Waiting for the Big Bang: Executing the European Defense Build-Up in Germany
Two German Eurofighters fly over the German North Sea as part of a military exercise.
by Robin Fehrenbach, Jakob Flemming, and Julia Friedlander
Since Germany’s reunification, defense spending has been a taboo topic in the country. Russia’s war with Georgia and incursions into Ukraine in 2014 raised relatively few strategic concerns in Berlin, and it took until February 2022 to shake the system loose. From guns versus butter debates to the unwinding of spending orthodoxies and industrial transformations, the last several years have witnessed a small revolution in the national dialogue as well as in the broader economy. The country has begun building a military-industrial complex essentially from scratch and exploiting all means to finance it—including using the public purse, commercial banking, and private capital. Policymakers and industry leads must deliberate what will be financed nationally, in consortium or through European Union (EU) and NATO mechanisms. It is all new.
European institutions are also expanding their mandate. The European Commission appointed Lithuanian Andrius Kubilius as its first commissioner for defense in a bid to draw defense consolidation into the technocratic machine best known for streamlining trade and financial regulation across the bloc. In November 2024 at the Berlin Security Conference, then-Commissioner-Designate Kubilius called for a “Big Bang” approach in defense policy, which would entail “producing a clear Industry Output Plan, based on the analysis of capability gaps according to NATO evaluations and covered by European production of defence equipment where we have capability gaps, with a clear target date to fulfil this Plan around 2030.” [1]
The political will is there – and the private sector is ready to contribute
The June 2025 commitment of NATO Allies to spend 5 percent of gross domestic product (GDP) on security and defense until 2035 provides the new baseline and blueprint for European defense [2]: 3.5 percent is to be invested into weapon systems and ammunition, 1.5 percent into critical infrastructure. NATO Secretary General Mark Rutte articulated this shift after pre-summit consultations with President Donald Trump, but he already had the facts to back up his assertions to the US president [3]. Just weeks earlier, Germany had upended its constitutional debt brake for security and defense investments and created the Sondervermögen for infrastructure.
After years of circuitous debate, the presumed new chancellor, Friedrich Merz, invoked the outgoing German Bundestag mandate to relax the debt brake [4]. The move ultimately gained support across the centrist political spectrum, ensuring that both state-driven and external financing mechanisms would be used to reach NATO pledges. The drastic increases in defense spending remain broadly in line with fiscal principles, requiring what some would call an accounting trick, and others a compromise. Defense investments are now exempt from the constitutional debt brake and can total up to 1 percent of GDP [5]. Anything beyond 1 percent of GDP for defense investments requires credits in special funds, usually referred to as Sondervermögen. While on-budget expenditures and investments in security and defense depend on the incoming tax revenues of the German economy, discretionary spending is effectively freed from these constraints, imposing no specific limit on such extra funding. Defense spending has gone from a crawl to a sprint, overnight.
It is a sea change that the government will now rely on private funding to uphold its national security obligations.
Government stimulus tends to trigger private sector interest, which is poised to play a crucial role in scaling up defense-related resources, increasingly billed as a reliable, growing, and even socially responsible investment sector. Commercial and investment banks as well as private equity and venture capital firms are rapidly developing products for both institutional and private clients, reflecting broader awareness among decision-makers from the public and private sectors that capital is needed to meet defense spending goals. As Deutsche Bank Chief Executive Officer Christian Sewing put it, “we need to efficiently combine public funds with private capital to finance expansion. Banks and investors are ready for this – for example, Deutsche Bank’s corresponding loan portfolio amounts to a mid-double-digit billion-euro amount.” [6]
Two recent high-level events that the Atlantik-Brücke hosted in Berlin brought together stakeholders from the military and private sector to discuss how private capital can fund the German defense build-up, sending a clear signal that private investors are ready to channel capital into Germany’s defense capabilities. It is a sea change that the government will now rely on private funding to uphold its national security obligations.
From incrementalism to joint European procurement
NATO’s 5 percent goal, and the financing behind it, is an aspirational figure without the hardware. Effective procurement is the ultimate test whether Germany and its partners can develop a modern defense capability. The strategic priorities for armament stem from the general planning processes in the alliance’s North Atlantic Council. These priorities range from modern tanks and air missile defense systems, such as the Patriot, to fighter jets, such as the F-35; unmanned drones; battleships; submarines; and the latest defense and intelligence satellites for space and cyber operations [7].
So far, the incremental procurements of military assets by individual NATO allies and EU member states are hardly the breakthrough the European defense architecture so desperately needs. European defense procurement does not take advantage of scaling effects in procurement and maintenance, and the various procured systems are not interoperable, artificially inflating operating costs [8].
For the time being, nation-states and private capital will provide the lion’s share of required funding, largely due to the direct economic impulse defense spending gives to national economies and their flagship contractors.
The problem has been long recognized by EU officials. Jiří Šedivý, chief executive of the European Defence Agency, noted in a briefing to the defense industry in February 2025 that “the European defence base remains fragmented” and that “it is only by cooperating more that Member States can strengthen the defence technological and industrial base, create economies of scale, and develop the defence capabilities our Member States need.” [9]
Based on this assessment, the EU created a program, SAFE (Security Action for Europe), to provide €150 billion in long-maturity loans for procurement efforts and fund projects based on common procurement [10]. SAFE projects should involve “at least one Member State benefitting from SAFE and another Member State, as well as Ukraine and EEA-EFTA [European Economic Area-European Free Trade Association] countries,” but will also temporarily fund individual member states’ procurement in acute security crises. It remains to be seen whether SAFE can fulfill Commissioner Kubilius’ big promise from September 2025 to “unify our fragmented defence procurement.” [11] For the time being, nation-states and private capital will provide the lion’s share of required funding, largely due to the direct economic impulse defense spending gives to national economies and their flagship contractors.
Through defense, Germany’s economy can change in shape and scope
Increased investment in military systems will impact the overall industrial and economic landscape in Germany. In addition to defense allocations, the Sondervermögen also includes €500 billion for infrastructure and climate protection [12]. It has not escaped the governing parties that the security crisis in Europe provides an opportunity to ignite a long-needed growth stimulus for the German economy. Germany remains the third-largest economy in the world, but is poised to record a third consecutive year of zero or negative growth. This year most likely will not bring the turnaround: In the second quarter of 2025, Germany’s economy decreased by 0.3 percentage points compared with the first quarter [13]. All major economic institutes in the country as well as the International Monetary Fund predict hardly any economic growth for Germany in 2025 [14].
Germany’s defense industry will also play a crucial role in building Ukraine’s deterrence capabilities.
Germany’s economy has developed formidable strengths in the automotive, machine engineering, and chemical industries over the past few decades, leading to its export-oriented position in the global economy. This has changed significantly, especially over the past five years, as global competitors have improved their research and development in all kinds of industrial sectors, their labor force skills, and their knowledge. More robust supply chains and much lower energy costs have also contributed to the successes of foreign economies, mostly in the Indo-Pacific region and in South America.
The stimulus of the defense sector lands at a decisive moment for Europe’s industrial powerhouse. In the near and midterm future, development and production in German defense industrial capacities will change the economic landscape and help maintain industrial output and employment levels. They could even ensure long-term economic growthgiven Germany’s extended NATO commitments [15], so long as the country focuses on defense technologies of the future (such as drones) as well as industrial stalwarts that can draw on current production capacities (such as tanks). Germany’s defense industry will also play a crucial role in building Ukraine’s deterrence capabilities—which European Commission President Ursula von der Leyen refers to as Europe’s “steel porcupine.” [16] This will provide opportunities for the defense industry beyond NATO’s borders.
From Zeitenwende to Kriegstüchtigkeit
[realted] NATO planning structures are responsible for analyzing allied readiness in Europe, the United States, and Canada in varied crisis scenarios, including if Russia were indeed able to attempt a full-scale attack on the alliance’s territory by 2029, as predicted by recent war games. Acknowledging that Germany is far from reaching this goal, Germany’s federal minister of defense, Boris Pistorius, has coined the term Kriegstüchtigkeit, or “war readiness,” for the Bundeswehr [17]. This is a sea change. As minister, he has spearheaded an about-face in the security identity of Germany, from enjoying the fruits of a peace dividend under the United States’ nuclear umbrella to becoming a European leader and transatlantic partner in security and territorial defense. Germany’s new role is even now visible on the streets. There are widespread advertisements for both drone-warfare technology and recruitment for the armed and intelligence services.
Although public attitudes are changing, we must continue to wait for the “Big Bang” at both the EU and German levels—and perhaps we need to come to terms with the idea that the outcomes produced by the EU always reflect the intricate balancing of diverse interests. Instead, the process will be arduous. However, first steps have been made, and we can learn from them to meet the urgency of the moment:
Private capital is waiting to be leveraged. Private capital will play an ever-increasing role in funding the capability to innovate and will assume some risk-taking propensity in new technologies. This paradigm shift has already occurred but too often lacks the mechanisms to effectively translate private assets into tangible capabilities.
Europe and Germany should seize this moment as an opportunity to avert deindustrialization. While demand can also stimulate production beyond Europe’s borders, it also presents Europe with the chance to boost its struggling industrial base into a defense industry of scale.
Joint European procurement is the goal, but not an end in itself. Despite NATO force posture requirements, there is still too little incentive to streamline the patchwork of European military structures. Defense procurement must become more flexible, faster, and more aligned among EU and NATO partners. However, absent a common debt mechanism, European security architecture will depend on national defense spending and defense contractors.
While Germany cannot straighten out these problems single-handedly, it can—and should—be the first mover. Ideally, the German armed forces will become a technology driver in a competitive European environment, capitalizing on defense research and development, start-up willpower, and effective exchange between public and private stakeholders. Military threats are unfortunately a central pillar of Europe’s geopolitics. Now, executing the European defense build-up is key to making the spirit of the Zeitenwende a new reality.
Check out our other policy briefs for the Transatlantic Forum on Geoeconomics:
„Points of Vulnerability in the Battery Cell Industry“ by Kai Müller, Chief Financial Officer at PowerCo SE. and Sören Pippart, Senior Expert for Public Affairs at PowerCo SE.
„The dollar in the fight for US primacy“ by Martin Mühleisen, former International Monetary Fund (IMF) official and nonresident senior fellow at the Atlantic Council’s GeoEconomics Center.
“The Road to Turnberry” by Elizabeth Baltzan, Senior Fellow at the Atlantic Council GeoEconomics Center.
„How to dismantle a reserve currency“ by Daniel McDowell, nonresident senior fellow at the Atlantic Council’s GeoEconomics Center.
„The summer of AI action plans“ by Alisha Chhangani, assistant director at the Atlantic Council GeoEconomics Center and Ananya Kuma, deputy director, Future of Money, at the Atlantic Council GeoEconomics Center.
Sources
[1] Andrius Kubilius: Keynote Speech At The Berlin Security Conference. November 11, 2024. https://andriuskubilius.lt/en/keynote-speech-at-the-berlin-security-conference/
[2] North Atlantic Treaty Organization: Defence expenditures and NATO’s 5% commitment. 27. August 2025. https://www.nato.int/cps/en/natohq/topics_49198.htm
[3] Chris Lunday: NATO’s Rutte embraces 5 percent defense spending goal. In: Politico. May 26, 2025. https://www.politico.eu/article/mark-rutte-embrace-5-percent-defense-goal-nato-summit/
[4] Deutscher Bundestag: Mehrheit für Reform der Schuldenbremse: 512 Abgeordnete stimmen mit Ja. 18. März 2025. https://www.bundestag.de/dokumente/textarchiv/2025/kw12-de-sondersitzung-1056916
[5] Bundeszentrale für politische Bildung: Grundgesetzänderung für Verteidigung und Sondervermögen. 28. März 2025. https://www.bpb.de/kurz-knapp/hintergrund-aktuell/560839/grundgesetzaenderung-fuer-verteidigung-und-sondervermoegen/
[6] Christian Sewing: Private capital can strengthen Europe’s defence. April 28, 2025. https://www.db.com/news/detail/20250428-private-capital-can-strengthen-europe-s-defence?language_id=1 (Originally published in German in Handelsblatt on April 28, 2025.)
[7] Bundesministerium der Verteidigung: Kampfjet F-35: Beschaffung und Baumaßnahmen im Zeitplan. 25. Juni 2025. https://www.bmvg.de/de/aktuelles/kampfjet-f-35-beschaffung-baumassnahmen-im-zeitplan-5958376
[8] Luigi Scazzieri: Towards an EU ‚Defence Union‘? January 30, 2025. https://www.cer.eu/publications/archive/policy-brief/2025/towards-eu-defence-union
[9] European Economic and Social Committee: No more ‘national preference’: fragmentation is threat to security, EDA tells EESC forum. February 12, 2025. https://www.eesc.europa.eu/en/news-media/news/no-more-national-preference-fragmentation-threat-security-eda-tells-eesc-forum
[10] European Commission: SAFE | Security Action for Europe. July 30, 2025. https://defence-industry-space.ec.europa.eu/eu-defence-industry/safe-security-action-europe_en
[11] European Commission: Remarks by Executive Vice-President Virkkunen and Commissioner Kubilius on the allocation of loan amounts to Member States under SAFE. September 9, 2025. https://ec.europa.eu/commission/presscorner/detail/da/speech_25_2050
[12] Die Bundesregierung: Investitionsoffensive für das ganze Land. 24. Juni 2025. https://www.bundesregierung.de/breg-de/aktuelles/sondervermoegen-2356240
[13] Statistisches Bundesamt: Gross domestic product: detailed economic performance results for the 2nd quarter of 2025. 22. August 2025. https://www.destatis.de/EN/Press/2025/08/PE25_310_811.html
[14] International Monetary Fund: World Economic Outlook Update. July 2025. https://www.imf.org/en/Publications/WEO/Issues/2025/07/29/world-economic-outlook-update-july-2025
[15] Moritz Schularick und Niall Ferguson: Schuldenbremse und Verteidigung: Den Schuss nicht gehört. In: Kiel Institut für Weltwirtschaft. Juli 2024. https://www.ifw-kiel.de/de/publikationen/kiel-focus/schuldenbremse-und-verteidigung-den-schuss-nicht-gehoert/
[16] European Commission: Doorstep by President von der Leyen at the leaders’ meeting on Ukraine in London. March 2, 2025. https://ec.europa.eu/commission/presscorner/detail/en/statement_25_653
[17] Bundesministerium der Verteidigung: Verteidigungsminister: “Wir müssen kriegstüchtig werden!” 10. November 2023. https://www.bmvg.de/de/mediathek/verteidigungsminister-wir-muessen-kriegstuechtig-werden-5701664