"Groundhog Day": Zelensky Torches Europe's Defense Inaction

$800 billion in European defense spending hangs in the balance. And Zelensky just torched the very allies who control it.

At the World Economic Forum in Davos, Ukrainian President Volodymyr Zelensky delivered his harshest criticism of European allies since Russia's invasion began nearly three years ago. 

He called their support a "Groundhog Day" loop—the same conversations, zero action. 

The speech wasn't just diplomatic theater. It was a direct challenge to Europe's defense posture that could reshape billions in military spending.

Here's what we know. European defense budgets have stalled while rhetoric soars. Germany and France keep talking about a unified European army. But actual spending commitments remain stuck in committee meetings. Zelensky's frustration boiled over when he told the Davos audience: "Europe loves to talk about the future but avoids action today."

The timing matters. With uncertainty around future US involvement in NATO, Europe faces a choice: develop real defensive capability or remain dependent on an alliance that might not hold. For investors, that choice translates directly into defense contractor revenues and ETF performance.

But here's the thing. Zelensky didn't stop at budget complaints. 

He went after NATO's foundational assumption, that American military intervention is guaranteed.

That statement lands differently now given ongoing political debates about America's role in European security. European capitals can't ignore the message: relying on Washington for continental defense might be a strategic mistake.

The immediate market question is simple. 

If Europe actually follows through on independent defense capability, where does the money flow? 

And more importantly, can European governments overcome their historical reluctance to spend on military infrastructure?

The skepticism is warranted. European nations have promised defense spending increases for decades with limited follow-through. Rules are rules, as one observer noted—either play by them or not at all. Europe's track record suggests caution before assuming this time is different.

European defense spending increased 18% in 2024 vs 2023, according to recent NATO figures. That sounds impressive until you examine the composition. Most increases went to ammunition and immediate-term military aid for Ukraine, not long-term procurement contracts that benefit defense manufacturers.

Germany allocated €85.5 billion for defense in 2024. France committed €50 billion.

At the June 2025 NATO Summit, Allies committed to a major increase in defense spending, targeting 5% of GDP annually by 2035 to strengthen collective defense, more than doubling the previous 2% guideline.

European defense manufacturers need multi-year contracts to justify production expansion. Short-term aid packages don't create that certainty. Zelensky's speech puts pressure on European governments to move from crisis spending to structural defense investment.

But there's a fundamental question investors need to ask: Is Europe capable of working independently to secure its interests, or will internal disagreements continue to block meaningful action? The continent's history of requiring unanimous agreement on major initiatives doesn't inspire confidence.

Defense-focused ETFs have already started reflecting this uncertainty. Year-to-date performance shows clear divergence between US-heavy defense funds and those with European exposure.

The data shows $ITA maintaining strong performance despite modest European exposure. But that 12% European allocation could become a catalyst if Brussels commits to the defense spending Zelensky demands.

$DFND carries the highest European defense exposure at 22%. That includes significant positions in Rheinmetall, BAE Systems, and Leonardo. These companies would be primary beneficiaries of increased European military procurement. The fund's underperformance year-to-date suggests the market hasn't priced in a serious European defense buildup.

Zelensky's speech coincided with renewed discussions about a European defense bond—a joint borrowing mechanism similar to the COVID recovery fund. France and Poland support the concept. Germany remains skeptical about shared debt.

The bond proposal would raise €100-150 billion for European defense infrastructure. That's real money flowing to contractors, not just political commitments. Financial Times reporting indicates preliminary talks have accelerated following Zelensky's remarks.

If the bond moves forward, European defense stocks could see 15-25% upside based on historical multiples for major defense contractors during procurement cycles. American defense companies with European operations (Lockheed Martin, Raytheon) would benefit, but the primary winners would be European manufacturers.

The catch? Germany needs to agree. And German fiscal conservatism has blocked similar proposals before. Without unanimous European support, the defense bond remains theoretical.

Most defense ETF investors focus on US contractors because of budget certainty and Pentagon spending predictability. That makes sense in normal times. These aren't normal times.

European defense spending has been constrained by fiscal rules and political reluctance. Those constraints are breaking down. Germany suspended its debt break for defense spending. Poland committed 4.7% of GDP to defense, the highest in NATO. Italy increased its defense budget 28% in the latest appropriations.

The rotation opportunity is straightforward. Reduce exposure to US defense companies trading at 22-25x earnings. Increase exposure to European defense firms trading at 14-18x earnings with higher growth potential as budgets normalize upward.

ITA vs DFND represents that trade in ETF form. The spread between their valuations suggests the market hasn't fully appreciated the European defense spending catalyst.

But investors need to recognize the political risk. As some analysts point out, creating new defense frameworks outside existing NATO structures could fragment rather than strengthen European security. If Europe can't agree on basic spending levels, can it execute a complete strategic realignment?

European political unity on defense remains fragile. Germany's coalition government faces elections. French President Macron's approval ratings hover near historic lows. A change in government could reverse defense commitments.

The European defense industrial base also lacks capacity. Rheinmetall can't triple artillery shell production overnight. Leonardo's fighter jet production lines are booked through 2028. Increased budgets don't immediately translate to revenue if manufacturers can't deliver.

Currency risk matters for US investors in European defense stocks. The euro has weakened 3.2% against the dollar year-to-date. Further dollar strength would reduce returns for American investors even if European defense stocks rally in local currency terms.

And there's the trust issue. Putin has proven repeatedly that he doesn't negotiate in good faith unless it secures overwhelming advantage. If European defense spending is partially motivated by potential negotiations with Russia, investors should question whether those negotiations will actually reduce defense needs or simply create new security uncertainties.

The frozen Russian assets currently total nearly $300 billion. Many argue these should fund Ukraine's reconstruction, not enter any negotiation framework that benefits Moscow. If Europe prioritizes diplomatic settlements over military capability, the entire defense spending thesis weakens.

Three developments would confirm this thesis:

Each of these would validate that European defense spending is moving from rhetoric to reality.

But add a fourth indicator: actual European unanimity on defense policy. If France, Germany, Poland, and other major players can't agree on framework and funding mechanisms, the whole thesis collapses. Watch for disagreements and delays—they're more predictive than optimistic speeches.

Zelensky's criticism wasn't just venting frustration. It was a calculated push to force European action. The Ukrainian president understands that American support faces political headwinds. Europe needs to fill that gap or face strategic vulnerability.

The question for ETF investors is whether European governments will actually follow through. Historical patterns suggest skepticism. European promises on defense spending have consistently underdelivered. 

The current threat environment is unprecedented in post-Cold War Europe, but bureaucratic inertia and fiscal conservatism remain powerful forces.

Defense ETFs with European exposure currently trade at a discount to their US-focused peers. That discount exists because the market doesn't believe European defense spending will sustainably increase. Zelensky's speech, combined with deteriorating transatlantic relations, creates the catalyst for that skepticism to reverse.

The trade isn't complicated. Buy European defense exposure before the market prices in budget certainty.

The timing risk is real. European bureaucracy moves slowly, and political will remains questionable. But the asymmetry favors early positioning. If European defense budgets do normalize upward, current valuations will look cheap in retrospect.

And if they don't? You're holding defense companies that still generate solid cash flow selling to existing customers. The downside is limited. The upside could be substantial.

Just remember what multiple observers have noted: Putin is devious, clever, and focused on rebuilding the Russian sphere of influence. He won't agree to anything that doesn't secure his strategic position. If European defense policy depends on negotiating with Moscow, investors should price in the probability that those negotiations won't reduce Europe's security needs, they might increase them.

Europe faces a binary choice: develop independent defensive capability or accept continued dependence on uncertain American commitments. For defense ETF investors, that choice represents either a significant opportunity or another cycle of unfulfilled promises. 

The data suggests preparing for the former while remaining realistic about the latter.

Subscribe to ETF Alert for real-time market news. 

We track the trends that move billions, before they hit mainstream headlines.

[Subscribe to ETF Alert]

What's catching investor attention today: Trump's NATO Shakedown at Davos: Defense Sector Poised for Historic Rally as $680B European Spending Hangs in Balance
Disclaimer: This is not financial or investment advice. Do your own research and consult a qualified financial advisor before investing.