For decades, Germany’s economic engine has been powered by its prowess in exports—think shiny new cars and sophisticated machinery rolling off assembly lines and shipping out across the globe. But lately, the gears have been grinding. Rising energy prices, tangled supply chains, and a volley of new U.S. tariffs have all taken their toll, with German exports to the United States dropping for three consecutive months and hitting their lowest point since February 2022, according to MENAFN and Xinhua. The once-reliable model is showing its age, and policymakers in Berlin are searching for a new spark to jumpstart growth.
Enter defense spending. In a move that marks a profound shift in economic and political strategy, Germany’s lower house of parliament, the Bundestag, approved a historic relaxation of the national debt ceiling in March 2025. The aim? To open the fiscal floodgates and ramp up defense expenditure to 3.5 percent of GDP by 2029—a staggering 162 billion euros, or about 187.92 billion U.S. dollars. This is a dramatic leap from the 2 percent NATO target that Germany only just managed to hit in 2024, for the first time in thirty years. It’s no small feat, and it signals an era of military buildup not seen since the Cold War.
Chancellor Friedrich Merz has made no secret of his ambition, envisioning “the strongest conventional army in Europe” as Germany responds to the ongoing Ukraine crisis and mounting pressure from U.S. President Donald Trump. According to Xinhua, Merz’s vision reflects both the urgent security concerns on the continent and growing doubts about Washington’s long-term commitment to European defense. The message is clear: Germany intends to take its security—and perhaps its economic fate—into its own hands.
The numbers are eye-popping. In 2026 alone, defense spending is set to reach around 83 billion euros (about 96.28 billion dollars), which is roughly 55 percent more than the previous year. The defense ministry is already drawing up more than 60 procurement orders for parliamentary approval by year’s end. These include 20 Eurofighter jets from a consortium of Airbus, London-based BAE Systems, and Rome-based Leonardo, as well as thousands of Boxer armored vehicles from Rheinmetall, Germany’s largest arms manufacturer and the fifth largest in Europe.
It’s not just about hardware. The policy shift has breathed new life into Germany’s defense industry, which had shrunk considerably after the Cold War. Economy Minister Katherina Reiche described the revitalized sector as “an indispensable but long-time underestimated component of economic resilience as well as a potential major engine of recovery amid broader stagnation,” according to Xinhua. The hope is that a booming arms industry will not only bolster national security but also help pull the economy out of its two-year slump.
But not everyone is convinced that defense spending is the silver bullet for Germany’s economic woes. Economists are sounding notes of caution, warning that the benefits may be more modest—and more fleeting—than policymakers hope. Tom Krebs, an economics professor at the University of Mannheim, points out that the GDP multiplier for military investment is limited, at roughly 0.5. “That means every euro spent generates only around 50 cents of additional economic activity,” Krebs explained. By contrast, investments in infrastructure, education, and childcare can double or even triple the return on investment. In short, while defense spending may provide a short-term boost, it is unlikely to deliver the kind of sustained, broad-based growth that Germany needs.
There’s also the issue of where the money actually goes. A surge in military orders, Krebs notes, is more likely to fatten the profit margins of arms companies than to lift the broader economy. The defense market, with its limited number of big players, is oligopolistic by nature, which could drive up prices unless there is strict government oversight. And while the ramp-up in orders may offset losses in other sectors, such as automotive manufacturing, the overall gains may be limited if companies simply switch from making cars to making tanks.
Structural constraints loom large as well. Defense projects are notorious for their long production cycles, years of necessary training, and increasingly automated factories. All of this means that the hoped-for employment boom may not materialize—at least not in the short term. “Greater arms spending could help offset losses in other sectors, but overall economic gains could be limited as companies outside the defense sector are potentially switching to arms production,” said Zheng Chunrong, director of the German Research Center at Tongji University in China, as quoted by Xinhua. “Defense spending cannot be sustained indefinitely. Relying solely on military stimulus will not boost lasting growth.”
Still, the government’s decision to relax the national debt ceiling is, in itself, a major development. For years, Germany has prided itself on fiscal discipline, enshrining a strict debt brake in its constitution. The move to loosen these controls in the name of national security—and economic revival—underscores just how deep the current malaise runs. It’s a gamble, but one that Berlin’s leaders seem willing to take as they chart a new course.
The international context cannot be ignored. With the Ukraine war grinding on and U.S.-European relations in flux, Germany’s renewed focus on defense resonates far beyond its borders. Allies welcome the increased commitment to NATO, while critics worry about an arms race and the potential for escalating tensions. Meanwhile, the country’s export-dependent economy continues to feel the sting of American tariffs and global uncertainty.
For now, the future of Germany’s economic recovery hinges on a delicate balancing act. The defense sector may provide a much-needed shot in the arm, but experts warn that lasting prosperity will require a broader approach—one that includes investment in infrastructure, education, and innovation. Whether Berlin’s historic bet on defense will pay off remains to be seen, but one thing is certain: the days of business as usual are over.
As Germany embarks on its largest military buildup in decades, the world is watching closely. The stakes are high, and the outcome will shape not only the country’s economic trajectory but also its role on the global stage. For a nation that has long defined itself by its economic might and its commitment to peace, the road ahead promises to be anything but predictable.
