Europe has switched to a wartime mindset and is surging defense spending to levels not seen since the Cold War: 20% growth in 2024 and in 2025, and a total of around $450 billion across the EU. Europe is also ramping up defense production locally, and seeking to accelerate this process through preferential funding schemes. Ukraine has become a military powerhouse and a global leader in defense tech, such as drones and counter-drone systems. And the tech Ukraine has other countries need, particularly in the Middle East. The upcoming NATO summit in Ankara in July and the prospective EU-GCC summit later this year in Saudi Arabia will continue to shape investment priorities across EMEA. For private equity firms, technology companies, prime defense contractors, and scale-ups operating in the defense sector, this shift creates opportunities to meet rising demand, while also introducing additional regulatory complexity that must be navigated carefully to secure market access and long-term strategic positioning.

EU as a defense player

The EU has now become a major player in funding and regulating defense. Its key instrument is the Security Action for Europe (SAFE) fund, which provides €150 billion in cheap, long-term loans for common procurement of defense products such as ammunition, missiles, drones, air defense, and AI‑enabled systems. Eligibility rules include European establishment requirements, cap on third-country participation, foreign direct investment (FDI) screening, governance commitments and security-of-supply obligations. The aim is to expand local production capacity and reduce dependencies through preferential policy tools that favor local capacity and trusted supply chains. For non‑EU defense primes, suppliers, and technology providers, these new policies mean that market access increasingly depends on industrial strategy, governance, and supply‑chain architecture.

Defense surge in the UK and the Nordics

The UK is treating defense as a core economic and industrial policy pillar, supported by procurement reform and active engagement of private and foreign capital. Recent public reporting puts UK defense spending at around 2.5% of GDP by 2027, with ambitions toward 3% around 2030. In contrast to SAFE’s rules‑heavy market‑access conditions, the UK posture can be described as open, but screened, relying on national‑security mitigation and governance safeguards rather than blanket headquarters-based exclusion.

The Nordic countries, including Norway, are also pursuing concrete budget uplifts and major acquisition programs. In Norway, defense spending is expected to reach 3.5% of GDP by 2035, in line with NATO pledges, and the country’s long‑term plan prioritizes maritime and high‑north deterrence, including new frigates and submarines, long‑range surveillance drones and satellites, and strengthened air defense.

Defense innovation in Ukraine and the Gulf

Current threats and security challenges in Ukraine and the Gulf are prompting governments to reassess their defense capabilities. Ukraine is no longer only Europe’s first line of defense; it has emerged as a global leader in defense technology, notably in drones and counter‑drone systems, with combat‑validated capabilities now shaping European and allied forces. In parallel, recent security threats in the Gulf region, including missile and drone attacks and critical‑infrastructure vulnerabilities, are driving renewed investment in missile defense, counter‑drones, cyber resilience, and space‑enabled surveillance.

As a result, the defense market across EMEA is emerging around three pillars:

• Ukrainian engineering expertise and operational know‑how, developed under combat conditions;
• European system integration, certification, and program management, enabling scaled production and faster, more efficient procurement; and
• Gulf sovereign demand, translated into strategic partnerships, capital investment, and industrial scale‑up.

Regulatory complexity

These dynamics across the EMEA region are reshaping the defense sector, creating new opportunities while also increasing regulatory and operational complexity for companies. As frontier defense technologies—such as AI, autonomous systems, space‑based capabilities, quantum technologies, and next‑generation communications—become central to modern warfare, the regulatory frameworks governing them are growing more complex.

Transactions and deployments in this sector will increasingly raise questions around the ownership and control of intellectual property, cross‑border data access, hosting and sharing arrangements, and the applicability of export controls or restrictions to critical dual‑use software and components. At the same time, deals and supply contracts are subject to heightened scrutiny through national‑security lenses, including foreign‑investment screening and security‑of‑supply requirements.

This raises the premium on putting robust governance, compliance, and operational control frameworks in place early in the investment process.

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The team at Covington is well placed to advise on these policy developments and engagement with relevant decision-makers. We can help gather intelligence, analyse legislative initiatives, navigate complex regulatory requirements, and design and execute strategy across Europe and the Middle East.