European defense companies are making a lot of money — and that’s a problem

BRUSSELS — Europe’s big defense firms are rolling in cash thanks to the steep increase in spending prompted by Russia’s attack on Ukraine, but those profits are undermining arguments for the European Union to issue common debt to help the bloc rearm.
“I don’t want to have the risk that taxpayer money ends up subsidizing profits for companies,” said Tobias Cremer, a German member of the European Parliament with the Socialists and Democrats and on the Parliament’s defense subcommittee and foreign affairs committee.
However, those higher corporate profits are dwarfed by the scale of the EU’s defense challenge. Commission President Ursula von der Leyen warned this summer that the EU is “facing unprecedented and growing security threats,” and needs €500 billion in additional defense investments over the next decade.
It’s not clear how that money will be raised — either from national budgets, from the EU’s own multiyear budget or by issuing bonds backed by the bloc’s 27 member countries.
And that’s where defense company profits become a problem, as they make it more difficult to justify borrowing to invest in arms production.
“Companies need orders, not money,” stressed a diplomat from a Nordic country opposed to common defense bonds. 
It’s clear that defense companies are doing very well.
In the first nine months of this year, France’s Thales reported sales were up by 6.2 percent at €14 billion compared to the same period last year, largely driven by defense and security.
Over the same period, Sweden’s Saab saw its orders jump by 71 percent to 79 billion krona (€6.9 billion).
“We continue to see increasing demand as European nations need to replenish their defense stocks, which will require long-term efforts,” said CEO Micael Johansson.
Germany’s Rheinmetall “significantly increased its sales and operating result” in the second quarter of the year, and predicted record sales of €10 billion and an operating profit margin of 14 percent to 15 percent for the full year.
Italy’s Leonardo noted double digit growth in the first half of this year, its orders were up 18.8 percent at €10.3 billion and its net result was €555 million, a 166.8 percent increase on the same period in 2023.
CEO Roberto Cingolani said in February: “We are in the presence of a special window of opportunity as the defense industry is now part of global security.”
And the trend shows no sign of stopping. The world’s top 15 defense contractors are forecast to log free cash flow of $52 billion in 2026, almost double the figure for 2021, according to an analysis by Vertical Research Partners for the Financial Times.
Those profits are so high that Italian Finance Minister Giancarlo Giorgetti took special note of how flush defense companies are when mulling taxing corporate windfall profits.
“Paradoxically, today, one could say that with all these wars, companies that produce weapons are doing particularly well,” he said in early October.
In the end, the provision didn’t make it into this year’s budget, and even Cramer, the Socialist MEP, conceded that “taxing profits usually should be a very last resort.” But Giorgetti did hit on a pain point.
It’s also an issue in the United States, where Navy Secretary Carlos Del Toro denounced arms-makers for using their windfalls to boost stock prices through share buybacks. “Overall, many of you are making record profits, as evidenced by your quarterly financial statements,” he told defense contractors in February.
“You can’t be asking for the American taxpayer to make greater public investments while you continue to goose your stock prices through stock buybacks, deferring promised capital investments, and other accounting maneuvers,” he said. 
Although Italy hasn’t taken the plunge on taxing defense companies, there are precedents for doing that.
The U.S. imposed special taxes during both world wars on the sector.
Ukraine regulates the profits companies can earn on production tied to state orders — but that’s created worries that it undermines their bottom lines and also limits their ability to invest.
Despite the grumbles about fat profits being earned by European companies, they are investing — often with no firm government orders to back up those financial risks.
“Many European defense companies have already significantly invested to expand their production capacities in the last years, taking on business risk to the limit of what is possible without the immediate assurance of orders,” said Jan Pie, secretary-general of the Aerospace, Security and Defence Industries Association of Europe.
Even so, the sight of profitable defense firms taking advantage of government programs sticks in the craw of some politicians. In one example, Rheinmetall is a key beneficiary of the EU’s €500 million Act in Support of Ammunition Production.
“We do need large companies to scale up ammunition production quickly, and there are cases where EU and member state support is essential,” said Hannah Neumann, a German Green MEP who sits on the defense subcommittee. “But why are highly profitable companies like Rheinmetall receiving millions in outright grants? Loans or grants with repayment conditions based on profit would achieve the same results without unnecessary giveaways.”
One response to the profit bonanza is to slash what governments are paying for arms and ammunition, especially by promoting joint purchases and by integrating what has historically been a very fractured defense market.
The high profits and high share prices show that there is “a strong argument for European market integration. As you integrate the market, in principle, you should see more competition and as you see more competition, you should see the competition reduce excess profits,” said Guntram Wolff, a senior fellow at the Bruegel think tank in Brussels.
That’s a view shared by Defense and Space Commissioner-designate Andrius Kubilius.
“Prices are going through the roof,”  he told POLITICO, but added that EU regulations such as the draft European Defence Industry Programme (EDIP) aim to incentivize common purchases. “Joint procurement can lower prices,” he said.
Veronika Melkozerova contributed reporting from Kyiv.