German Defence Spending Surge Reshapes European Security Market

Berlin's money now sets the pace of European rearmament

European security spending has a clear centre of gravity, and it is Berlin. Several recent assessments describe the same change. Germany has stopped being the continent's reluctant spender and has become the engine of European rearmament. That shift creates as many political and commercial tensions as it settles.

The size of the shift is hard to overstate. The International Institute for Strategic Studies calculates that Germany's defence budget grew in real terms by 20.4% in 2024, 16.5% in 2025 and 23.2% in 2026. Those rates are far above the average for other European NATO members.21 Berlin's share of spending by NATO's European members has risen from 16.5% in 2022 to 22.1% in 2026. The IISS says Germany has been Europe's largest defence spender since 2025, with France and the UK falling behind because their public finances are much weaker.21 The European Central Bank has reached a similar conclusion from another angle. It estimates that Germany accounts for somewhat more than 70% of the additional national defence spending in the euro area included in its June 2026 projections.28

The exact size of Germany's budget depends on who is counting. Some analysts cite a 2026 figure of €108.2 billion. The IISS, after a June budget update from the finance ministry, puts the 2026 defence budget at €119.7 billion, almost double the €63.5 billion of 2023.21 These figures do not contradict each other. NATO, EU and national accounting rules treat pensions, equipment timing and security forces differently, and analysts warn against comparing the datasets mechanically.29 The ECB gives an example: EU functional accounts show German defence spending at 1.5% of GDP in 2025, while NATO's measure shows 2.2%.28 Whichever definition is used, the trend is steep. The IISS projects that German spending will reach 3.6% of GDP by 2030, five years before NATO's 3.5% deadline.21

The legal and fiscal change behind it

The spending surge rests on a constitutional change. In March 2025, German lawmakers amended the Basic Law so that defence spending above 1% of GDP is exempt from the debt brake. Merz's coalition then opened the way to roughly €400 billion for defence and security and €500 billion for infrastructure.24 Analysts say Germany's 2027 budget is financed by borrowing €838 billion between 2027 and 2030. Berlin can do this because its debt starts at about 66% of GDP.26

For the wider economy, the ECB's view is broadly positive in the short term. It estimates that extra defence spending since early 2025 will add 0.4 percentage points to cumulative euro-area growth over 2025–28, peaking in 2026, while raising inflation by less than 0.1 points.28 The ECB also gives a sharper long-term warning. Unless the mix of spending changes, the effect on output will be limited, because Europe imports a large share of its equipment and spends relatively little on research and development.28

Who wins the contracts

For business, the key question is where the money goes, and the answers are becoming clearer. One market analysis cites a Hamburg Commercial Bank study estimating that about €73 billion of a planned €108 billion German budget could flow directly to companies. Suppliers of components, electronics, steel and engineering services could benefit, not just the large defence firms.22

How that money is spread across Europe is the most contested part of the story. Politico reported that only about 8% of roughly €83 billion in near-term German contracts was earmarked for US firms. That figure has been widely read as Europe turning away from American suppliers. The same planning documents show that about half of Berlin's wider list of orders is expected to go to German companies, with Rheinmetall and Diehl at the centre.15 An analysis in Modern Diplomacy puts it bluntly: Europe is not so much buying European as its largest spender is buying German.15

Paul Taylor of the European Policy Centre goes further. In a Guardian column, he writes that €123.3 billion of planned purchases notified to the Bundestag last month come overwhelmingly from German and US industry, leaving very little for European partners.18 Germany is also still buying American where it sees no alternative. Its plans include about 15 additional F-35s and four P-8A Poseidon maritime patrol aircraft. Defence Minister Boris Pistorius has said openly that there are systems Germany lacks and urgently needs within five to ten years.27

Franco-German divisions

The sharpest disagreement over strategy is between Paris and Berlin. France wants the European Commission's proposed €131 billion for defence, security and space in the next EU budget reserved for a genuinely European industrial base. Germany wants to keep the freedom to work with companies from NATO partners such as Norway, Canada and the UK.27 Each side sees the other as the outlier. Paris sees Germany putting itself first. Berlin sees France pushing preference rules that would favour French companies.27

The clearest casualty so far is the Future Combat Air System, the €100 billion programme for a next-generation fighter. Berlin and Paris formally abandoned it in June.27 Only the shared "combat cloud" network layer survives. The basic problem was that France needs a carrier-capable aircraft able to carry nuclear weapons, and Merz said Germany needs neither.15 Germany has also announced a €10 billion military satellite communications system that competes with the EU's IRIS² network, which has raised concerns about duplication.27

In my reading, the critics have the better argument on efficiency, though not necessarily on politics. Investigate Europe notes that European militaries operate 178 different weapons systems, compared with 30 for the US. It also cites a European Parliament estimate that governments lose about 44 cents of every euro spent on defence equipment because purchasing is not coordinated.25 Taylor points out that buying national is not only a German habit. France and the UK protect their own arms makers just as strongly, and the EU's defence commissioner says up to 80% of European defence purchases are direct awards to national prime contractors without competitive tender.18 Germany's spending is large enough, though, that its choices largely shape the market for everyone else.

Berlin's defenders can point to real contributions. Germany is the largest donor of financial and military aid to Ukraine. It has opened its European Sky Shield air-defence programme to allies, and it has stationed a brigade in Lithuania.18 It has also made Ukraine an industrial partner, with six joint armaments projects announced in May.14

Rheinmetall's paradox

The gap between political momentum and investor sentiment is clearest at Rheinmetall. The group reported first-half 2026 sales up 39% to €5.2 billion and an order backlog of €80.5 billion.7 It keeps adding orders: a 155mm artillery shell contract worth a low triple-digit million-euro sum,5 a US Army order for 3,104 MK93 gun mounts,2 and satellite reconnaissance access for the Bundeswehr through its ICEYE joint venture.7 It has also opened a new site in Norway3 and doubled its syndicated credit line to €1.5 billion.1

The shares have nonetheless fallen about 40% this year, closing at €935.30 on Friday.8 Several reasons appear across the coverage. Losing the F126 frigate programme to TKMS forced a guidance cut and wiped about €10 billion off Rheinmetall's market value.6 Reports of possible cuts to German ammunition spending in 2027 have unsettled investors.10 There is also a broader debate about whether procurement budgets will move from heavy platforms towards drones and unmanned systems.6 Analysts are split. Berenberg downgraded the stock to Hold, arguing Rheinmetall needs many more orders to keep growing after 2030. Bernstein still sees catalysts, including an expected order under the Arminius vehicle programme.8 Chief executive Armin Papperger has said he expects about €12.4 billion in Arminius vehicle business by the end of the year.10

The market is not doubting that Germany will spend. It is questioning whether incumbent companies' share prices already reflected the most optimistic version of that spending, and whether newer technologies will take a growing share of the money.

Startups and new risks

The second question links to a separate boom. European defence-tech startups have raised a record $7.4 billion in venture capital so far in 2026, almost three times the total for 2025. German startups account for $3.5 billion of that, and Munich is Europe's leading hub.19 Helsing, Quantum Systems and Stark lead the German total, and US investors are increasingly prominent.13

The industry is also becoming a target. Germany's domestic intelligence agency, the BfV, is advising defence companies to consider private close-protection teams for their executives. Its president, Sinan Selen, has told lawmakers that Russia is planning violence against individuals, including through organised crime networks.11 Papperger has had round-the-clock protection since a plot against him was uncovered in early 2024. Smaller firms say the cost of security is a real burden.20 Separately, former BND chief August Hanning was arrested on suspicion of espionage and treason. German media report that the case does not appear to involve Russia, but allied services are reviewing what intelligence they have shared with Germany.17

Funding remains the open question

The main open question is money beyond 2028. The EU's escape clause lets governments exceed fiscal rules by up to 1.5% of GDP for defence until 2028. After that, they are expected to tighten budgets again.29 Germany has ruled out eurobonds for defence.18 Modern Diplomacy's base case, which it gives roughly even odds, is a two-speed rearmament: Germany, Poland and the Nordic and Baltic states stay on track, while France, Italy and Spain fall behind.26

Berlin has the money to rearm, and on balance it is right to do so. The weakness is how the spending is designed. If Germany's surge mainly buys German and American equipment while weaker-budget neighbours struggle to keep up, Europe will end up with more weapons but not a more coherent defence. How Berlin handles the next EU budget and the 2029 fiscal deadline will be the real test of whether German spending strengthens Europe's common defence or only Germany's own forces.