For decades, Europe has relied on a robust industrial sector, producing everything from automobiles to advanced chemical products. However, recent years have been marked by an exodus of manufacturing as energy costs soared and economic conditions worsened. Now, with growing security concerns and increasing doubts about the United States as a reliable military ally, Europe may be on the verge of a major industrial shift—transforming struggling civilian factories into military production hubs.
Arms manufacturer Rheinmetall has openly stated its willingness to take over idled car factories, signaling a broader effort to convert commercial manufacturing capacity into military use. “Between producing cars and producing tanks, there is some connection,” said Pierre Wunsch, head of Belgium’s central bank, in a recent interview with The Wall Street Journal. This transition is being fueled by a European defense spending surge, driven by heightened tensions with Russia and the need for strategic independence in a more volatile geopolitical landscape.
Yet, this shift is not occurring in a vacuum. Europe’s ongoing energy crisis has played a decisive role in undermining traditional manufacturing, forcing companies to either adapt or collapse. The same energy crisis that has driven factories to a standstill is now creating an opening for a new era of military-focused production.
The Energy Crisis: A Slow-Burning Disaster
Europe’s industrial challenges can be traced directly to its worsening energy situation. The continent was already struggling with the high costs of transitioning to renewable energy when Russia’s invasion of Ukraine in 2022 created an even more severe crisis. Moscow weaponized energy exports, slashing natural gas supplies to Europe and driving prices to unprecedented levels. At its worst, European gas prices surged by over 35%, forcing manufacturers to cut back production or shut down entirely.
Germany, long reliant on Russian gas, was hit hardest. The country had already phased out nuclear power, removing a stable source of electricity, while its transition to renewables was hampered by bureaucratic inefficiencies and slow infrastructure development. As a result, Germany found itself in a precarious position, dependent on expensive LNG imports and forced to reintroduce coal-fired power plants just to keep the lights on.
Despite short-term relief from milder winters and emergency gas storage measures, Europe’s energy situation remains fragile. The impending expiration of Russia’s gas transit agreement with Ukraine and additional sanctions on Russian energy firms mean that even the limited gas still flowing from Moscow may soon be cut off. Markus Krebber, CEO of RWE AG, noted the severity of the issue: “We still have problems with gas supply. If we really want to be independent of Russian gas, we need to have more import capacity.”
Dunkelflaute: When Renewables Fail
A major weakness in Europe’s energy strategy has been its over-reliance on renewables without sufficient backup infrastructure. This vulnerability is exemplified by “Dunkelflaute,” a German term meaning “dark lull.” It describes periods when wind and solar power generation plummets due to prolonged cloudy and windless weather.
During a recent Dunkelflaute, Germany’s renewable electricity generation fell sharply, triggering a spike in energy prices. Without sufficient natural gas supplies, the country was forced to burn coal at record levels while relying on imported power from nuclear-heavy France and fossil fuel-dependent Poland. The consequences have not gone unnoticed by Europe’s neighbors. Sweden’s Energy Minister Ebba Busch bluntly stated, “Germany’s energy system isn’t right. It is a result of decommissioned nuclear power. When it’s not windy, we get high electricity prices.”
Germany has found itself increasingly dependent on foreign energy sources while struggling to maintain the infrastructure needed for industrial production. Norwegian officials have also voiced their frustration, with Energy Minister Terje Aasland calling the situation “an absolutely shit situation” due to rising energy costs caused by Germany’s surging demand for imported power.
Manufacturing Exodus: Where Are the Factories Going?
The combination of high energy costs and economic stagnation has already driven a wave of deindustrialization. Major automakers like Volkswagen are closing plants, and industrial giants such as Michelin, Continental, and Northvolt have announced layoffs and downsizing efforts. Volkswagen, for example, has laid out plans to cease making vehicles at its plants in Dresden and Osnabrück, citing a need to save billions of dollars amid declining demand.
Companies are not just downsizing; they are relocating. The United States, with its lower energy prices and financial incentives under the Inflation Reduction Act, has become an attractive destination for European manufacturers. Asian countries, particularly China and Vietnam, are also seeing an influx of European production as firms seek more cost-effective solutions.
Even within Europe, there is an internal shift. Countries with more stable energy supplies, such as France (thanks to nuclear power) and Norway (with abundant hydroelectric energy), are retaining more industrial activity than energy-strapped Germany. This shifting landscape raises concerns about long-term industrial decline in Europe’s largest economy.
The Link Between Energy and Military Production
While energy costs have made traditional civilian manufacturing increasingly unviable, military production presents a unique opportunity. Unlike consumer goods, military equipment is not subject to the same price sensitivity or demand fluctuations. Governments are willing to invest in strategic industries even when costs are high, making defense manufacturing an attractive alternative for struggling industrial firms.
Rheinmetall and other defense contractors are already stepping in to repurpose shuttered factories, with European governments eager to bolster domestic production. Given the continent’s plans to increase defense spending from 2% to 3% of GDP, the demand for tanks, ammunition, and armored vehicles is expected to surge by 140%, requiring significant new production capacity. “If that happens, we have to double our ammunition capacity,” said Armin Papperger, Rheinmetall’s chief executive. “If that happens, we have to double our vehicle capacity.”
This shift also aligns with Europe’s strategic goal of reducing reliance on U.S. military support. With uncertainty surrounding American foreign policy and increasing global instability, European leaders recognize the need to develop independent defense capabilities.
A New Industrial Future for Europe?
The transition from civilian to military production marks a profound shift in Europe’s economic landscape. For decades, the continent prided itself on industrial innovation and efficiency, but its failure to secure a stable energy supply has undermined its manufacturing dominance. Now, as European leaders prioritize security over economic liberalization, defense production may replace traditional industries as the backbone of the region’s economy.
However, this shift carries risks. Military manufacturing may not generate the same broad economic benefits as traditional industrial sectors, and the loss of consumer-focused production could weaken Europe’s competitiveness in global markets. Additionally, if energy costs remain high, even military factories may struggle to maintain long-term viability.
The coming years will reveal whether Europe can successfully pivot its industrial sector toward defense, or if high energy prices will continue to erode its economic foundations. One thing is clear—without a reliable energy strategy, Europe’s industrial future will remain uncertain, whether in the civilian or military realm.
FAM Editor: Military production is less sensitive to energy costs than consumer goods, so this makes sense to a certain degree. But what a shame it is that such a formidable manufacturing base has been essentially destroyed by short-sighted energy policies.
