Germany is undergoing a historic shift, planning to borrow over €800 billion by 2030, a move that breaks with decades of fiscal restraint and Chancellor Friedrich Merz’s own party's tradition of fiscal prudence. This significant borrowing, including over €200 billion next year, will primarily fund the country's defense budget, which is projected to reach €109 billion next year and €183.6 billion by 2030. This rearmament drive is fueled by concerns over Russia and the potential for reduced US military commitment to Europe, with Germany also providing €11.6 billion in military aid to Ukraine next year. The country has amended its constitutional debt brake to exempt defense spending, effectively allowing unlimited borrowing for military purposes.
This surge in defense spending is part of an explicit industrial strategy by the German government to revitalize manufacturing and secure supply chains. Germany aims to reach NATO’s defense spending target of 2.8% of GDP this year and 3.5% by 2029. This environment has led to a boom in the defense sector, attracting global groups to set up operations in Germany. European weapons manufacturers like Rheinmetall have seen significant stock market performance, with shares rising nearly 190% in early January from a year earlier. The country also seeks to build US weaponry domestically to further boost its industry.
The influx of capital and demand for defense technology has also created a boom for consultants and advisers. Firms like McKinsey and Boston Consulting Group have expanded their defense teams, and private equity and venture capital have poured $4.3 billion into aerospace and defense globally between January 1 and March 16 of last year, nearly matching the total for all of 2024. While the government hopes this spending will stimulate economic growth and create skilled jobs, critics point to rising debt interest payments, projected to almost double from €42 billion next year to €81 billion in 2030, and concerns about inflationary pressures and bottlenecks in Europe's depleted industrial base. The BDI, a major industrial lobby, called the borrowings “alarming,” noting skyrocketing interest costs.
