How Effective is Germany's Rearmament Really? Between Aspiration and Reality

Germany is massively increasing its defense spending to respond to new security risks while simultaneously aiming to provide economic stimuli. However, a large portion of the funds is flowing abroad.

Germany has announced its support for the defense industry to respond to growing security concerns and, at the same time, provide momentum to a weakening economy. To this end, large-scale investment plans have been launched. However, the question arises whether the defense industry in Germany has actually gained momentum as a result of these investment plans. To what extent have these investments contributed to strengthening defense capabilities while also unfolding measurable positive effects on the weak economic development?

Germany’s Industry and Security Under Pressure

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For several years, Germany has been trying to cope with significant challenges. In the past five years, economic growth has remained very limited. In the industrial sector, 300,000 jobs were lost. High energy prices, changed supply chains, and countries like China and Türkiye, which are industrializing rapidly, have weakened the competitiveness of German industry.

At the same time, Germany’s security policy environment is also changing today. In a country whose defense architecture depends heavily on the USA and which hosts some of the largest US bases in Europe, the perception of security is beginning to shift. The assumption that American support for European defense might not be as strong in the future as it was in the past has prompted Berlin to put the long-neglected defense industry and military spending back on the political agenda. On the other hand, the German defense structure has also been confronted with significant problems for years. Over the past decade, the Bundeswehr (German Armed Forces) has repeatedly been in the public eye due to the poor condition of its equipment.

As an answer to all these problems, comprehensive reforms in defense and security policy have been carried out in Germany over the past three years. The defense budget planned for 2026 has since grown to 108.2 billion euros. Berlin has pledged to invest significantly more in the domestic production of defense goods.

Berlin Invests Massively in Military Rearmament

In this context, very large investment packages were announced. Chancellor Merz stated that hundreds of billions of dollars in total are to be used for defense spending in the coming years. The government has committed to spending a total of 550 billion euros on defense between 2026 and the end of 2029, provided that military aid for Ukraine is included. With this policy, Germany wants to revitalize the production sector and the economy on the one hand and strengthen the country’s defense capabilities on the other.

Germany has thus moved up to fourth place among the world’s largest defense spenders—behind the USA, China, and Russia. In 2022, when Russian President Vladimir Putin began his full-scale invasion of Ukraine, Germany was still in seventh place. But this is exactly where the real question begins: How effective are these large-scale investments actually when it comes to setting the economy in motion and increasing defense capability?

A look at the details of the German defense budget shows that a significant portion of the budget is earmarked for the purchase of weapons. Which weapon systems are these, and is it already clear where they will come from? Yes, this is largely known. As part of the modernization of the German armed forces, around 14 billion dollars have been allocated for F-35 fighter jets to be procured from the USA, and another approximately 7 billion dollars for Patriot air defense systems. If helicopters and ammunition are added, payments for US products are likely to total more than 35 billion dollars.

Conventional Weapons Instead of a Technological Leap?

Israel ranks second in this massive supply chain with the sale of the Arrow 3 missile defense system worth around 6.7 billion dollars. The Arrow 3 contract was the largest single arms export in the history of the State of Israel.

Looking at individual expenditure items, it becomes clear that more than 35 percent of the enormous German defense budget flows to American and Israeli companies. Despite the scale of defense spending, this raises the question of the extent to which the resulting economic effects actually remain in Germany. In other words: the budget is growing, but it is not yet clear how much of it actually strengthens German industry, German manufacturers, and Germany’s technological capability.

Another point of criticism is that a significant part of the budget flows primarily into traditional defense goods. A government insider expressed concern that the Ministry of Defense is spending “a huge amount of money” on conventional weapons such as armored vehicles and fighter jets.

Arms Boom as an Escape for Industry?

In Germany, it is also evident that many companies want to use their existing infrastructure for the defense industry in light of the slowdown in automotive production. Numerous firms are therefore looking for ways to enter the arms industry. Particularly the weakness of traditional production sectors makes the defense industry a new way out. However, there is also a major problem here: a very large portion of the budget provided for defense flows only to certain large corporations.

In recent times, the general trend in the defense industry has been more toward promoting small and medium-sized enterprises (SMEs). This is because the most innovative technologies today often no longer come from established large corporations, but from startups and flexible technology companies. Nevertheless, in Germany, only a very small part of this large state budget flows to SMEs and startups. According to Moritz Schularick, President of the Kiel Institute, more than 95 percent of German defense spending since 2022 has flowed into “traditional legacy procurement.” For example, Rheinmetall alone has a massive order volume of about 30 to 40 billion euros in the area of ammunition and modernization of armored vehicles, while Airbus receives around 15 billion euros for new Eurofighter aircraft and systems. In the naval sector, TKMS (ThyssenKrupp Marine Systems) is signing contracts worth 5.5 billion euros for next-generation submarines, and the electronics group Hensoldt is collecting tenders for radar systems worth more than 3 billion euros. This picture shows that more than 70 percent of defense spending is concentrated directly on only four or five strategic companies.

Another problem for Germany in this process is the cumbersome procurement procedures and sluggish bureaucracy. In other words: the budget is there, but the procurement process and the operational readiness of the systems remain highly problematic. A report prepared for the Federal Ministry for Economic Affairs and Energy in 2023 explicitly emphasized that the military procurement system must be reformed and designed to allow for testing, rapid procurement, and flexible decisions. According to the report, existing procurement rules are adequate neither for rapid technological change nor for the conditions of high-intensity conflicts.

The Federal Audit Office (Bundesrechnungshof) also points to years of delay in the transition from procurement to actual capability generation. For example, sixteen years after the first K130 corvette was ordered for the German Navy, five corvettes have been commissioned, but it is still not possible to deploy drones from these ships. Yet this capability is now considered a fundamental necessity. This example clearly shows how slowly procurement processes run in Germany and how difficult it is even to integrate modern—now standard—technologies into the rearmament process.

Furthermore, the distribution of the defense budget is far from creating a competitive and innovative ecosystem. In Germany, Poland, and the United Kingdom, between 67 and 90 percent of total military procurement is accounted for by the ten largest contractors.

Germany’s Rearmament with Limited Innovation Impact

In the USA, on the other hand, the share of the ten largest contractors is below 40 percent, despite a significantly higher total defense budget. This difference points not only to the size of the budget but to structural differences in procurement strategy.

Another issue is how much of the defense budget is spent on research and development (R&D). The difference between the USA and Europe is evident not only in the weight of large companies but also in research, development, and startup capacity. Public spending on defense-related R&D in the USA is significantly higher than in European states, both in absolute terms and as a proportion of total public R&D spending.

Against this background, Germany’s rearmament appears at first glance to be a profound change, but the nature and distribution of the expenditures paint a much more complex picture. Yes, Germany is increasing its defense budget significantly. Yes, the country is undergoing a historic shift in security policy. However, a significant portion of these funds flows into foreign procurement, particularly to companies from the USA and Israel. The portion remaining domestically is, in turn, largely distributed among existing large corporations. Therefore, while the increase in defense spending strengthens certain military capabilities in the short term, it has so far contributed only limitedly to a broad-based industrial transformation and the building of a technology-driven new defense ecosystem in Germany.