Why Europe’s smaller defence players fear missing out on spending spree

Good morning. Investors are on edge ahead of Donald Trump’s plan to announce tariffs on imports from Europe and other trading partners today.

Today, our correspondents across Europe provide a dispatch on the fears among small countries and companies that they will be overlooked in the continent’s splurge on defence spending, and preview the ICC-defying visit to Hungary of Israel’s wanted prime minister.

Small arms

EU leaders are facing demands to ensure that small defence businesses benefit from the bloc’s splurge in military spending as countries and companies outside the big league worry about missing out, write Barney Jopson and Patricia Nilsson.

Context: European governments are preparing to cast off their fiscal shackles, as a consensus hardens around spending more to end the continent’s security dependence on the US. But with the money come tough questions about which companies get to enjoy the bonanza.

The defence sector is dominated by big players such as Germany’s Rheinmetall and France’s Thales, but Portugal’s defence minister has called for the EU to make room for others.

Nuno Melo, defence minister in a government facing elections in May, told the Financial Times that start-ups and small and medium-sized businesses were “key drivers of innovation” in defence, and needed three things from EU policymakers.

First, he said, Brussels must increase the involvement of small businesses in defence supply chains. Second, it should support initiatives to integrate them into the big projects, such as new fighter jets or navy destroyers. Third, it must “facilitate access to venture capital and reduce bureaucratic hurdles”.

EU defence ministers are meeting in Warsaw today and tomorrow to discuss rearmament, as well as sending more support to Ukraine.

In Germany, smaller contractors are complaining that since Russia’s full-scale invasion of Ukraine — and Germany’s decision to respond with a €100bn military fund — most money has been spent on aircraft, tanks and other big-ticket items made by larger companies.

“We’re told that we’re delivering critical capability to Germany, EU and Nato and that we should scale up”, said Martin Karkour, chief sales officer at Bavarian drone start-up Quantum Systems. However, to do so they need concrete orders, he said.

While the company has delivered more than 1,000 drones to Ukraine since the outbreak of the war, the German army has so far only ordered 14 units.

The trickle-down matters politically. In Portugal, the government wants to win popular support for more defence spending by arguing that it will boost industry more widely. Spain’s government is making a similar pitch. Both countries’ defence sectors are primarily composed of small businesses.

In Germany, Karkour senses a boost is finally coming for such companies through Berlin’s decision to scrap strict debt rules and unleash more defence spending. “We are starting to see a changed mentality”, he said.

Chart du jour: Cheaper

Eurozone inflation fell for the second month in a row to 2.2 per cent, strengthening the case for the European Central Bank to cut interest rates this month.

Friendly visit

Israeli Prime Minister Benjamin Netanyahu begins a five-day visit to Hungary today, defying an arrest warrant issued against him by the International Criminal Court for alleged crimes against humanity and war crimes in Gaza, write James Shotter and Marton Dunai.

Context: The trip is Netanyahu’s first to an ICC member state since the warrant was issued last year. Under the ICC’s rules, its 124 member states — which include most European and Latin American countries and many in Africa and Asia — are obliged to arrest anyone subject to a warrant who enters their territory.

Neither Netanyahu nor his Hungarian counterpart Viktor Orbán, who invited him, has given much information about what they will discuss during the lengthy visit. But the symbolism of the trip is clear.

Hungarian officials have been outspoken in their backing for Netanyahu, who has dismissed the accusations and warrants against him and his erstwhile defence minister Yoav Gallant as “absurd and false”.

Hungarian foreign minister Péter Szijjártó told reporters during a visit by his Israeli counterpart Gideon Sa’ar in January that the warrants had “discredited the ICC”.

Orbán has traditionally treated Netanyahu as one of his closest allies. In turn, the Israeli premier and his allies have courted his Hungarian counterpart and other far-right leaders in Europe, whose support has become increasingly important as Israel’s diplomatic isolation has grown.

But the visit to Hungary could pave the way for further defiance of the court: other members such as France and Poland have also indicated an ambivalence on the Netanyahu case, and Germany’s next chancellor Friedrich Merz said he would find “ways and means” to welcome Netanyahu.

What to watch today

1. EU defence ministers have dinner in Warsaw ahead of an informal meeting on Thursday.

2. Denmark’s Prime Minister Mette Frederiksen visits Greenland.

3. Israel’s Prime Minister Benjamin Netanyahu visits Hungary.

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