New War Economy: The Great Shift?


The rapid shifts in international geopolitics, particularly with the U.S. retreating from its role in guaranteeing global security, have struck as a wake-up call for a more strategically autonomous European continent.

To examine the critical issues in this transition to a New War Economy, Eric Benoist and Hadrien Camatte from Natixis CIB Research and Laurence Porruncini from Natixis CIB Tech Hub invited, in partnership with Audacia, a panel of leading industry experts. Together, they explored the challenges at stake, the means and solutions, and their feasibility in achieving Europe's security objectives.

We warmly thank Jean-Baptiste Kerveillant, Deputy Director for the Protection and Resilience of Businesses - Direction Générale de l'Armement, Guilhem de Marliave, CEO - Elistair,  Vianney Mercherz, Executive Vice President - ATDI Group and Thomas Schmitz, Investment Director, Straton – Audacia, for their insights.

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Increasing Defense Budgets

As the United States currently accounts for two-thirds of NATO's defense spending, European NATO partners need to strengthen their defense efforts significantly. In June 2025 summit, NATO countries committed to invest 5% of their GDP on defense by 2035, including 3.5% on core defense requirements and 1.5% on defense - and security-related investments such as infrastructure and industry. This is up from the current NATO target of 2%, which many nations are already struggling to meet.

To finance this additional expenditure, the ReArm Europe plan allows European nations to borrow up to €800 billion for defense over the next four years.  This raises questions about the ability of states to manage these loans: while Germany has the fiscal room to accommodate them, most European countries, including France and Italy, may struggle to increase their public deficits. Consequently, private capital appears necessary to support these defense efforts.

The DGA action plan on getting ready to war economy rests on five pillars: give the defence industry more visibility, in particular through public procurement ; secure supply chains by remedying bottlenecks, reconstituting strategic stockpiles, and relocating production; simplify requirements, standards and procedures for the armed forces ; mobilize the nation’s human resources ; and strengthen the resilience of the defense industrial base, including cyber security and access to finance.

Jean-Baptiste Kerveillant - DGA

The Challenges of the New War Economy

Beyond the obvious concerns regarding defense budgets, the New War Economy presents a range of complex challenges. The panel identified that Europe must produce "more, better, and faster," while addressing various bottlenecks.

A critical issue is the fragmentation of European defense markets, which hinders defense companies' ability to scale. The market is comprised of many specialized SMEs that require support. European markets remain dominated by national procurement programs and a proliferation of standards that hinder industries from achieving critical mass.

Additionally, European armies need to modernize and integrate new technologies, such as AI, to remain competitive and close the gap with the U.S. and China, necessitating a significant increase in research and development efforts. For instance, R&D funding in the United States amounts to $140 billion, or 16% of the total budget, compared to approximately 4 to 5%, or €13 to €14 billion, across Europe.

We need larger players in Europe. To achieve economies of scale, so as to reduce costs and enhance technology accessibility; to ensure program readiness, through rapid scaling for large projects; and to attract investors. Consolidation is one approach, creating a scale up is another.

Guilhem de Marliave - Elistair

Consolidation, Innovation, Sovereignty

In this respect, the panelists agreed that consolidation is likely to be beneficial, allowing businesses to scale up, standardize, and reduce costs while boosting investment in research and development.

As military innovation is often concentrated in small, agile companies that struggle with delivery timelines and financing, there is a pressing need to bolster these firms through increased public and private investment. Creating a collaborative ecosystem that fosters innovation while streamlining procurement processes is essential.

A unified approach to defense production and procurement is crucial for strengthening European sovereignty. Simplifying equipment for the armed forces, along with standards and administrative procedures, is key. Furthermore, enhancing supply chains, rebuilding strategic stockpiles, and relocating production will be vital.

Reshoring has emerged as a key factor in the additional growth resulting from increased defense spending, alongside the total amount spent and the composition of expenditures. Depending on these three factors, this could lead to an increase of between 0.3 and 0.6 additional percentage points of growth in EU GDP by 2028 and around 1.6% by 2035.

We target companies with revenues between €10 million and €50 million that are already profitable, have a clear vision, and are beneficial to the defense industry. Our emphasis is on dual-use applications, and most companies today fit this model, which helps mitigate risk.

Thomas Schmitz - Audacia

The Crucial Role of Private Equity

As traditional public funding struggles to meet the growing financial demands of defense industries, private equity is playing an increasingly vital role in the sector. Private equity funds provide not only capital but also the strategic expertise necessary for sustainable growth.

The appetite for investment in defense is on the rise, with private equity increasingly recognizing the sector as a viable investment opportunity. For instance, French private equity investment in the sector totaled €9 billion over the past 20 years, with €4 billion coming in the last five years.

This growing interest is underscored by a shift in attitudes toward ESG exclusions; the sector is increasingly seen as a responsible investment, apart from controversial weapons, which are and will continue to be excluded.

Panelists also discussed the introduction of private equity to individual savings, such as Bpifrance's initiative to establish a national savings fund that individuals can join with a minimum investment of €500. With the right level of precaution, they viewed this as beneficial for strengthening the connection between the nation and the defense industry, noting some demand for it.

Another interesting approach to funding startups was highlighted: early-stage contracts directly with SMEs, which help these businesses transition from the lab to the battlefield. This method provides startups with credibility, valuable references, and real-world testing. There's a noticeable shift in Europe from a heavily grant-based model to a more early-stage funding approach, similar to what we've seen in the US.

As we enter the US, we adjust our strategy monthly to navigate rapid geopolitical changes and emerging market players. With support from our global teams on the ground, success relies on finding the right local partner who can value the integration of our expertise and solutions.

Vianney Mercherz - ATDI Group

Balancing Capital and Export Control

The surge in private investments raises the issue of capital control; finding the right balance is essential, as it is perfectly legitimate to impose capital controls on such strategic companies. This concern is significant when attracting investors, who prioritize liquidity and want assurance that they can resell their acquisitions. Typically, equity stakes come with conditions that are well understood and accepted by foreign investors seeking access to European markets.

Finally, the panel discussed the importance of export strategies in enhancing the competitiveness of European defense firms. Experts indicated that a significant portion of defense revenues would come from international markets, necessitating a focus on dual-use technologies that cater to both military and civilian needs.

Naturally, strict legislation is upheld, as no nation wants to allow companies to export critical military components without oversight. This can however hamper smaller firms from entering foreign markets. The panel emphasized that supporting SMEs, as well as fostering strong relationships between government entities and the defense industry is crucial for facilitating exports and securing a foothold in a competitive global landscape.

Learn more in our previous publication


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