Europe’s rearming zeal has an antitrust blind spot

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MUNICH, Feb 16 (Reuters Breakingviews) - In shoving Europe towards faster rearmament, Donald Trump’s Greenland antics arguably did the bloc a favour. That’s the optimistic slant on the U.S. president’s recent threats to invade the territory of a NATO state – and one that was doing the rounds at the Munich Security Conference over the weekend.

How much of a favour, though, hinges on how European Union states deploy roughly 800 billion euros of defence spending, opens new tab by 2030. Notwithstanding the relatively constructive tone set in Munich by U.S. Secretary of State Marco Rubio regarding transatlantic relations, some EU capitals have been pushing for a broader “buy European” approach to government procurement. This theme is already at work in the defence sector, but in extremis risks creating local monopolies that could undermine military readiness.

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Based on figures compiled by Guntram Wolff, an academic at the Bruegel think tank, a large proportion of European rearmament cash could go to a relatively small number of companies. Wolff reckons that more than 70% of spending for military equipment between 2020 and 2025 in key European states was claimed by the top 10 suppliers of each country. Compare that with the United States, which has made efforts to ramp up contributions from smaller players, and where the equivalent figure is between 30% and 40%.

The poster child for this corporate concentration is Rheinmetall (RHMG.DE), opens new tab. The German defence group’s market capitalisation has jumped from 4 billion euros four years ago, shortly before Russia invaded Ukraine, to over 70 billion euros now. It’s underpinned by an order backlog that CEO Armin Papperger reckons could hit 120 billion euros in the middle of this year, which is over 11 times the revenue that analysts reckon the company made in 2025.

Papperger has said that Rheinmetall snared, opens new tab 40% of a special German defence fund announced in 2022. Analyst estimates compiled by Visible Alpha, meanwhile, envisage the group’s revenue growing at a compound annual average rate of 33% from 2025 to 2029, which is quicker than the equivalent forecasts for all the so-called Magnificent 7 Big Tech stocks.

Some defence sector types see Rheinmetall as part of the problem. Papperger is a powerful figure, both within his company and in German politics. Plenty of attendees at the Munich shindig raised eyebrows at Rheinmetall’s recent decision to branch out beyond its traditional core products, like weapons and ammunition, into new areas like drones, shipping and even space. In December, the company was awarded, opens new tab a 1.7 billion euro satellite reconnaissance contract in partnership with Finland’s ICEYE, despite having only a small space-focused team. The group also recently tried, opens new tab to take a stake in Franco-German rival tankmaker KNDS.

Yet Papperger has also been a key figure in the drive to ramp up European production. Take 155mm howitzer shells. Rheinmetall envisages, opens new tab that annual output, just 70,000 in 2022, could hit 1.1 million in 2027. Other Munich attendees scoffed at antitrust pearl-clutching while Russia is remilitarising too. On this reading, the standard concern with monopolists – that they are incentivised to produce a smaller amount of goods at a higher price than under a more competitive environment – is just ivory tower economist-speak.

The truth is somewhere in between. Rheinmetall and other EU behemoths can hardly be criticised for pursuing their interests. And governments, with the blessing of the European Commission, are happy to send money towards home-grown champions rather than American firms. That said, it’s reasonable to worry about overpowerful state-linked monopolists snapping up an outsized share of contracts, potentially leading to higher prices and lower production over time.

Consider the scale of the mission at hand. Research, opens new tab by the Kiel Institute for the World Economy has tried to nail down how much extra manpower and ordnance Europe would need if the U.S. substantially withdrew its forces. Factoring in expected increases in Moscow’s strength, the forecasts show the number of Russian tanks by 2030 outnumbering European ones by a multiple of 1.5. That’s in a scenario where Europe adds only 25 brigades, each amounting to a few thousand troops and all their kit. To get the ratio down to a more comfortable 1.2, Europe would have to add 50 brigades.

But if European procurement doesn’t move enough, the ratio balloons to 2.2 – a level the Kiel analysts fear might hand Russia a decisive advantage if President Vladimir Putin launched an assault on NATO’s eastern flank. In other words, markets that lack competition are a long-term risk. The bloc needs a dynamic environment that embraces technological innovation but is also incentivised to constantly ramp up production.

Higher prices, another consequence of minimal competition, are equally problematic. The Kiel Institute tracks, opens new tab the cost of key military kit like tanks, guns and ammunition. It estimates an all-in sum of 86 billion euros for the 1,293 new tanks, 564 new howitzers and 7,197 new infantry vehicles that would be needed for an extra 50 brigades, using the cheapest prevailing production costs. But if the kit is bought using the higher prices charged by some European defence companies, the bill comes to 203 billion euros. In other words, unnecessarily expensive kit purchased from a string of siloed national champions – rather than ones competing in a Europe-wide single market – could mean that European states’ defence budgets don’t go as far.

In areas where competition is rife, costs have plummeted. In only a few years after the outbreak of the 2022 Russia-Ukraine war, the unit cost, opens new tab of 155mm shells fell from nearly 6,000 euros to under 3,000 euros. That was down to Rheinmetall, but also the fact that it was heavily incentivised to hike production capabilities to maintain its market share against competition from rival manufacturers in other countries. Separate areas, like tanks and infantry vehicles – where there is less market choice – have not seen the same trends in output and prices.

German military analysts like to distinguish between a so-called “Fight Tonight, opens new tab” approach, which prioritises speed over perfection, and a “Fight Tomorrow” one, which de-emphasises immediate readiness. The risk is that Europe, in a post-Greenland panic, sees competition as a nice-to-have rather than an imperative - to the detriment of its own military force.

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Editing by Liam Proud; Production by Aditya Srivastav

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George Hay

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George Hay is Breakingviews’ EMEA Editor, based in London. He manages the team in Europe, the Middle East and Africa, and also covers the global energy transition. His previous roles have included European Financial Editor coordinating banking coverage during the euro zone crisis and the global financial crisis. Prior to Breakingviews he worked for AFX News and United Business Media, and has an undergraduate degree from Edinburgh University and a Graduate Diploma in Economics from Birkbeck, University of London.

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