Europe’s defense spending should focus on innovation

European Commission President Ursula von der Leyen recently unveiled an ambitious defense initiative known as the "ReArm Europe Plan". The additional defense budget totals €800 million. If allocated effectively, these funds can stimulate technological innovation, which has become the cornerstone of modern warfare. Cost-effective systems frequently outshine expensive conventional weaponry: a $1,000 drone can disable a $10 million tank, and a $5 million autonomous naval vessel can pose a threat to a $500 million submarine.

Despite the urgency, European countries underinvest in their defense capabilities, particularly in defense innovation. According to Lakeside Ventures, European governments allocate only 4% of their defense budgets to innovation, significantly less than the United States’ 14%. In 2024, U.S. defense tech start-ups attracted $3.5 billion in investments, while European firms secured just $800 million.

However, innovation in defense industries relies on more than mere funding. Significant institutional changes are essential to foster an environment where new technologies can thrive. Here are three key reforms:

1- Adopt a Product-Based Approach Instead of a Project-Based Approach

European militaries have traditionally relied on a project-based procurement model that issues highly specific requirements, such as "affordable, durable, electrically conductive coatings,” and selects companies to create tailored solutions. As highlighted in a recent paper by the National Bureau of Economic Research, while a project-based approach can satisfy immediate needs, it often results in long-term technology lock-in.

A product-based strategy, in contrast, encourages startups to create scalable solutions that can be adapted to civilian markets. For instance, Portugal’s Tekever produces drones utilized in Ukraine’s defense efforts and Nigerian search-and-rescue operations. This dual-use emphasis reduces costs, speeds up innovation, and secures more sustainable funding streams.

2- Decentralize Procurement for Faster Innovation

Military procurement processes are generally centralized and bureaucratic, and Europe is no different. While centralization can promote standardization—potentially saving $30 to $100 billion annually, according to McKinsey—it also favors established, often state- owned, defense contractors.

In contrast, Ukraine’s decentralized model empowers brigade-level commanders to acquire technology that meets their immediate needs. This more flexible system has enabled Ukraine to quickly iterate and implement innovative solutions on the battlefield. Incorporating elements of decentralization in Europe could similarly accelerate innovation cycles and better equip armed forces to face evolving threats.

3- Remove Barriers to Public Venture Capital Investment in Defense 

A significant obstacle to building a vibrant European defense tech ecosystem is the reluctance of public investment bodies, such as the European Investment Bank (EIB), to invest in defense. However, as a recent NATO Innovation Fund report explained, defense technology is not a standalone area; it integrates AI, materials, energy and propulsion, quantum, and biotechnology. Why is it more legitimate to invest in defense technologies if you are already investing in these fields? To unlock substantial capital and nurture homegrown defense champions, European public institutions must amend restrictive policies that prevent public funds from being allocated to defense. Indeed, this was one of the key components of Van Der Leyen’s "ReArm Europe Plan" package.