It may seem obvious that governments should think through their policies before implementing them; if they don't, they risk facing the dreaded law of unintended consequences. That's exactly what's happening with the United States' military-industrial policy.
While shares of American military companies are collapsing, shares of European defense companies are rising rapidly because markets have concluded that these governments will spend much more on defense. And every government in the world knows what happened to Ukrainian President Volodymyr Zelensky in the Oval Office last week.
The conclusion that many leaders will draw from the spat that US President Donald Trump and Vice President J.D. Vance had with Zelensky is that American security guarantees - a major reason why countries are willing to buy American weapons - are no longer a compelling argument. So far, Trump's efforts to "make America great again" for that crucial pillar of American power: the defense industry have been miserable.
Since Trump took office, shares of the six largest US defense companies have fallen by an average of 4%. At the same time, shares of the largest European defense groups - including Germany's Rheinmetall - have "risen" by almost 40% over the same period, the Financial Times reported on February 25.
On March 3, the first trading day after Trump’s acrimonious meeting with Zelensky on Friday and the subsequent defense summit of European leaders in London over the weekend, European defense stocks took an even bigger plunge: Italy’s Leonardo was up more than 17% at the close on Monday, France’s Thales was up almost as much; Rheinmetall was up 15% and Sweden’s Saab was up almost 12%.
The market, as industry insiders like to say, is always right. And crucially, the market is not ideological. In recent days and weeks, markets have been following the messages from Washington and have come to the unsurprising conclusion that the Trump administration wants to cut the defense budget. Sure, Defense Secretary Pete Hegseth has said he wants to increase U.S. combat capabilities while cutting administrative costs, but Elon Musk’s newly created Department of Government Efficiency looks set to slash funding across the government.
Meanwhile, European countries are getting serious about increasing their military. To appease Trump, Britain quickly announced it would increase its military budget to 2.5 percent of GDP by 2027. Poland is on track to reach 5 percent this year. At the London summit, hosted by British Prime Minister Keir Starmer in support of Zelensky, the leaders agreed to provide more military support for Ukraine and to create a “coalition of the willing” to help defend the country in its war against Russia.
All of this is much more complicated than buying new weapons, although adding weapons is a key part of it. And since European governments can no longer be sure that the United States has their backs, they will certainly do everything they can to buy European ones. (When foreign governments buy weapons from the United States or other Western countries, the governments of those selling countries have a say in how those weapons are used. And these days, European buyers must consider the risk that Washington will block the use of U.S.-made weapons against Russia.) So it’s hardly surprising that markets see European arms manufacturers in for a bumper month and year.
Not everyone will be able to take advantage of this sudden government generosity, but many will.
“It remains to be seen which companies will win,” Robert Limergaard, secretary general of the Swedish Security and Defense Industry Association, told me. “It’s about how security policy develops in the Western alliance, and how companies can adapt their weapons to new types of warfare. If you can do that, you’ll win.”
It also means learning from the Russo-Ukrainian war. Many Ukrainian defense companies, which until recently were not among the leaders in the global arms market, have invaluable knowledge, given that Ukraine has the most battle-tested army on the continent. U.S. defense manufacturers would also have that opportunity. But markets think they know where things are going: Since late January, Lockheed Martin's share price has fallen from nearly $500 to just under $450.
Trump’s abrupt change of course away from Western allies and Ukraine has an even more fundamental unintended consequence: Washington’s security guarantees, which underpin arms exports, have become worthless.
“I’m not going to provide very big security guarantees,” Trump said last week as he tried to force Ukraine to sign a deal that Ukrainian sources said would give the United States 50 percent of Ukraine’s state-owned natural resource revenues. “We’re going to get Europe to do it,” Trump added, because “Europe is the neighbor.”
But security guarantees are the unrivaled sweetener that Washington has historically used to make most deals. Many countries, including many European ones, have bought American weapons precisely because they came with American security guarantees. The guarantees were not just a sweetener: They were the heart of the deal.
“When countries buy weapons, they consider the equipment, and therefore the manufacturer, and therefore the country, because those things matter with equipment that is used for many years, up to 40 years,“ said Limergaard. “And U.S. foreign military sales depend a lot on whether America offers security guarantees.“
In other words, buying American weapons was a way to buy the friendship and protection of the United States. After months of acrimonious debate in 2021, still-unjoined Finland chose to buy U.S.-made F-35 fighter jets to replace its aging fighter fleet, even though Gripens from Sweden, a close friend and neighbor of Finland, would have been cheaper. While the F-35 has undeniable capabilities, no one realized that the Finns’ $9.4 billion deal also included American goodwill and security guarantees. In fact, the deal was managed through the U.S. government’s Foreign Military Sales program.
But with Trump now seemingly openly siding with Russia and President Vladimir Putin, even the most generous buyers of American weapons can no longer be sure that their money will result in Washington’s goodwill and protection.
This uncertainty is particularly problematic because modern weapons require constant software updates. This means that buyers of these extremely expensive products need complete confidence that the selling country will continue to cooperate and that software updates will be provided in this way. Even the slightest suspicion that Trump might decide to harm friendly governments by blocking software updates to their military arsenals is enough to make those governments rethink American military acquisitions.
The UK and Australia, as well as the companies involved in the much-touted AUKUS submarine coalition with the United States, face a particularly tricky dilemma: AUKUS involves not only building submarines but also sharing advanced technology. This could leave Australia, which is estimated to have spent about $230.6 billion on the project in an effort to boost its security, dependent on an ally that might decide to punish it by withholding key technologies.
Markets, i.e. Stock analysts who closely follow politics and business to understand their impact on companies have decided that the smart money is in the stocks of European defense companies (which, as a permanent part of the transatlantic relationship, work with countless U.S. subcontractors).
And to whom will American defense manufacturers sell their wares if America’s closest friends and allies are no longer available? Certainly Saudi Arabia is an active importer of American weapons, as are the United Arab Emirates, Qatar, and Israel, but some of these countries are also likely to watch with concern the United States’ new approach to its allies. In any case, they are unlikely to increase their arms purchases from their already high levels.
The dismantling of the United States’ formidable military-industrial complex is almost certainly not what Trump envisioned. But erosion has set in.
Elizabeth Brau
translation: Nick Iliev