Europe’s Manufacturing Sector Struggles Amid Rising Costs, Increased Military Spending Proposals
According to market intelligence firm Interact Analysis, Europe’s manufacturing sector is stagnating due to factors such as rising costs, increasing regulatory burdens and lower productivity, weakening its global competitiveness.
The firm carried out research using its Manufacturing Industry Output (MIO) Tracker and international statistics, which show that key regions face challenges that are limiting growth potential.
How can Europe overcome its manufacturing struggles? One suggestion, courtesy of Senior Data Analyst Jack Loughney: increasing defense spending to help revitalize the sector.
The MIO Tracker data reveals a stark contrast between military spending and manufacturing output among major economies, Loughney reported. In 2023, the combined military expenditure of Europe’s four largest NATO members—Germany, France, Italy and the UK—totaled $22.2 billion, while the United States alone spent an estimated $86 billion on defense.
Although the manufacturing output in Europe (totaling $4.5 trillion) closely follows the U.S. output ($6.3 trillion), when considering military spending relative to production, the U.S. outspends its European counterparts by more than four times while yielding significantly higher production levels.
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Loughney goes deeper into the correlation between military expenditure and overall manufacturing production and says the U.S. allocates over 3% of its manufacturing output to military equipment—a stark contrast to Germany’s sub-1% allocation from 2014 to 2020. This discrepancy highlights a broader trend where European military spending often does not translate into substantial growth for domestic manufacturing sectors.
For instance, despite Germany increasing its military equipment spending by more than 30% in recent years, the overall impact on total production has been minimal. supporting the notion that higher military spending does not directly correlate with the robust manufacturing sector.
Furthermore, the challenge exacerbates as a considerable portion of Europe’s military equipment is imported, predominantly from the U.S. According to the Stockholm International Peace Research Institute (SIPRI), arms imports by European NATO members significantly surged between 2015-2019 and 2020-2024, with the U.S. supplying more than 64% of these arms—a marked increase from 52% in previous years. The reliance on imports raises concerns about whether increased military spending can truly benefit European economies when so little of that expenditure is directed toward domestic production.
Despite a commitment by NATO members to boost military procurement from their own industries, European nations have struggled to meet even the 35% collaborative defense procurement benchmark that was set over 15 years ago, according to the research. A recent EDIS Joint Communication revealed that only 18% of the total military equipment spending in 2022 was allocated for EU collaborative defense projects, with the goal to increase this figure to 40% by 2030. Loughney says that achieving this target seems daunting given the historical context.
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In light of these findings, it appears that Europe’s attempt to remedy its manufacturing malaise through increased military spending may falter unless there’s a substantial shift toward domestic production. The U.S.’ success in integrating military spending with broader industrial output underscores a model that Europe has yet to embrace fully.
With recent criticisms regarding Europe’s reliance on American defense capabilities, this situation may prompt a change in approach. However, Loughney says that evidence suggests that without concerted efforts to utilize military spending for internal production, the prospect of rekindling growth within the European manufacturing sector through remilitarization remains tenuous at best.
As Europe seeks to navigate its manufacturing challenges, understanding the interplay between military spending and economic revitalization will be crucial. Without strategic shifts toward domestic procurement, increased military expenditure may merely serve to bolster foreign suppliers rather than build a robust manufacturing revival at home.
As for what this means for the engineers who work in the machine design space, Loughney told Machine Design, “The impact on mechanical and design engineers will largely depend on how European governments allocate the increased military and infrastructure budgets. Should European governments prioritize procurement from domestic firms, engineers in the upstream sectors from military equipment production could face a significant increase in demand for their expertise, leading to a particularly busy period.
“On the other hand,” he continued, “if the spending continues to favor American-produced equipment, the effect on local engineering demand would be relatively minimal.”
He added that, historically, European economies have been hesitant to make large investments in defense due to the cost-efficiency of purchasing American-made equipment. “However, if there is a shift toward prioritizing European procurement, there could be notable growth in sectors like machine tools and semiconductor machinery, areas that are integral to advanced defense and infrastructure projects,” Loughney said. “That said, this scenario remains uncertain and hinges on political decisions and procurement policies.
“While the potential for growth in the machinery design space is considerable, it requires a clear and sustained commitment from European governments to support domestic production,” he added. “Without this, engineers may not experience the anticipated boom, as external procurement would likely maintain the status quo, offering little long-term change to demand.”
