Germany to spend trillions on defense and infrastructure
Germany is poised to embark on a substantial investment in defense and infrastructure, amounting to a trillion euros. Germany’s substantial spending initiative has successfully navigated its final parliamentary obstacle, setting the stage for nearly €1 trillion in civilian and defense investments aimed at invigorating the regional economy and diminishing military dependence on the United States. However, analysts and defense specialists have cautioned that for Germany and Europe to fully capitalize on the financial influx, it is essential that this capital be accompanied by bold—and potentially unpopular—structural reforms, encompassing taxation, administrative efficiency, and labor market adjustments.
Germany’s fiscal strategy, amounting to approximately $1.08 trillion, has elicited positive reactions throughout a continent increasingly anxious about indications that the United States is reducing its security obligations to Europe while pursuing a reconciliation with President Vladimir Putin’s Russia, perceived as the principal threat to the region. “Berlin is depleting its financial reserves, and it is doing so prior to the inauguration of the next government,” stated François Heisbourg, a Paris-based authority on strategy and defense who has provided counsel to the French president. Germany is equipping itself to establish a military capability that aligns with its economic and strategic significance. This represents a significant transformation.
Friedrich Merz, the victor of the recent German election and the prospective chancellor, has committed to prioritizing European collaboration following a period in which the outgoing administration was notably preoccupied with internal discord among the coalition’s three parties. The German spending plan he devised represents a significant shift for Berlin, which has long advocated fiscal discipline to its European counterparts while allowing its military capabilities to decline due to insufficient investment. The magnitude of the package significantly surpasses the €158 billion defense fund proposed by the European Commission this month, aimed at bolstering military expenditure within the European Union and providing ongoing assistance to Ukraine.
Heisbourg noted that the German decision carries significant credibility, as it stands to directly advantage domestic arms manufacturers such as Rheinmetall, known for its production of armored vehicles and ammunition, alongside other firms that have demonstrated their capacity to fulfill substantial orders promptly for Ukraine. The spending package is facilitated by a constitutional amendment that effectively exempts defense-related expenditures from the constraints of Germany’s stringent fiscal regulations, which prohibit budget deficits exceeding 0.35% of gross domestic product. This exemption will encompass expenditures not only on military equipment but also on cybersecurity, intelligence, and civil protection initiatives.
Germany’s relatively low public debt positions it to increase defense spending in accordance with the willingness of investors to lend. This is contingent upon maintaining overall expenditures within the bounds of the EU’s more flexible fiscal regulations. “The current focus must be on ensuring that expenditures are optimized and not merely directed towards addressing deficiencies in hardware,” stated Ben Schreer, executive director of the International Institute for Strategic Studies’ Europe office in Berlin. “We are now presented with the opportunity to consider the essential capabilities we must develop—in software, artificial intelligence, communications, and space—if we aim to reduce our reliance on the United States.”
The amendment establishes a €500 billion investment fund aimed at revitalizing the country’s historically underfunded transport, communication, digital, and power infrastructure, alongside initiatives to address climate change, over the forthcoming 12 years. The legislation was structured to ensure that only new investments qualify for funding, a measure intended to inhibit the transfer of existing investments from the regular budget into the fund. Following the amendment’s attainment of the requisite two-thirds majority in both parliamentary houses on Tuesday and Friday, the execution of the package will hinge on the formulation of comprehensive legislation, which is set to be developed upon the inauguration of the subsequent government.
The conclusion of negotiations is anticipated by the end of April, as Merz’s conservatives and their potential center-left coalition partners remain engaged in discussions regarding the government’s policy framework for the forthcoming four years. Although the two set aside their disagreements to advance the spending package, they continue to diverge on various issues, including the extent of measures needed to address illegal immigration and the advantages of reducing income and corporate taxes. The recent spending package has generated significant unease among conservative factions, particularly following Merz’s campaign opposing any relaxation of the nation’s fiscal regulations. However, there is a consensus among experts that the dual approach of swift military buildup alongside essential infrastructure investments may serve as a catalyst for an economy that has experienced stagnation since prior to the Covid-19 pandemic and has faced recessionary conditions for the last two years.
According to insurer Allianz, the plan has the potential to boost Germany’s GDP by 0.3% in the current year and by 2.1% by 2027, contingent upon prompt implementation. Germany’s public debt, previously projected to decline sharply under the existing spending trajectory, is now anticipated to rise to 68% of GDP by 2027, according to Allianz. This level remains relatively low compared to European and U.S. benchmarks and is unlikely to significantly affect the nation’s funding costs. However, the economists within the group cautioned that achieving and sustaining this growth trajectory without reigniting inflation necessitates Germany to undertake several structural reforms. These include addressing the unsustainable pension system, enhancing incentives for labor and innovation, and reducing taxes, measures that may not resonate well with the electorate.
Similarly, the economic repercussions of increased military expenditure would be most pronounced if Germany prioritizes domestic and European spending, with a significant portion allocated to research and development, as indicated by the Kiel Institute for the World Economy. This would enhance the probability that military innovations transition into the private sector, thereby further stimulating growth. “If allocated effectively, the proposed defense expenditure has the potential to provide Germany with a structural enhancement,” stated Moritz Schularick, president of the institute. Experts indicated that the forthcoming administration must address the sluggish, bureaucratic, and inefficient procurement procedures within the Defense Ministry to guarantee that the additional funds raised in capital markets can be effectively utilized by the military.
