Fortifying the Future: Germany's Bold Step to Strengthen Defence and Civil Foundations
Jonathan Leathem
Introduction: A Bold New Era for Germany's Defence Spending
In March 2025, Germany unveiled a revolutionary €500 billion defence and infrastructure spending plan that is set to reshape its role on the global stage. This initiative, spearheaded by Chancellor-designate Friedrich Merz, marks a significant shift from Germany’s post-World War II defence policy, which has always had a relatively passive reputation. With the growing tensions surrounding the Ukraine conflict and broader geopolitical uncertainty, Germany is looking to strengthen its military and enhance its international influence by boosting defence funding to 3% of GDP by 2027.
Unpacking Germany's €500 Billion Defence Overhaul: A New Era of Military Investment
The German government's new defence strategy revolves around a €500 billion package. This includes substantial funding for the modernisation of Germany’s military forces and infrastructure, including upgrades to existing equipment and the procurement of advanced military technology. This strategic overhaul is also positioned as a catalyst for economic recovery, particularly after the stagnation caused by the COVID-19 pandemic. A key aspect of the plan is the lifting of the "debt brake," which had previously restricted military spending to under 1% of GDP. Overall, this decision has major economic implications both domestically and internationally. Primarily, through unlocking funds for defence and infrastructure, Germany is set to inject substantial liquidity into its economy. The estimated €500 billion infrastructure fund is expected to be deployed over 12 years, which could significantly boost job creation, improve national productivity, and stimulate various sectors, particularly construction, technology, and defence industries. Conversely, one of the primary risks of lifting the debt brake is the potential for higher inflation. With more government spending, particularly in areas like defence, there’s a risk of overheating the economy, driving up demand for goods and services.
Rising Military Aid: Supporting Ukraine in Crisis
Germany has also committed more than €3 billion in military aid to Ukraine, reinforcing its stance against Russian aggression. This commitment not only bolsters Ukraine’s defence capabilities but also signals Germany’s increasing responsibility within the NATO alliance, with Germany now having allocated donations worth up to 0.5% of its GDP to Ukraine since the start of the war. The support for Ukraine is part of Germany’s broader strategy to increase its military contribution to European and global security. The growing military aid and spending on Ukraine reflect Germany’s shift towards a more proactive foreign policy, with implications for its defence budget and its geopolitical position within Europe. This may also lead to greater cooperation with NATO allies and influence Germany’s defence strategy for years to come.
Figure 1: Chart showing International aid allocation to Ukraine as a percentage of GDP, to 31st December 2024
(Credit: BBC, Kiel Institute for the World Economy)
Economic Implications: Inflation and National Debt
Germany’s surge in defence spending has important macroeconomic implications. While crucial for national security, it could exacerbate inflationary pressures in an economy already dealing with post-pandemic inflation. The increase in government expenditure, particularly for defence, may strain household finances as living costs rise. Moreover, this expansion is likely to increase Germany's debt-to-GDP ratio, potentially raising future borrowing costs and affecting the country's fiscal health. The lifting of the "debt brake" to fund these initiatives risks long-term debt sustainability, with the possibility of higher interest rates on government bonds. Politically, the defence plans faced opposition from the far-right and far-left parties, particularly the AfD and Die Linke, who oppose military spending and aid to Ukraine. Their opposition could block defence initiatives in the Bundestag, although a deal was struck to allocate €100 billion of the fund to climate protection, helping to secure broader support. While these investments are vital for national security, the challenge for policymakers lies in balancing defence priorities with economic stability amid rising inflation and national debt.
Conclusion: A Strategic Shift with Complex Consequences
Germany’s decision to significantly boost its military spending is both a reaction to growing global security threats and a sign of shifting priorities in Europe. While this move enhances Germany’s defence capabilities and reinforces its support for Ukraine, it also comes with considerable challenges and potential risks. The increase in military expenditure is set to have lasting consequences, forcing policymakers to navigate difficult choices. As Germany advances its ambitious plan, the impact on both national and global economic stability must be closely watched, particularly as the war in Ukraine continues.