By German standards, it was a shocking moment in 2022 when, after Russia’s full-scale invasion of Ukraine, center-left Social Democrat Chancellor Olaf Scholz announced the Zeitenwende or turning point. In response to Moscow’s aggressive invasion of Ukraine, Berlin’s defense posture would shift to a war footing.
In addition to vast, far-reaching sanctions on the Russian banking, arms, and, most especially, energy sectors, Chancellor Scholz announced the creation of a special, one-off fund that would inject vast sums of money into defense by German standards.
Friends and Allies had long lambasted the German Bundeswehr. Critics stated the group was domestically inefficient at best and hopelessly ineffectual at defending the country at worst. But, the Chancellor explained, it would receive a €100 billion shot in the arm and the biggest rejuvenation since the end of the Cold War and subsequent military draw-down.
Though lambasted across the world at the beginning of the conflict for its hesitancy in supplying Ukraine with weapons and ammunition, Berlin would eventually, albeit slowly, become one of the staunchest supporters of Ukraine, which it remains today.
The German government continuously updates a complete list of its military aid to Ukraine, which can be seen here.
Germany’s Military: On the Comeback Trail?
It was, in essence, a clever accounting trick that leveraged a loophole to circumvent Germany’s constitutionally mandated debt brake.
Chancellor Angela Merkel’s tenure at the helm saw German lawmakers enshrine in law a debt brake, essentially a federal rule forbidding surplus spending in excess of 0.35 percent of GDP. Germany—one of the world’s most fiscally solid and financially responsible countries with a sterling credit rating to boot — essentially tied one hand behind its back by forbidding virtually any excess spending.
One exception that lifted the rule was for emergencies, put into practice most recently during the COVID-19 pandemic, when the debt brake rule was suspended to combat the virus.
To the outside observer then, it was almost inexplicable that the largest, most brutal war in Europe in 80 years did not make the cut as an emergency. But there it was anyway, Chancellor Scholz’ Sondervermögen, the special one-off €100 billion, was passed in response to the Russian full-scale invasion of Ukraine via constitutional amendment, and technically in adherence to Germany’s debt brake spending law.
As impressive as that sum was, it was not sustainable—Germany’s core defense spending levels had not risen, and once the fund was spent by 2026 or 2027, basic spending levels would remain the same.
Defense Spending and Growth: Spillover Effect
There are clear arguments to be made that an increase in German defense spending above and beyond the current levels, and sustainably into the future, will not be a drag on the economy but a generative force for economic growth—which becomes even more critical when considering the current economic uncertainty caused directly by the current American administration.
The Kiel Institute of the World Economy, a think tank, studied the issue of increased defense spending and reached some important conclusions.
“There is broad consensus that the economy expands to accommodate at least part of the increased defense spending, production, procurement, and employment. There is some disagreement on the magnitude of this expansion and whether military spending crowds out or stimulates the private sector. The effects will depend on the context, including the ECB’s response and the source of financing,” the report explains.
“A conservative estimate is that the Europe-wide GDP will grow by 0.9% to 1.5% if defense spending increases from 2% to 3.5% of GDP. This implies only a limited tradeoff between armament and private consumption in the short run in the short run.”
But one of the report’s most substantial findings is remarkable. It says that “the long-run productivity gains from military spending may be substantial. The best examples of public research and development are for military applications and there is evidence of spillovers to the private sector.”
Furthermore, “a transient 1% of GDP increase in military spending could increase long-run productivity by a quarter of percent both through learning-by-doing and R&D. The returns to public R&D are particularly high and may pay for themselves. R&D spending has been identified as one of the three main keys to addressing Europe’s lagging productivity in the Draghi report.”
Interestingly, the report bashed NATO’s percentage of GDP spent on defense metrics. “Setting percent-of-GDP targets for military spending is counterproductive. It may lead to procyclical macroeconomic policies and dis-incentivize efficient procurement.”
“Instead,” the report says, “one should conduct a long-run cost-benefit analysis of the materiel and personnel requirements against their expected fiscal cost and allow procurement to achieve the highest quality at lowest cost possible.”
The Newest Chancellor and the Defense Spending Reform—or Revolution
Chancellor Scholz’s days are numbered. In May, German lawmakers will meet to officially anoint the center-right Christian Democrat Friedrich Merz as the new Chancellor following the recent snap German federal elections. Merz’s defense spending plan is ambitious.
It dwarfs the previous one-off €100 billion fund in both scope and sustainability. In addition to increased military aid to Ukraine, the incoming Chancellor’s coalition negotiations yielded a €500 billion special fund tied to defense and infrastructure investment.
While a welcome boost to the Bundeswehr and German defense industry, perhaps more important is the future of defense spending—the Merz-led government amended the constitution. It exempted defense spending from the constitutionally enshrined debt brake. German defense spending will no longer be tied to minuscule percentages of GDP but allowed to increase as necessity arises.
What Happens Now for Germany’s Military?
So, while Germany’s newest Chancellor does not yet hold office, it is clear that Germany’s industrial might will soon be put to the test of reequipping and rearming the moribund German Bundeswehr. If it is enough to fend off Russia, should the United States cement itself in opposition to Europe, however, remains to be seen.
About the Author: Caleb Larson
Caleb Larson is an American multiformat journalist based in Berlin, Germany. His work covers the intersection of conflict and society, focusing on American foreign policy and European security. He has reported from Germany, Russia, and the United States. Most recently, he covered the war in Ukraine, reporting extensively on the war’s shifting battle lines from Donbas and writing on the war’s civilian and humanitarian toll. Previously, he worked as a Defense Reporter for POLITICO Europe. You can follow his latest work on X.
