Defense innovation is becoming a top priority for Europe as security challenges grow. With rising geopolitical tensions and new technological threats, European nations need stronger, more advanced defense systems. 

The European Defense Fund (EDF) is the EU’s key initiative to strengthen Europe’s defense capabilities by funding research and development of advanced military technologies. Launched in 2021, the EDF supports cross-border collaboration between European companies, startups, and research institutions to reduce reliance on non-EU defense suppliers and enhance military innovation. With a budget of €8 billion for 2021-2027, the fund focuses on projects in areas like AI, cybersecurity, space defense, and next-generation weapon systems.

EDF 2025: Key points

ReArm Europe

As of 2025, the European Defence Fund (EDF) operates within a broader EU initiative known as ReArm Europe. This strategic plan aims to bolster the EU's defense capabilities in response to evolving geopolitical challenges, notably the ongoing conflict in Ukraine and uncertainties regarding U.S. military support.

ReArm Europe’s goal is to mobilize up to €800 billion in the coming years to strengthen Europe's defense infrastructure. This plan includes several funding mechanisms, starting with fiscal flexibility, which suspends EU budget rules to allow member states to increase defense spending, potentially unlocking €650 billion over four years. Another €150 billion in defense loans will be made available for joint projects, such as air and missile defense systems. The initiative also seeks to repurpose existing EU funds, including cohesion funds, toward defense investments. To further support the industry, restrictions on European Investment Bank (EIB) lending to defense firms will be lifted. And lastly, a new "savings union" mechanism will be introduced to mobilize private capital, encouraging further investment in Europe's defense sector.

The EDF fund

In 2025, the EDF focuses on strengthening major defense capabilities. A main priority is improving air and missile defense systems. Significant investments are also being directed toward cyber systems and electronic warfare technologies to counter cyber threats and electronic attacks. The initiative also promotes joint procurement of military equipment, promoting collaboration among EU member states to ensure interoperability and cost-effectiveness in defense acquisitions.

The EDF helps Europe become more self-sufficient in defense technology, by funding research and innovation, it strengthens Europe’s ability to develop its own advanced military systems instead of relying on non-European suppliers. This not only boosts security but also ensures that Europe remains competitive in key areas like AI, cybersecurity, and next-generation weaponry.

Key emerging technologies in defense

  • Artificial Intelligence (AI) - AI is revolutionizing military operations by improving decision-making processes, enabling real-time analysis of vast amounts of data, and enhancing threat detection. It also powers autonomous systems, such as drones and vehicles, to carry out complex missions with minimal human intervention. AI helps in predictive maintenance for equipment, optimizing logistics, and even developing strategies for defense.

  • Cybersecurity - As defense systems become increasingly digitized, robust cybersecurity becomes essential to protect sensitive data and networks from cyberattacks. This technology ensures the security of military communications, critical infrastructure, and operational systems, preventing adversaries from exploiting vulnerabilities. Cybersecurity is also vital for safeguarding supply chains and preventing disruptions to defense operations.

  • Autonomous Systems - The development of autonomous systems, including unmanned aerial vehicles (UAVs), ground robots, and underwater drones, is transforming military operations. These systems reduce the need for human intervention in dangerous or high-risk environments, performing reconnaissance, surveillance, and combat tasks. They also enhance precision and efficiency in missions while minimizing casualties.

  • Quantum Computing - Quantum computing has the potential to revolutionize defense by breaking current encryption methods and enabling the development of ultra-secure communication channels. It can accelerate the processing power of military simulations, improve data analytics, and enhance cryptography. Quantum technologies may also lead to breakthroughs in areas like secure communications and battlefield management systems.

The growing role of startups, small and medium-sized enterprises (SMEs), and dual-use technology firms in defense is becoming increasingly vital. These companies bring agility, innovation, and new perspectives to an industry traditionally dominated by large defense contractors.

  • Startups - Startups often lead in cutting-edge technologies like artificial intelligence, cybersecurity, and autonomous systems. They can quickly adapt and experiment with new ideas, offering solutions that may be more advanced, cost-effective, or flexible than those developed by larger companies. Their ability to innovate outside traditional defense paradigms helps accelerate the adoption of breakthrough technologies.

  • SMEs - SMEs contribute by offering specialized expertise and niche technologies that may not be available from larger suppliers. They often act as critical suppliers in the defense supply chain, providing unique components, software, and systems that are integrated into larger defense projects. SMEs also play a role in improving the overall competitiveness of the European defense sector by fostering collaboration and encouraging cost-efficient solutions.

  • Dua-use technology firms - Dual-use technology firms, which develop technologies that have both military and civilian applications, are particularly significant. These firms bridge the gap between the defense and civilian sectors, ensuring that innovations in one area can be quickly adapted for use in the other. For example, advancements in AI and cybersecurity made for commercial use can be leveraged to strengthen national defense capabilities. Dual-use technologies also help reduce costs by creating solutions that benefit both industries, leading to more sustainable and versatile defense systems.

Investment Opportunities in European Defense Innovation

As of the last three years, there has been an increase of investments focused into defense startups and technology firms, particularly those focused on emerging technologies like AI, cybersecurity, and autonomous systems.

  • Growing demand for innovation - As defense needs evolve, there is an increasing demand for cutting-edge solutions that traditional defense contractors may struggle to provide quickly. Private capital is stepping in to support the development of these innovations, which can be rapidly scaled and integrated into defense systems.

  • Technological advancements and dual-use potential - The rise of dual-use technologies, which have both military and civilian applications, has attracted private investors. These technologies, like cybersecurity solutions or AI-driven systems, offer potential for substantial commercial success, making them particularly appealing to investors looking for scalable and versatile opportunities.

  • Strategic geopolitical considerations - Private capital is also motivated by the growing geopolitical risks and the need for countries to ensure their defense sovereignty. Investing in defense technologies not only offers financial returns but also plays a role in securing national and international interests, especially in a climate of rising defense budgets and strategic investments.

  • Government collaboration and funding - Government defense initiatives, such as the European Defence Fund (EDF), are further encouraging private sector investment by offering funding, incentives, and opportunities for collaboration. This partnership model allows private capital to be part of high-priority defense projects while benefiting from government support.

Challenges and risks 

  • Regulatory and Geopolitical Considerations - The defense industry is heavily regulated, with strict rules on the export of military technology and compliance with national and international laws. Investors must stay aware of the different regulations in various countries and the potential impact of geopolitical instability, which can affect market demand and investment returns.

  • Navigating Government Partnerships - Many defense technologies rely on government contracts, which can offer stable funding but come with complex processes and long timelines. Investors need to understand the challenges of working with government bodies, including potential delays and changes in funding due to political shifts.

  • Balancing Ethical Concerns - Defense technologies, such as AI and autonomous weapons, raise ethical questions about their use in military conflict or surveillance. Investors must carefully consider the potential risks of misuse and weigh these concerns against the benefits of technological innovation, especially in an environment where public opinion and regulations are closely scrutinizing such investments.

The bottom line 

The growing focus on defense innovation, fueled by emerging technologies and increased private capital, is reshaping the future of European defense. By fostering technological sovereignty, reducing dependency on non-European suppliers, and encouraging collaboration between startups, SMEs, and government entities, we are positioning Europe to meet evolving security challenges. While opportunities are abundant, we must carefully navigate regulatory, geopolitical, and ethical complexities to maximize both impact and return. As the defense landscape continues to evolve, our strategic investment in cutting-edge technologies will be crucial in ensuring a secure and sovereign future for Europe.