapons) remain off-limits. This gradual ESG repositioning in favour of defence has widened the pool of capital available to defence firms. Some European asset managers have adjusted fund mandates to include defence as an acceptable sector, especially when linked to democratic nations’ security. In practical terms, this means higher demand for defence equities and potentially lower cost of capital for industry expansion.

Another notable financial trend is the uptick in venture funding for defence tech start-ups in Europe, albeit from a low base. Venture capitalists are awakening to the opportunities in dual-use technologies (AI, robotics, space, cybersecurity) that have defence applications, partly thanks to the geopolitical wake-up call and partly due to public programs like EUDIS that encourage “spin-in” from the civilian tech sector. In 2024, European defence-tech start-ups raised around $626 million in VC funding, a record amount (roughly 5x the annual level just a few years prior). However, this was still less than one-fifth of global venture investment in defence tech, with the U.S. startups attracting the lion’s share. Tellingly, a single mega-deal – the $489 million Series B of AI company Helsing (Germany) – accounted for most of the European total. Aside from a handful of players like drone-maker Tekever (Portugal) or rocket start-up Isar Aerospace (Germany), Europe’s defence startup scene remains nascent. But momentum is building: governments are supporting incubators and hackathons for defence, and traditional defence primes are scouting and investing in startups (as seen with Saab and Helsing). As European militaries demand capabilities in software, autonomy, and space that are often driven by smaller tech firms, venture investment is expected to grow. The creation of the EU InvestEU Defence Equity facility in 2023, providing €100 million for venture investments in defence SMEs, is an example of policy stepping in to catalyze private capital. Over the next 1–2 years, we may see new defence-focused funds emerging in Europe and more startups securing sizable rounds, especially in areas like cyber defence platforms, AI-driven intelligence analysis, drone swarming, and secure communications – all priority areas in EDF calls.

Meanwhile, European defence companies are repositioning strategically in response to this favorable capital environment and policy push. Many firms have announced expansions of production capacity, hiring surges, or new R&D initiatives aligned with EU priority areas. For instance, Italy’s Leonardo is investing in next-gen radar and electronic warfare research (aligned with EDF sensor and cyber projects), and France’s Thales in secure communications and AI. Mergers and acquisitions, such as the Rheinmetall–Expal deal, also indicate confidence that defence demand will remain strong for years, making such investments pay off. On the flip side, companies are aware of execution risks – investors are watching whether the promised increase in European orders actually materializes on a timely basis. Analysts note that while budgets have been approved, order backlogs and revenues will depend on how fast procurement contracts are signed and how coordinated they are. The initial euphoria in stock prices could moderate if there are political or bureaucratic delays in turning funds into contracts (a real concern given past slow EU procurement). Nonetheless, for now the financial trend is clear: defence is seen as a growth industry again in Europe, attracting both public and private financing on a scale not seen since the Cold War. This influx of capital, if managed well, should reinforce the industrial base – enabling new factories (for ammunition, missiles, microchips), modernization of shipyards, and the scaling up of production lines for fighter jets, tanks, and air defences that European governments have signaled they will need in bulk.

Outlook and Scenarios

Over the next 12–24 months, Europe’s experiment with defence integration through EDF and PESCO will face a pivotal test: can these instruments deliver tangible enhancements to Europe’s defence posture in time to meet pressing threats? Several indicators to watch will be the progress of flagship projects, the uptake of joint procurement, and the political resolve behind EU defence initiatives as memories of recent conflicts evolve. On the optimistic side, the pipeline set in motion by the 2021–2025 EDF work programs will begin to bear fruit. By 2025–2026, dozens of EDF-funded R&D projects from early waves will be reaching prototype or demonstration phase. We can expect, for example, initial demonstrators of the Eurodrone UAV, since the development contract was signed in 2022 – keeping that project on track for a first flight mid-decade. Similarly, prototypes or testbeds for collaborative combat drones, soldier-worn advanced sensors, hybrid naval propulsion systems, and new counter-artillery radar systems are likely to emerge from the lab and be unveiled. These will give European ministries of defence concrete options for next-generation equipment developed collaboratively. If member states seize the opportunity to place coordinated orders for such new systems, it could inaugurate a virtuous cycle: collaborative R&D leading to collaborative procurement, which in turn reduces unit costs and validates the EDF/PESCO model. A near-term example is in ground combat: multiple countries are considering replacements for their infantry fighting vehicles and main battle tanks in the late 2020s. If the PESCO “Eurotank” concepts or the modular land vehicles studied under EDF produce a viable design, we might see a consortium of nations launching a joint acquisition program (instead of each buying different foreign models). Success for EDF/PESCO would look like more announcements where “X countries agree to jointly procure Y system developed with EU support.”

European institutions are actively trying to facilitate this. The proposed European Defence Investment Programme (EDIP) regulation, expected to be finalised in 2025, will create a legal and financial framework for joint defence acquisitions (including potentially modest EU co-financing). This, combined with the larger loan facility under discussion, could be a catalyst for multi-country orders in areas such as air defence batteries, main battle tanks, or naval vessels. In 2024 the EU also launched a joint ammunition procurement scheme (for 155mm artillery rounds) which will be a test case – if it succeeds in aggregating demand and delivering shells at scale by end-2025, it could build confidence in further joint buys. We will also see a fifth wave of new PESCO projects in late 2024 (members were invited to propose new projects by July 2024), likely focused on capability gaps revealed by Ukraine. Possible new PESCO initiatives could target short-range air defence swarms, high-volume ammo production, or joint maintenance depots, complementing existing projects. These would start in 2025 and aim to deliver results within a few years. The European Defence Agency’s 2024 Coordinated Annual Review (CARD) will also shed light on whether countries are aligning their defence planning. If the CARD report shows members converging on certain priorities and doing more “collaborative spending” (one of the metrics is the percentage of equipment spending conducted with other EU states), that would signal a continuing integration trend.

However, a more cautious scenario must be considered. As one EU review in 2022 noted, it “remains to be seen” if nations will truly follow a coordinated approach or if old habits of fragmentation will persist. The risk is that when the urgency of the Ukraine war eventually ebbs (for example, if a ceasefire or peace occurs in 2025), some governments might revert to focusing on domestic economic issues and apply the brakes on defence growth. Already, high inflation and energy costs have strained budgets; defence, despite political support now, could face pushback if deficits swell. Political turnover is another wildcard – elections in key countries could bring in leaders less enthusiastic about EU defence cooperation. A fragmentation scenario would involve states taking the new EU-funded technologies but ordering them separately or turning to non-European suppliers for quick fixes (as we saw when some eastern members bought off-the-shelf U.S. or Korean kit to refill inventories). If collective action falters, Europe could end up with a patchwork of duplicative programs – the very outcome PESCO/EDF were designed to avoid. For instance, despite the joint effort on a future combat aircraft (FCAS) by France, Germany, Spain, a parallel British-Italian-Japanese fighter project (GCAP) is ongoing, and other EU countries simply opted for the U.S. F-35. In land systems, while some plan for the Franco-German MGCS tank, others are purchasing Leopard 2A7s or considering Korean K2 tanks. This illustrates that EU defence integration could still splinter into clusters if a unifying effort is not sustained.

The likely outcome lies between these extremes, but the direction will be clearer in the next two years. One positive sign is that even as countries pursue some separate paths, they are at least coordinating requirements more than before. NATO’s defence planning process and the EU’s Capability Development Plan are being aligned to ensure Europe doesn’t omit key capabilities. The shock of war on European soil has created a lasting consensus that certain investments (air and missile defence, heavy armor, ammunition stocks, cyber resilience) are non-negotiable for all. The EDF 2025 calls mirror this consensus, and if fully subscribed and executed, Europe by 2026–2027 will have a range of new prototypes in those fields. The challenge then is political: converting prototypes to deployed equipment in a synchronized way. To address this, the EU and NATO are working closer than ever – for example, through the NATO-EU Task Force on defence supply chains – to avoid working at cross-purposes. The United States’ support will also be pivotal; so far it encourages EU efforts that clearly contribute to NATO, and even U.S. firms may contribute technology as allowed (e.g. via European subsidiaries to comply with EDF rules, or by joining PESCO projects as observers). If tensions were to arise (say, over rules excluding non-EU components), it will need careful management to keep transatlantic trust while Europe boosts its self-sufficiency.

In terms of innovation hotspots, expect to see Europe doubling down in a few areas. Missile technology and air defence is one – with threats from ballistic and cruise missiles starkly demonstrated, Europe will likely funnel new funds into interceptor systems (the EU budget may support this via the upcoming European Sky Shield initiative) and into counter-drone lasers or EW systems (building on disruptive tech projects). Space-based defence services will be another hotspot – by 2025 the EU should have launched its initial satellites for the IRIS reconnaissance constellation (an offshoot of the EDF space projects) and likely approve further investments in military comsat and surveillance networks. Digitalization and AI for command and control will remain a core focus, following on projects like the “Digital Naval Combat Cloud” and AI dialogue systems; we should see test deployments of AI-assisted decision support in EU military missions or exercises. Sustainability and climate adaptation of defence will also trend: technologies for energy-efficient operations (hybrid engines, deployable renewable power) funded under the 2025 EDF reflect a longer-term push to make forces more logistically resilient and in line with climate goals. In industry terms, new entrants and collaborations could emerge around these hotspots – perhaps a consortium of AI startups delivering an “AI battle-management module” to multiple EU armies, or a joint venture on green propulsion between an aerospace firm and an automotive energy company. The EU Defence Innovation Scheme will likely sponsor hackathons and accelerators in 2025 that bring such non-traditional players in.

In conclusion, the coming 1–2 years will be decisive for Europe’s defence integration project. The momentum is currently strong – driven by security necessity – and the institutional tools (EDF, PESCO, joint procurement funding) are in place. If European states maintain unity, we can expect a more robust and integrated European Defence Technological and Industrial Base by 2026, with several collaborative capability programmes in advanced stages of development or initial production. That would mean Europe is on track toward the “full spectrum defence capabilities based on joint investments” that its leaders envision. Conversely, if momentum stalls, many EDF research projects could fail to transition into reality, and the old inefficiencies would creep back, squandering the opportunity. As EU High Representative Josep Borrell warned, Europe must “avoid competing for the same products… [with] limited industrial capability” and instead ensure “interoperability of the armies” through cooperation. The next two years will reveal how well Europe can heed this advice. For defence and security professionals, the takeaway is to watch these European programs closely – they will shape the future market structure, partnership opportunities, and investment landscape in the defence sector. For financial stakeholders, Europe’s defence push offers significant openings, but success hinges on political follow-through. In the best-case scenario, Europe’s strategic awakening will solidify, yielding both improved security and a vibrant defence-industrial ecosystem – one capable of innovating at the cutting edge and sustaining Europe’s autonomy within the transatlantic alliance. In more adverse scenarios, fragmentation would undercut Europe’s buying power and leave money on the table. Most likely, Europe will continue incrementally on the integration path, with occasional setbacks, but overall the trend of the next 12–24 months is toward greater collaboration – simply because the security environment demands it. The business and investment communities should therefore prepare for a Europe that is investing more, innovating faster, and increasingly working as one on defence.

Sources: European Commission EDF work programme factsheets; official EU and NATO statements; European Defence Agency data; Centre for European Reform analysis; Atlantic Council and CSIS reports; Reuters and Bloomberg news on industry and finance; and various EU official documents on PESCO projects and joint initiatives.