April 21, 2022 | Blog
For several years, many European member states of the North Atlantic Treaty Organization (NATO) attracted criticism from the US for failing to spend 2% of their annual economic output on defense spending, as is mandated by the military alliance.
Only four European Union (EU) countries that are also members of NATO met that threshold in 2020, according to data specialists Statista: Romania (2.3%), Estonia (2.4%), Latvia (2.5%), and Greece (2.6%). The equivalent figure for the EU as a whole – of whose 27 members, 21 are part of NATO – is just 1.2%, with financial powerhouse Germany expending just 1% on defense.
Pressure to spend
The facts on the ground changed in Q1 when Russia launched its invasion of Ukraine, a country with aspirations to join both the EU and NATO. And though conflict is bad for most parts of the economy, private businesses in the defense sector may enjoy a windfall – with the risk of a second cold war brewing, European public military spending is set to balloon.
Already, there are signs that US pressure has expedited defense spending in Europe in recent years. Although the overarching M&A figures for the defense and related aerospace sectors can be fickle – given that both industries are relatively small compared to dealmaking mainstays such as financial services and TMT – 2021 was undeniably a time of plenty.
According to Mergermarket figures, 52 deals were announced last year in Europe’s defense and aerospace sectors, eclipsing the previous high-water mark logged in 2019 (50). The aggregate value of last year’s 52 deals, at just under €27bn, more than doubled the next highest total (€11.7bn, 2017).
Public and private spending
After years of cuts, rising public defense expenditures will invariably feed into the private sector. National security concerns complicate cross-border defense M&A, even between long-time allies – US buyers like the look of relatively inexpensive European assets. In the end diplomacy, one hopes, will win the day.
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