It is the golden age of the arms industry: The German Federal Armed Forces aim to become the strongest army in Europe. What does this mean for the German economy? Economists have conducted detailed analyses on this.

March 18, 2025 will be a day etched in German history. On that day, the German Bundestag approved an unprecedented debt path with a two-thirds majority. In the coming years, Germany will finance investments of 400 billion euros to modernize its aging infrastructure and 100 billion euros for climate protection through loans.

Germany is investing even more in defense, with almost no limits in this area. As the defense minister from the Social Democratic Party, Pistorius, has repeatedly called for since Russia's invasion of Ukraine, all measures that make Germany and the German Federal Armed Forces "combat-ready" will receive funding. German Chancellor Mertz (also known as "Merkel") hopes to turn the German military into the strongest conventional army in Europe.

This is good news for companies building roads and bridges, laying railways, and producing high-speed internet fiber optic cables. It is even better for the defense industry. For decades, the defense industry has seen its position in the German economic structure steadily decline. After all, who in Germany would be interested in tanks anymore?

In 2020, the stock price of Rheinmetall AG, Germany's largest defense company, was 59 euros. By June 2025, its stock price fluctuated between 1,700 and 1,800 euros. UBS predicts that Rheinmetall's stock price will continue to rise, with a current target price of 2,200 euros.

"A massive economic stimulus plan"

The defense industry is currently in a golden era, and defense industry executives state that the beneficiaries of increased defense spending are not only businesses. "Defense spending is a huge economic stimulus plan," said Dohl, head of the defense company Hensoldt, at an event in Frankfurt in March 2025. He stated that increased defense investment would boost the German economy, which is currently in a downturn.

Politicians also hope to inject new momentum into economic growth while modernizing the defense industry. However, economists had already pointed out before the historic vote in the Bundestag that expectations should not be too high. "An increase in national defense spending brings some stimulation to the German economy, but the economic impact will be limited," wrote Professor Krebs from the University of Mannheim in a statement submitted to the Bundestag Budget Committee.

Economists warn: low economic returns

Krebs and his colleague Kaczmarczyk discussed this in detail in a study: when examining the contribution of additional government spending to GDP, German defense spending can bring at most a 0.5-fold increase. In other words, for every euro spent by the government, it can generate at most 50 cents of additional economic activity.

Compared to investments in infrastructure and education, or the expansion of childcare facilities such as kindergartens and schools, the return rate would be two or even three times higher. Krebs stated that from an economic perspective, militarizing the economy is a risky gamble with very low overall economic returns.

Defense spending is like insurance

The reason is easy to understand. A tank, once built, creates no additional value whether it is used, left idle, or destroyed on the battlefield. Defense spending is like insurance - you buy it for protection in an emergency, but if you don't need it, the premium is wasted.

On the contrary, if the government uses this money to invest in transportation routes, goods can be transported to businesses via these roads, bridges, and railways. Businesses can use these goods to produce products and then sell them. If kindergartens are built, parents can have time to go to work and earn money. Schools can help young people grow up to be successful.

Additionally, the current production of defense industry products can only bring limited economic growth. Orders in the German defense industry are increasing significantly. For example, Rheinmetall's order backlog reached nearly 63 billion euros in the first quarter of 2025. Before the outbreak of the war in Ukraine, this number was less than half of the current figure, around 24 billion euros. Other companies in the industry are also busy.

If demand increases and supply is limited, it usually means there is a lack of competition, leading to rising prices. Economists have already warned about this. Krebs and Kaczmarczyk wrote: "The benefits of increased defense spending for defense capabilities are far less than the benefits for the profits and dividends of defense companies."

Could a car factory start producing tanks?

However, the good business prospects have also caught the attention of the civilian industry, especially those affected by the economic slowdown. For example, Deutz AG, based in Cologne, not only produces engines for aerial work platforms but also engines for agricultural vehicles, excavators, and other large machinery. Due to the weak economy, the company's sales dropped by 12% in 2024. Deutz has already been producing engines for military vehicles and now plans to significantly expand this business. "For us, defense is an important and attractive market with great growth potential," said the company's CEO Schulte in March.

Taking Volkswagen as an example, this carmaker is currently in crisis and has been forced to lay off thousands of employees. The factory in Osnabrück is on the verge of closure. The development of the defense industry could provide it with a turning point. Rheinmetall is considering whether it can also produce tanks there. A plan to produce bulletproof driver cabins for trucks has already been made.

Using laser technology to defend against drones?

For Trumpf, a mechanical engineering company, changing business areas is not easy. Its shareholder agreement stipulates that the family-owned company will not participate in weapon production. However, the chairman of the supervisory board and co-owner of Trumpf, Leibinger, wants to change this situation. At the Munich Security Conference in February, he told the Handelsblatt: "We in the economy must also reassess our necessary contribution to the construction of a defensive democracy and confirm the value of defense capabilities and essential supplies from within."

Nevertheless, Trumpf clearly has commercial reasons for wanting to make adjustments. The company has extensive expertise in laser technology but is struggling with declining orders. "Even Trumpf cannot escape the prolonged global economic recession that has lasted nearly two years," the company stated in a declaration announcing the layoff of 1,000 employees. If laser technology is used to defend against drones, their orders will certainly not be a problem anymore.

R&D can benefit from it

These are examples that benefit the economy. Increased defense spending may also have a positive impact on R&D. Economists from Mannheim, Krebs and Kaczmarczyk, also acknowledge this in their research. However, they also write that it is necessary to ensure that military research not only leads to technological developments in the defense sector but also sparks technological developments in the civilian economy.

This requires specific control mechanisms. These two scholars suggest that the state directly invest in defense companies. This way, "the use of public funds can be more precise, and the use of funds can be better controlled."

Sources: DW

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