Who Gets Paid When Europe Rearms

Near Várpalota, a town in western Hungary, production of 155mm artillery shells for the PzH 2000 self-propelled howitzer and 120mm rounds for the Leopard 2 tank was scheduled to begin in early 2026 — but there has been no public announcement that large-calibre production has actually begun. Part one set out the machine that, in four years, freed up around €100 billion for European rearmament. This part follows the revenue side: where that money ends up — and why Hungarian industry became one of this story's leading players, and one of the least noticed.

1. The record year in numbers: the Rheinmetall phenomenon

Rheinmetall, based in Düsseldorf, is the continent's largest ammunition maker, and its 2025 figures show how much the rearmament wave has been worth to the manufacturers. In the 2025 financial year, group sales came to €9.935 billion, 29% more than a year earlier; operating profit rose by a third to €1.841 billion, and the operating margin climbed to 18.5%. The weapons and ammunition division alone generated €3.532 billion of sales at an operating margin of around 29% — meaning that of every euro spent on ammunition, roughly 29 cents is operating profit for the manufacturer. In the first half of 2026, the division posted sales of €1.757 billion (+33%) at a margin of 23.7% — so the scarcity premium has eased, but it remains strikingly high.

The order backlog is where the future is already visible — and by the summer of 2026, the picture had changed. According to the half-year report the company published on 6 August, the backlog stood at €80.5 billion on 30 June, against €56 billion a year earlier: growth of 44%. First-half sales were €5.2 billion (+39%), operating profit €786 million (+74%) and the operating margin 15.0%; the second quarter on its own lifted operating profit by 115%, from €262 million to €562 million. In the same report, however, management cut its full-year guidance: instead of the earlier €14.0–14.5 billion it now expects sales of €13.7–14.2 billion, organic growth of 28–31% and a margin of roughly 19%. The company itself gave the reason: the cancellation in June of Germany's F126 frigate programme, from which it expects to lose as much as €300 million of sales in its naval division. Nor does the company expect demand from Europe alone any longer: at the March results presentation, the chief executive, Armin Papperger, said Rheinmetall was in a “prime position” to supply the United States as well, whose stockpiles the Iran war has run down. In November 2025, Papperger set a target of €50 billion in annual sales and a margin above 20% by 2030 — more than six times its 2024 sales.

On 3 June 2026, the company announced the sale of its last civilian division, Power Systems, for €350 million — completing its exit from the car industry and turning Rheinmetall into a pure defence company. A firm that for a hundred years also made pistons and car parts now lives solely off what state defence budgets buy. The deal has a Hungarian angle, too: the civilian operations at the Szeged plant in southern Hungary, opened in 2025, change hands as part of Power Systems, while the site's defence-electronics production stays with Rheinmetall — the new owner has promised to take the workforce on.

Prices point in the same direction. In mid-2024, a single 155mm artillery round made in western Europe cost between $5,000 and $10,000 — several times the pre-war level. When demand is driven by a political spending target and supply is concentrated in a handful of manufacturers, rising prices and margins are not a surprise but a consequence of the way the system is designed.

The winners, of course, are not confined to a single company: the Czech group CSG, the Franco-German KNDS, Italy's Leonardo and the Norwegian-Finnish Nammo are all beneficiaries of the same guaranteed demand. Rheinmetall is nevertheless the cleanest case: nowhere is the mechanism clearer — political spending targets turn into an order backlog, the backlog into sales, sales into a stock-market re-rating — and Rheinmetall was also where it first became clear what happens when the first link in that chain, political will, wavers.

2. Hungary's role: two factories, one legacy

In this European gold rush, Hungary became a producer rather than simply a buyer — and it did so under the previous government, the cabinet of Viktor Orbán, which ran the country from 2010 until the April 2026 election. Rheinmetall has built up two centres in Hungary:

Zalaegerszeg: in far-western Hungary, near the Austrian and Slovenian borders — the Lynx KF41 infantry fighting vehicle plant began production in 2023; it employs around 500 people and has an annual capacity of more than 100 vehicles. In August 2023, the Hungarian Defence Forces' first domestically built Lynx rolled off the line.

Várpalota: the ammunition plant jointly owned by Rheinmetall (51%) and the Hungarian state (49%) was inaugurated on 29 July 2024; it began by making the 30mm cannon ammunition used by the Lynx. A second phase adds 20 hectares, bringing the total site area to around 120 hectares, and creates some 200 jobs; this is where production of 155mm artillery rounds and 120mm tank ammunition is due to start, scheduled for the beginning of 2026. The most recent public progress report dates from October 2025: the buildings were finished and the machinery was being installed. There has been no public announcement since to confirm that production has begun — one to watch. An RDX explosives plant is also going up, a joint venture between Rheinmetall and the Hungarian N7 Holding; there is no public target date for it to start production.

This capacity grew out of decisions taken by the Orbán governments — the industrial arm of the Zrínyi programme, Hungary's armed-forces modernisation drive — but it is bearing fruit under the Tisza government, until then the main opposition force, which took office after the April 2026 election. Ammunition and explosives production is ramping up in precisely the segment where supply is tightest and where, on the divisional figures above, margins are the highest. The press close to Fidesz — since the 2026 election the country's largest opposition party — put it this way: “Viktor Orbán and his people were quicker than anyone; they landed the military deal of the decade for Hungary.” The picture is more nuanced than that, and a recent deal showed exactly why.

3. The Romanian lesson: the race for the rent

On 30 April 2026, Romania picked the Lynx KF41 as the backbone of its military modernisation, and on 29 May it signed Central Europe's arms deal of the decade: the full package — 298 Lynx vehicles, 24 Skyranger air-defence systems, ammunition and four naval units — comes to €5.7 billion, the largest international order package in Rheinmetall's history, financed through SAFE, the EU's joint defence credit line; the 298 Lynx alone account for around €3.3 billion excluding VAT. The vehicles, however, will not be built in Zalaegerszeg: Rheinmetall is setting up its new production hub in Mediaș, in Transylvania, at the Automecanica plant in which it took a majority stake in early 2024. Világgazdaság, a business daily close to Fidesz, registered the news under a headline opening “A huge disappointment”: “Romania leaves Hungary out of the arms deal of the century, but makes Transylvania the hub.”

The Romanian decision shows two things. First, the logic of SAFE lending: the country doing the buying with EU money steers the work into its own industry — in practice, joint European procurement turns into a competition between national industrial policies, in which every government competes for domestic assembly. Second, that a country's status as a production hub is not permanent: Rheinmetall builds where the orders and the state co-financing are already in place. Zalaegerszeg's advantage was that it got there first; the Mediaș case shows that such an advantage can be lost again with every new contract. The other side of the coin is that the company's supply chains are integrated: Mediaș is the third large Lynx production centre, after Germany and Hungary itself, and the production capacity for the Lynx's 30mm ammunition was established at Várpalota, so the Hungarian sites may benefit indirectly from regional orders.

Not everyone is celebrating: the ETUC, the confederation of European trade unions, warns in a position paper that member states risk being forced to choose between welfare and weapons.

4. Whose money, whose risk?

Let us follow the money along a single chain, from where it starts to where it ends up. The EU taxpayer (or the state borrowing on their behalf) pays in; the government places the order using SAFE or the escape clause that lifts defence spending out of the EU's fiscal rules — that is, outside the usual peacetime budget constraints; the manufacturer fulfils the order at record margins; and the shareholder pockets the re-rating. Every step in the chain is legal and out in the open. The question is not legality but the direction of the incentives: at one end of the chain a political spending target guarantees the demand, at the other a share price rewards the expansion of capacity — while the classic brake, the budget constraint, has been removed.

24 June 2026 showed how vulnerable a boom built on guaranteed demand can be. When the German defence ministry terminated the F126 frigate programme — the estimated cost of the six ships had climbed from €10 billion to more than €18 billion, so it switched to eight smaller vessels — Rheinmetall's share price fell 20% within a single day, to a near-15-month low, wiping out more than €11 billion of market value. In a single-buyer market, one decision is all it takes. The €80.5 billion order backlog covers nearly six times the sales expected for 2026 — but it depends on the same political will that cancelled the frigate programme with a stroke of the pen.

And the risk did not stay abstract: the guidance cut described in the first section is precisely that decision translated into numbers. Six weeks passed between the decision in Berlin and the company's downgrade of its own full-year forecast — that is how long it took a political decision to feed through to the results.

There is a second vulnerability, one independent of politics, that emerges from the same report: alongside the record backlog, operating free cash flow sank to negative €1.616 billion in the first half, against negative €631 million a year earlier. The company puts this down to changes in the timing of advance payments, deliberate stock-building and continuing capital expenditure — in other words, the ramp-up calls for spending up front, while the revenue is booked only as the deliveries are made. The market reacted more strongly to that than to the record figures: in mid-August, Rheinmetall's shares stood at around €1,168, down 25.2% on the year from January's €1,561 — even as, over the same period, sales rose by 39% and operating profit by 74%. So the defence industry's golden age does not translate into a steadily rising share price: investors price in the cash it actually generates, not the order backlog.

In this chapter of the story, Hungary's ledger is clearly in the black: the two plants are high-value manufacturing capacity with an export market, and their market is the whole rearming continent — the revenue comes in even when the spending is financed from another country's budget. At the same time, the ownership structure means the larger share of the profit belongs to the Düsseldorf parent and its shareholders: at Várpalota the Hungarian state is a 49% co-owner, and at Zalaegerszeg the plant is a Rheinmetall subsidiary. What Hungary gains is chiefly jobs, a tax base and a role in Europe's security of supply — the stock-market returns of the defence-industry golden age accrue elsewhere.

5. The counter-argument: this is catch-up spending, not a bubble

The strongest objection to the risk picture above runs like this: what is happening now is not an overheated boom but a catch-up after a decade of neglect. Europe's ammunition stocks in 2022 would have lasted weeks; according to the Draghi report on European competitiveness, the continent's defence industry goes into the coming decade with an investment shortfall of several hundred billion euros. If demand stays structurally higher over a ten-year horizon — and the Russian threat makes that likely — then today's capacity-building is not misallocation but belated normalisation, and the high margins are a temporary scarcity premium that new entrants (the Czech CSG, Romania's Pirochim, an expanding KNDS and Leonardo) will erode over time.

There is a great deal in that argument — the shortage of stocks is a documented fact. What it does not resolve is that the demand here is political rather than consumer demand. It does not come from the decisions of millions of buyers but from a few dozen budget votes. The normalisation scenario therefore stands or falls on whether political commitments running to 2035 survive ten years and successive changes of government. The cancelled frigate programme, the Spanish exemption and NATO's 2029 review all point to the same thing: the defence industry's biggest risk today is neither technology nor competition — it is that its customer changes its mind.

In summary. The revenue side of Europe's rearmament wave is heavily concentrated: demand guaranteed by political spending targets has brought record sales, record margins and a record order backlog to a handful of large manufacturers, Rheinmetall foremost among them — yet the first half of 2026 also showed that negative free cash flow, a downgraded forecast and a share price that fell over the quarter can sit behind the records. Hungary sits at an unusually favourable point in the chain: not merely a buyer but a producer too, and through Zalaegerszeg and Várpalota one of the continent's supply nodes for ammunition and combat vehicles. But the Romanian Lynx deal and the German frigate cancellation teach the same lesson: this income is not a guaranteed rent but revenue from a business exposed to competition and to politics. Part three turns to the other side of the ledger: who pays for all of this — and how Hungary's 5% pledge squares with the promise of the euro by 2030.