Germany's Defence Boom Is Built on the Ruins of Its Own Industry

Berlin found a legal way to subsidize its dying industry and it is called Defence.

The German federal cabinet adopted the government draft of the 2027 federal budget on 6 July 2026, setting defence spending inside the Federal Ministry of Defence budget at 109.7 billion euros. That compares with 82.7 billion euros in 2026, a rise of roughly 33 percent in a single year and by far the largest increase granted to any ministry. Total federal expenditure is planned at 555.4 billion euros. A further 30 billion euros comes from the Special Fund for the Bundeswehr and 11.6 billion euros is earmarked for support to Ukraine. The fiscal plan running to 2030 lifts the core defence budget to 153.9 billion euros in 2028, 162.9 billion euros in 2029 and 183.7 billion euros in 2030. Berlin states that the defence spending ratio will reach the NATO target of 3.5 percent of GDP by 2029. The draft still has to clear the Bundestag before the end of this year.

This rearmament effort lands on an industrial base in poor health. The Federation of German Industries reported in late July 2026 that manufacturing is shedding around 15,000 jobs every month. Industry cut about 124,100 positions in 2025 and roughly 266,000 since 2019. Industrial output sits close to 10 percent below its 2018 level, while energy intensive production has fallen 15.2 percent since February 2022. Chemical output dropped 3.3 percent in 2025 with capacity utilisation near 72.5 percent, well under the profitability threshold. Corporate insolvencies reached 14,675 cases by May 2026, concentrated in the western industrial regions. The employers association Gesamtmetall warned in March 2026 that up to 150,000 jobs could disappear from the metal and electrical sector during the year.

The French historian and essayist Philippe Fabry published a post on X arguing that the budget should be read as industrial policy rather than as military revival. Fabry has developed a cyclical framework for historical analysis that he calls historionomie, and he writes regularly for French outlets on geopolitical questions. His post, translated into English, reads as follows. The enormous increase in the German military budget above all allows a German government that is cornered by the difficulties of its industrial economy since the start of the war in Ukraine to subsidise its industry massively and durably while bypassing EU legislation, because defence spending is an exception to the normal rules governing competition. He adds that the situation should mainly be understood from that angle, and that the idea of a returning great German military power is unlikely to be achieved through billions of euros, noting that Saudi Arabia spends heavily and that the low value of its army is well known.

The first part of that reading matches the economic record. Germany lost access to cheap Russian pipeline gas after February 2022, having previously drawn 55 percent of its gas imports from Russia. Supply now comes mainly from Norway, the Netherlands and Belgium, with American liquefied natural gas covering much of the remainder. Chancellor Friedrich Merz acknowledged in July 2026 that the energy crisis was largely caused by the loss of Russian gas. German industrial energy costs currently rank third highest in the world. The renewed conflict around Iran added a further shock, with diesel prices in Germany climbing to about 2.30 euros per litre in July 2026 and the Finance Ministry naming the Iran war as a significant drag on the economy in its own budget statement.

The second part of the argument rests on European competition law. Article 346 of the Treaty on the Functioning of the European Union allows member states to take measures they consider necessary to protect essential security interests in connection with the production of or trade in arms and ammunition. The European Commission Defence Readiness Omnibus states that support for investment in production capacity for defence products can normally be deemed to serve essential security interests, which means member states do not have to notify such measures to Brussels. Aid falling outside that article can still be cleared under the General Block Exemption Regulation or under Article 107(3)(c). In practice this gives Berlin a funding channel that ordinary industrial subsidy does not offer.

The third element concerns battlefield performance. German armour has had a mixed record in Ukraine. Leopard 2 tanks proved effective as fire support platforms but suffered attrition of roughly 20 percent among the units supplied. Ukrainian crews reported that the vehicles are vulnerable to top attack drone strikes and hard to repair near the front, with damaged hulls often sent to western Ukraine or Poland. Analysts in Berlin have argued that the design assumed air support and combined arms conditions that Ukraine cannot provide. The comparison with Russian losses remains favourable, with Oryx counting 41 Leopard 2 and 29 Leopard 1 losses against more than 4,300 Russian tanks destroyed, so the picture is one of a capable but fragile system in a drone saturated environment rather than outright failure.

The fourth element is political. Germany remains divided over its relationship with Moscow. Russia has repeatedly signalled readiness to restart deliveries through the surviving string of Nord Stream 2. Alternative for Germany (AfD) polled at about 27 percent in mid 2026, ahead of the CDU and CSU on 22 percent, and its leadership continues to campaign for an end to the energy boycott. Germany faces both a business lobby pressing for cheaper energy and an alliance framework built around Washington since 1945.

For supply chains the practical effect is already visible in plant conversions. Rheinmetall shifted its Pierburg site in Berlin from engine pumps and valves to machining casings for 155 millimetre artillery shells, with more than 200 workers moved into its weapons and ammunition division and the transition scheduled to complete around the middle of 2026. KNDS Deutschland is converting the former railcar plant in Goerlitz to build hulls and components for Leopard 2 tanks, RCH155 artillery and Boxer vehicles. Continental employees from a brake plant in Gifhorn are moving to a new ammunition facility on the Lueneburg Heath. Rheinmetall has examined the Volkswagen site in Osnabrueck, although chief executive Armin Papperger has said no talks are running at present and that conversion costs are high. Mercedes-Benz has signalled openness to defence work.

Buyers of machined steel parts, castings, forgings and precision components in Germany should expect tighter capacity and longer lead times as tier one automotive suppliers reallocate lines and skilled labour toward defence orders backed by state guarantees. Procurement teams outside the defence sector will find themselves competing for the same machining hours and the same welders. The pattern is spreading, with France examining Renault linked suppliers and Italy looking at the Iveco military division.

The open question is absorption. Doubling a defence budget in four years does not by itself deliver combat capability, and German industry has yet to show it can convert cash into delivered systems at that pace. What the money does provide, immediately and lawfully, is a demand floor for a manufacturing sector that has contracted for four consecutive years.