Europe’s €14 Trillion Defense Tab Needs Private Capital, Carlyle Says

Armed forces during the NATO exercise Steadfast Dart in Tsrancha, Bulgaria, on Feb. 13. Photo by Hristo Rusev /Photographer: Hristo Rusev/Getty

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(Bloomberg) — Europe could spend as much as €14 trillion ($16 trillion) on defense and related infrastructure over the next decade, creating a major opportunity for private capital, according to buyout firm Carlyle Group Inc. 

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Defense investments could soar from current projections of €4 trillion if European countries agree to proposed NATO spending targets of 5% of gross domestic product, Carlyle wrote in a report Tuesday on the eve of this week’s NATO summit. The longer-term benefits to the economy could be even more significant than the China boom that followed the Asian nation’s opening up to the world. 

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Under pressure from Russian President Vladimir Putin in the east and Donald Trump to the west, European countries are preparing to ramp up spending to eyewatering levels. NATO Secretary-General Mark Rutte is pushing members to agree to commit to spending 3.5% on core defense activity and another 1.5% on related areas like cybersecurity ahead of Tuesday’s summit in The Hague.

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“There’s going to be a big increase in the demand for capital to start getting these projects up and going,” Jeff Currie, chief strategy officer of energy pathways at Carlyle, said in an interview. “There’s going to be a lot of investment opportunities.”

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Carlyle’s pitch for the role of private capital echoes similar messaging from the European Commission, which published a white paper in March on an €800 billion plan that included suggestions for mobilizing private money.

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Spurring Innovation 

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Just as the birth of Silicon Valley and the internet are linked to American military priorities and private capital spending, Europe’s security needs can drive investments in innovation and infrastructure that end up benefiting the entire economy, Carlyle said.

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Europe faces challenges such as the fragmentation of its defense industry, with competing national defense companies, fighter jet and tanks programs. But the success of European multinational planemaker Airbus SE and the MBDA missile venture shows that there can be successful collaboration. 

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“Battles are won with soldiers and weapons. Wars, however, are won with supply chains and money,” the report said. This is where private equity and venture capital funds could step in, according to Carlyle. 

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Carlyle suggested Europe needs to coordinate supply chains to provide standardized designs — like Lego bricks — for basic system components from chips to drones to overcome national rivalries and competing platforms. 

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Private Equity Role

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A private equity firm can provide investment, expertise and a single intermediary to help governments build out the supply chain while avoiding the need to “micromanage,” according to the report. Europe should issue cross-border bonds to help fund the buildout, Currie said. 

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“It has to be a public-private partnership,” said Currie, who was previously global head of commodities research at Goldman Sachs Group Inc. “You don’t want to leave these types of projects to the vagaries of the publicly-traded markets, and you don’t want to completely let the bureaucrats control it. So the happy medium is the private space.”