German Rearmament Faces Allied Unease as Rheinmetall Waits on Orders

Big budgets, national contracts

Germany has the money to rearm. What remains unsettled is how it will spend that money, and the answer is creating friction with its neighbours and with investors. Coverage of German defence policy over the past several weeks has settled on a common point: money is no longer what holds Berlin back. Commentators, think tanks and equity analysts all describe the same problem. Germany is spending on a scale it has not attempted since the end of the Cold War, but most of that spending is going to German and American suppliers. Delivery and execution are also lagging behind the political promises.

The outline is now well documented. Germany's 2026 defence budget sits at roughly €108 billion, or about 2.4 percent of GDP, up from €32 billion and 1 percent of GDP in 2014.10 A constitutional amendment now exempts defence spending above 1 percent of GDP from the debt brake, so higher outlays are protected by law instead of depending on each year's budget fight.10 Planning documents point to about €109.7 billion for 2027.16 Chancellor Friedrich Merz's first defence strategy, published in April, set the goal of making the Bundeswehr Europe's strongest conventional army by 2039.1

Where the money goes is the bigger story. Weapons purchases worth €123.3 billion submitted to the Bundestag last month go overwhelmingly to German and US firms, with little left for European partners.1 A separate analysis of Berlin's near-term procurement plan found that only about 8 percent of some €83 billion in contracts was set aside for American companies. Roughly half of the orders on the wider wish list are slated for German firms, led by Rheinmetall and Diehl.5 Even so, the plans still include around 15 more F-35s and four P-8A Poseidon patrol aircraft.5 The most strategically important systems are still bought from the US.

Disagreement over what the numbers mean

The sources broadly agree on what Germany is doing but differ on how to judge it. A Guardian commentary by Paul Taylor of the European Policy Centre argues that rearmament is right, but that Berlin's habit of going it alone is feeding old fears in Poland and France.1 It points out that Merz has ruled out eurobonds for defence and that his government dropped two major joint projects with France, a next-generation fighter and a tank.1 It also cites researcher Liana Fix, who warns that Germany could become "Europe's next hegemon" unless its military power is tied into European structures.1

The Foreign Policy Research Institute reads the strategy more kindly. It sees the document as a step in a long line of German planning, not a break with the past, and notes that much of its content comes from NATO's own capability targets.10 The strategy was published in German, English and French at the same time, which the institute takes as a deliberate effort to reassure partners.10 Its main worry is not dominance. It is whether a slow, risk-averse procurement system and a weak supply of recruits can turn plans into real capability.10

The two views fit together better than they first appear. National strength and European integration are not opposites. The real issue is whether Germany's national capacity will help neighbours or crowd them out. Even the critics accept that Germany has done things that point toward integration. All its forces are assigned to NATO. It has invited allies into its European Sky Shield air-defence initiative. It is working with the UK on deep-strike weapons. It is Ukraine's biggest financial and military backer.1 It has also permanently stationed a 4,800-strong brigade in Lithuania to guard the Suwałki Corridor, its first permanent deployment abroad since the Second World War.7

The best reading is that Germany has chosen to build capability first and integrate later. That choice is defensible on military grounds but costly politically. Germany is not alone in it: the EU defence commissioner says up to 80 percent of European defence purchases are awarded directly to national suppliers without competition.1 An analysis in Modern Diplomacy puts it bluntly: Europe is buying European, and more precisely, its biggest spender is buying German.5 The collapse of the Franco-German fighter programme, known as FCAS, in June made the point clearer. It did not fail for lack of money. It failed because France needs a carrier-capable aircraft that can carry nuclear weapons, and Germany needs neither.5 Only the shared "combat cloud" networking layer will continue.5

Spending more nationally, cutting in Brussels

Germany's position on the EU budget adds to the picture. Merz and the leaders of Denmark, the Netherlands, Austria, Finland and Sweden wrote to EU leaders demanding that the Commission's proposed budget of nearly €2 trillion for 2028–2034 be cut by "several hundred billion euros".2 They argued it should focus on defence, competitiveness and migration.2 The six countries say they pay almost 40 percent of all national contributions, and they called the proposed 60 percent nominal increase unrealistic.2

The position holds together on its own terms: fund defence nationally and keep the EU budget tight. But it also explains why allies are uneasy. A Germany that spends heavily on its own forces while resisting shared EU funding leaves smaller and more indebted members to finance their defence alone. Italy, France, Poland and Belgium are all already under the EU's excessive deficit procedure.2 Taylor's practical point applies here: it is cheaper for Germany to help neighbours shoot down drones and missiles near the eastern border than to intercept them over Berlin and Frankfurt.1

Rheinmetall: a full order book, but weak cash flow

Rheinmetall shows the business side of all this most clearly. Its order backlog was about €80.4 billion as of mid-year. Second-quarter sales rose almost 70 percent to €3.29 billion, and operating profit more than doubled to €562 million.11 The company is building new capacity for explosives, propellant, rocket motors and cruise missiles, mostly due to come online through 2027.11 It says it is hiring about 10,000 people a year.11 It has also started series production of radar reconnaissance satellites with Finland's Iceye at a former auto-parts plant in Neuss, backed by a Bundeswehr contract worth about €1.7 billion.14 The Neuss plant is a small example of a wider shift, with car-industry sites being turned over to defence work. Taylor links this to the slump in German carmaking, chemicals and machinery, which gives Berlin a further reason to buy domestically.1

Investors are less enthusiastic. The shares are down about 30 percent this year even after a 5 percent rally in mid-October.13 That rally followed a Morgan Stanley forecast that government orders would pick up before year-end.12 The biggest single setback came on 24 June, when Defence Minister Boris Pistorius cancelled the F126 frigate programme and the stock fell 19 percent in a day.16 Rheinmetall had bought shipbuilder NVL partly to take over that work.16 Industry reporting also notes delivery delays: the Skyranger 30 air-defence system has slipped about a year, and a €2.7 billion heavy weapons-carrier programme is at least eleven months late, with quality problems cited.19 Operating free cash flow was about minus €1.6 billion in the first half.16

Analysts are split. Berenberg cut the stock to Hold and lowered its price target to €1,020, arguing that growth beyond 2030 would need much stronger order intake. RBC kept its Outperform rating and its €1,600 target.20 Rheinmetall doubled its syndicated credit line to €1.5 billion this month, which signals that it expects to keep spending ahead of the cash coming in.15

What to watch next

The near-term dates are clear. Rheinmetall reports third-quarter results on 5 November.13 The Bundestag is expected to consider funding for the Boxer armoured vehicle order on 9 December. Management expects an advance payment of more than €3 billion if the deal is signed.16 Those dates will show whether the German budget is actually turning into signed contracts. As one market analysis puts it, pledges no longer move the stock and binding contracts do.12

The political risks run further out. The defence strategy runs to 2039, across at least three federal elections.10 The AfD, which is sceptical of NATO and the EU and opposes aid to Ukraine, is leading national polls1 and recently won 44 percent in Saxony-Anhalt.7 Pistorius has told Washington that Europeans want to gradually take over primary responsibility for conventional deterrence.7

The reporting points to a clear conclusion. Germany's rearmament is real and well funded, and it is turning Rheinmetall into a much larger company. But it is being built mainly on national lines. Unless Berlin starts treating its neighbours' defence capacity as part of its own security, the gap between German strength and European cohesion will keep growing, and the AfD's rise makes that gap more dangerous.