Can increased defense spending by Germany stimulate its economic development?
In a bid to modernize the military and enhance Germany's defense capabilities following geopolitical tensions, particularly Russia's 2022 invasion of Ukraine, the German government has decided to increase defense spending to up to 5% of GDP. This move, while providing a significant boost to the defense sector and helping stabilize some industrial segments, is a riskier and less economically efficient strategy compared to investing in infrastructure, education, and childcare.
Economists from the University of Mannheim have found that the fiscal multiplier for military spending in Germany is about 0.5. This means that for every euro spent on defense, only 50 cents of additional GDP growth is generated. This is relatively low compared to public investments in areas like education, infrastructure, and childcare, which generate two to three times the economic value added for each euro spent.
The weaker economic impact of defense spending is attributed to the German defense industry's structural characteristics. It operates at high capacity with little competition, causing new government orders to mostly drive price increases rather than expand production significantly. In contrast, infrastructure projects, such as road and bridge construction, railway expansion, and fiber-optic network installation, tend to stimulate broader economic activity, benefiting multiple sectors and generating more sustained job creation.
The increased defense spending may offset losses in struggling sectors but does not necessarily lead to net new growth. For instance, German car manufacturer Volkswagen is considering producing tanks at its Osnabruck plant to offset losses and potential closure. However, limited supply and increased demand in the defense industry can cause prices to rise, potentially impacting the overall economy negatively.
Notably, increased defense budgets have led to cuts in other areas such as development aid, which may have negative social consequences but do not directly affect the comparison of economic returns from defense versus other investments.
On the bright side, the defense sector stands to benefit significantly from the increased spending. The German parliament has lifted the cap on national defense spending, allowing for greater investment in the industry. Companies like Rheinmetall (arms manufacturing) have seen enormous stock market gains, with shares rising from €59 in 2020 to between €1,700 and €1,800 by June 2025. German arms companies, such as Rheinmetall, have seen a surge in orders, with an order backlog worth €63 billion ($74 billion) in Q1 of 2025.
Moreover, the increased spending is expected to benefit companies that build infrastructure and manufacture high-speed fiber-optic internet cables. On March 18, 2025, Germany approved an infrastructure investment package worth billions. Companies outside the defense sector, such as Cologne-based Deutz AG, are looking to expand their presence in the defense industry.
In conclusion, while Germany’s ramp-up in defense spending provides a significant boost to the defense sector and helps stabilize some industrial segments, it is a riskier and less economically efficient strategy compared to investing in infrastructure, education, and childcare, which deliver greater overall economic growth multipliers and broader societal benefits.
- The German government's decision to boost defense spending could positively affect the news sector, as increased spending may lead to more stories about military modernization and Europe's geopolitical dynamics.
- Economists have discovered that technology-focused sectors like infrastructure and high-speed fiber-optic internet networks stand to benefit significantly from Germany's infrastructure investment package, which was approved on March 18, 2025.
- As the German government redirects funds from development aid to defense spending, the social consequences and potential negative impact on european and global underdeveloped regions should be closely monitored by the news media, particularly those focusing on international affairs.
