European defense contractors have focused on their submarine and naval asset production to meet rising demand for advanced underwater systems as geopolitical tensions spur an increase in military spending. 

European makers of submarines have benefited from the 6.8% annual increase in global military expenditures to $2.4 trillion in 2023. As geopolitical tensions heighten and defense priorities shift, the global submarine market will reach $13.3 billion by 2029 from $9.21 billion in 2024, according to a Mordor Intelligence report. 

"Governments worldwide are increasingly eyeing advanced submarine systems," Mordor Intelligence said. "The global demand for submarine systems is surging, especially in roles like naval intelligence and mine countermeasures operations."

A spike in terrorism on international waters and the need for underwater reconnaissance in rival territories are also driving the demand for naval assets, according to Mordor's report. "A notable trend is the adoption of crewless submarines for enhanced threat detection," it said. 

The ongoing war in Ukraine and military strikes between Iran and Israel have spurred European defense spending. It increased 16% to €552 billion in 2023, according to the Stockholm International Peace Research Institute (SIPRI). 

European Defense Spending Increases After Trump Pressure

Overall, NATO spending increased by 11% in 2024, compared to 3% in 2023, according to the International Institute for Strategic Studies. Growth was even stronger among NATO's European members, who increased their combined military spending by 19% in real terms in 2024, it said. 

NATO countries have accelerated their military expenditures to combat Russian threats in Eastern Europe. They did so after Donald J. Trump criticized them for missing their defense spending commitments.

If the former president wins the US elections today, NATO members worry that Trump may take a hostile or isolationist approach if the alliance's members do not increase spending.

So far, the number of NATO members reaching their 2% of GDP defense spending commitment has increased. Only four NATO members had reached the alliance’s target in 2017, compared to the 23 expected this year.  

Underscoring the European shift, Germany and the United Kingdom signed on October 22 a defense agreement to strengthen security in Europe in "the face of growing Russian aggression and increasing threats." 

"We must not take security in Europe for granted," German Defense Minister Boris Pistorius said. "With projects across the air, land, sea, and cyber domains, we will jointly increase our defense capabilities, strengthening the European pillar within NATO."

The Trinity House Agreement includes a Rheinmetall (OTC:RMBY) artillery gun barrel factory using British steel produced by Sheffield Forgemasters, in the UK. It will support more than 400 jobs and nearly half a billion-pounds boost to the British economy. 

European Submarine Spending Rises In Dangerous World

The UK has also bolstered its defense investments with a £560 million contract for the modernization of HMS Victorious, a Vanguard-class ballistic missile submarine, in March.

Awarded to Babcock International, a leading provider of naval ship support and maintenance, the investment supports the UK's Continuous at Sea Deterrent, a critical component of its national security.

"In an increasingly dangerous world, we must continue to invest in one of our most important assets, our nuclear deterrent," British Defense Secretary Grant Shapps said when the deal was signed. 

European Defense Contractors Benefit From Submarine Spending

European defense contractors, such as Saab AB, BAE Systems and France's Navel Group, are benefitting from the push to develop European naval capabilities.  

Saab's stock has increased 43% year-to-date, buoyed partly by strong demand for its Saab Kockums submarines and international partnerships.

"We have seen an extreme interest now for combat boats in Saab Kockums," CEO Micael Johansson said during the company's third quarter results call. "The mix is nice still in Saab Kockums when it comes to surface activities, the underwater activities, which, of course, mainly the submarines."

The company's share is up approximately 13% year-to-date.

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