Europe’s largest defence contractors are sitting on record order books. Rheinmetall ended June with a backlog of EUR 80.5bn, yet its shares have halved over the past year and its operating free cash flow for the first half was minus EUR 1.6bn. EU governments are projected to spend EUR 454bn on defence this year, and the US administration has asked for USD 1.5tn. Much of Europe’s money still buys American weapons, and more of them are now built in European plants. Croatia follows the same pattern. Its defence budget rises 20.9% this year, and 7.2% of the EUR 2.18bn equipment package it approved in December went to a Croatian company.

EU member states spent EUR 418bn on defence in 2025, up from EUR 186bn in 2019, and the European Defence Agency projects EUR 547bn by 2029. The agency’s definition includes military pensions and paramilitary forces. On national accounts, the euro area spent about 1.5% of GDP on defence last year.

EU defence spending and its share of GDP, (EUR bn, %, 2019 – 2026E)

Source: European Defence Agency, InterCapital Research

At The Hague in June 2025, NATO allies agreed to reach 5% of GDP by 2035, with a review of the path in 2029. The EU’s main addition is SAFE, EUR 150bn of loans raised by the EU and lent to 19 member states. EDIP, its defence industry programme, has EUR 1.5bn for three years.

How the EU is paying for rearmament

Source: European Commission, Council of the EU, European Investment Bank, NATO, InterCapital Research

In the United States the FY2026 national defence budget passed USD 1tn only with the USD 113.3bn the Pentagon planned to draw this year from a fund created by the July 2025 reconciliation law. Base spending on procurement and research, the part that reaches contractors, fell from USD 315.1bn in FY2024 to USD 307.4bn in FY2026. The FY2027 request of USD 1.5tn includes USD 350bn of reconciliation money. The budget resolutions in both houses of Congress allow USD 60bn.

US national defence budget, (USD bn, 2024 – 2027E)

Source: Congressional Research Service, White House, InterCapital Research

Rheinmetall’s backlog rose from EUR 73bn at the end of March to EUR 80.5bn at the end of June, and Saab’s included a SEK 47bn order for three submarines from Poland. Rheinmetall has not yet turned the growth into cash. Its operating margin in the first half was 15.0%, but operating free cash flow was minus EUR 1.6bn as working capital rose.

Order backlog, (EUR bn, Jun 2026)

Source: Company data, European Central Bank, InterCapital Research

Share prices have diverged. Rheinmetall rose about 23-fold from the end of 2020 to its peak in September 2025 and is down 50% over the past 52 weeks. It fell 18.7% on 24 June, when Germany cancelled the F126 frigate programme. Over the year BAE Systems is down 2% and Saab up 7%. In the United States, Northrop Grumman is down 13% and L3Harris 18%, while Lockheed Martin is up 8%, General Dynamics 4% and RTX 18%. Rheinmetall trades on 21.8 times consensus forward earnings, BAE Systems on 22.5 and Saab on 35.6, against 17.0 for Lockheed Martin and 17.4 for Northrop Grumman.

Share price development of selected companies (rebased to 100, log scale, 2021 – 2026)

Source: Market data, consensus estimates, InterCapital Research

Data from the Stockholm International Peace Research Institute (SIPRI) for 2021 to 2025 show where the equipment comes from. The United States supplied 42% of world arms exports, and Europe took 33% of imports, more than any other region for the first time since the 1960s. American suppliers accounted for 58% of European NATO imports, unchanged from 2016 to 2020, on a volume up 142%. Europe took 38% of US exports, ahead of the Middle East for the first time in two decades. SIPRI counts major weapons systems only, so its figures leave out most ammunition and services.

Sales the other way are much smaller. BAE Systems, which makes 43% of its sales in the United States, is the only European contractor with a large reported American business. More American equipment is now built in Europe. Lockheed Martin says 25% by value of every F-35 is produced here, with final assembly in Italy, and Rheinmetall will deliver F-35 centre fuselages from its plant in Weeze from 2027. The only Patriot missile production outside the United States is at Schrobenhausen, in a venture between Raytheon and MBDA Deutschland, and in July Lockheed Martin and Rheinmetall agreed to build ATACMS missiles at Unterlüß. For US suppliers the hardest SAFE rule is Article 16(11), which requires the buyer of some products to be able to change the design without restrictions from a third country.

Washington wants European purchases to rise. In February the State and War departments told the Commission that the US would likely review the Buy American waivers held by 19 EU countries if the EU restricted American suppliers. Some governments have bought European regardless. Denmark chose SAMP/T for long-range air defence and Switzerland cut its F-35 order from 36 to about 30. Twelve European countries still had 466 F-35s on order or selected at the end of 2025.

Palantir’s European business is small. About three quarters of its USD 4.5bn revenue in 2025 came from the United States. In Europe it supplies NATO’s Maven Smart System and holds a GBP 240.6m UK Ministry of Defence contract. Vice Admiral Thomas Daum, who heads the Bundeswehr’s cyber and information domain service, has said it is not being considered for the German military cloud.

Croatia’s defence ministry budget rises 20.9% to EUR 1.63bn in 2026 and is planned at EUR 2.13bn for 2027. The government targets 3% of GDP by 2030, against 2.08% this year on NATO’s definition. Croatia has also taken a SAFE loan of up to EUR 1.7bn, which pays only for European equipment: Leopard 2A8 tanks, Caesar howitzers, Tatra trucks and ammunition.

About EUR 3bn of Croatia’s purchases goes to European suppliers, led by 44 Leopard 2A8 tanks and 12 Rafale fighters, and about USD 1.1bn to the United States for Black Hawks, HIMARS and Bradleys. On 10 September Croatia signed for 18 K239 Chunmoo rocket launchers from South Korea’s Hanwha Aerospace for EUR 435.2m before VAT. The government cited delivery within 24 to 36 months, availability, price and industrial cooperation, and noted that Poland, Estonia and Norway had chosen the same system. The HIMARS, approved in August 2024, are due in late 2027 or early 2028.

Croatian defence procurement by supplier country (2021 – 2026)

Source: Ministry of Defence, Government of Croatia, DSCA, InterCapital Research

Croatia’s own defence exports reached EUR 182.7m in 2025, the highest since 2016 and almost three times the 2019 level. Since 2021 the country has committed more than EUR 4bn to foreign suppliers.

Croatian exports of military goods and non-military lethal goods, (EUR m, 2016 – 2025)

Source: Ministry of Economy, InterCapital Research

The companies most exposed to defence are mostly private. HS Produkt in Karlovac makes the pistols Springfield Armory sells in the United States under its own brand, and its revenue fell 8.5% to EUR 136.5m in 2025. Orqa, the Osijek drone maker, doubled revenue to EUR 24.2m. DOK-ING’s revenue fell 75% in 2025, and Rheinmetall bought 51% of it in July. On the Zagreb exchange, Končar holds the EUR 125m counter-drone framework agreement, and Đuro Đaković refurbishes the Bradleys and assembles the Tatra trucks, though most of its exports are railway wagons.

Croatia’s defence spending is rising fast, and most of the money goes to German, French, American and Korean suppliers. Investors on the Zagreb exchange have few direct ways to own the domestic industry.

The next test comes in 2029, when NATO reviews the path to 5%. At last year’s sales of EUR 9.9bn, Rheinmetall’s backlog alone represents about eight years of work, so much of what governments have ordered will still be in production when they decide whether to keep spending at this rate.