You need sufficient production to keep any kind of national defence industry going. You can't keep trickling in R&D money to build one-off prototypes and fancy CAD models forever to sustain an industry.
You can't build critical mass from building 150 fighters or 150 tanks every 40 years or 8 frigates every 25 years. Rising unit costs and manpower costs have drastically reduced what can be acquired.
What is "critical mass" in this case? If you mean sustainable returns on investment, the UK is well past that point. Which is why it's sort of floundering, at least in areas of armored vehicles and aircraft, and to a lesser extent surface escorts.
Production isn't important aside from a minimum scale to maintain a pool of talented welders and production specialists, which can be extremely low rates of production per month. Something like 10 tanks a year or one large ship (T45/FREMM/Burke sized) laid down every year and a half or so for each shipyard, and a plane every two months.
Japan and Korea builds tanks and aircraft at similar rates over long periods in small ateliers. The only problem being it's not easily scaled.
For reference, Japan was producing F-2s at a blistering speed of...about five or six a year, at maximum rate. The minimum economic rate was around eight but the LDP sorta just muscled it through anyway with the SDF getting about two squadrons' fewer fighters (~30) than it wanted.. You really don't need many fighters to be built to be economic at the lower end of the production scales, assuming you're just feeding a domestic market anyway. Domestic markets are small and have known quantities. Export markets can potentially be lucrative but are not serious in almost all realms for European production aside from extremely small missile boats or whatnot. No one who is buying major surface escorts, aside from the usual flaky suspects (Australia and Canada, well known renegers), are interested in British large ships. They want Spanish, German, or French. Or they make their own.
So, instead of 8 frigates in 4 years, why not 8 frigates in 16? Or 150 fighters or tanks over 15 years? That would be comparable to Japanese production rates of warship classes and fighters, respectively, and seems to be adequate to sustain industrial base. It's also long enough period that by the time you finish rolling out the last airplane or frigate, you're ready to do work on the next thing. Whether that's a mid-life upgraded version of the old ships, or a "technology insertion", or an entirely new ship; or upgrading old airframes to a new standard, or producing the next airplane's prototype.
FWIW the UK really hasn't lost its shipbuilding prowess though, which aside from airplanes, is the only thing it really needs.
The only thing European countries really need to do is realize that their arms markets aren't sustainable at their current grossly inflated sizes and scale back accordingly. Some international concerns are probably going to be necessary (Ericsson, Thales, etc.) since not every can make super radars like the SMART-L, but nearly every country in Europe has oversized basic AFV, ship, and aviation industries that results in bizarre and silly work sharing agreements that probably do more long term damage than not.
I guess long term (a few decades from now) those concerns are going to be consolidated into two or three major pan-European conglomerates, like how Airbus was formed, or they're going to be bought by Americans or Chinese or German investors at some point. Neither outcomes are particularly good for the individual countries those firms exist in, though.
