Germany Turns to Arms Industry to Save Its Economy, Sidelining France
Germany is redirecting its struggling export-led industry toward defense, backed by the largest military budget in Europe, and the shift is straining its decades-old partnership with France. On October 8, 2026, France's chief of the defense staff, General Fabien Mandon, told lawmakers in Paris that Germany had decided to leave the joint Main Ground Combat System (MGCS) tank program. One day later, the French and German defense ministers said the project remained active, but both countries are now preparing separate tanks to replace the Leclerc and the Leopard 2. The episode came four months after Paris and Berlin ended their shared fighter jet program.
For two decades, German manufacturing relied on low-cost Russian pipeline gas and strong Chinese demand for cars and machinery. Both pillars have weakened. Until 2022, Russia supplied about 55% of the gas Germany imported. German exports to China fell from about 106 billion euros in 2022 to 81.3 billion euros in 2025, while imports from China kept rising. According to the Federal Statistical Office, the bilateral trade deficit reached 89.3 billion euros in 2025, up from 66.9 billion euros in 2024. During his visit to Beijing in February 2026, Chancellor Friedrich Merz said the gap had quadrupled in five years.
The consulting firm EY reported in August 2026 that the German auto industry has lost 142,400 jobs since 2019, or about one position in six. Employment in the sector stood at 691,500 in mid-2026, the lowest level since comparable records began in 2005. The wider economy has improved this year: on September 24, 2026, the leading German economic institutes raised their 2026 growth forecast to 1.3%, citing stronger exports and manufacturing output. They still expect growth to slow to 0.4% in 2028 and warn that structural weaknesses remain.
Berlin's answer is a rapid military buildup that also works as industrial policy. Germany's defense budget reached 108.2 billion euros in 2026, compared with 57.1 billion euros for France. The draft budget for 2027 raises it to 139.6 billion euros, and the Bundestag is scheduled to hold its final vote between November 24 and 27, 2026. The financing rests on the 2025 reform of the debt brake, which exempts defense spending above 1% of GDP from the constitutional borrowing limit. Of the 118.7 billion euros in net borrowing planned in the 2027 core budget, 85.4 billion euros falls under the defense exemption and only 33.4 billion euros under the ordinary rule.
Some of the ideas in this article are drawn from a post on X by French commentator Joan Larroumec. He argues that Berlin is using defense as the channel to rebuild its industry for four reasons. First, security threats in Europe create real demand. Second, German voters and politicians who oppose public debt accept an exception for defense. Third, artificial intelligence, drones, robotics and space systems are dual-use technologies, so military progress can transfer to civilian industry. Fourth, defense procurement benefits from exemptions to European Union rules on state aid.
The conversion is already under way on the factory floor. KNDS, the maker of the Leopard 2, builds the tank at its Munich plant and reported more than 300 firm orders for the latest Leopard 2A8 version in May 2026, with a record order backlog of 33.1 billion euros at the end of 2025. The group has turned a former rail car plant in Goerlitz into a site producing tank hulls and turret housings, is expanding turret production in Kassel, and has held talks about using underused car plants owned by Mercedes-Benz and Volkswagen. It also works with automotive suppliers to raise output.
Most of this money stays at home. The Kiel Institute for the World Economy examined 222.3 billion euros of German military orders placed between January 2020 and January 2026. It found that only 3% went to European companies outside Germany, while 12% went to suppliers outside Europe, largely in the United States.
Private capital is following public orders. A Dealroom report published on October 5, 2026, showed that European defense startups have raised a record 7.4 billion dollars so far this year, including 3.5 billion dollars for German companies. Munich-based Helsing raised 1.8 billion dollars in July at a valuation of 18 billion dollars, and United States investors now provide 47% of European defense technology funding. In France, drone maker Harmattan AI was valued at 1.4 billion dollars in January 2026 in a round led by Dassault Aviation. German public orders for newcomers also face limits: in February 2026, the Bundestag budget committee approved first drone contracts worth 269 million euros each for Helsing and Stark Defence, but capped each company at 1 billion euros, well below the 4.3 billion euro framework first planned.
The two flagship programs launched by Paris and Berlin in 2017 have both run into trouble in 2026. On June 8, the two governments announced that the manned fighter at the center of the Future Combat Air System (FCAS) would not be built, after Dassault Aviation and Airbus failed to agree on leadership and work share. Work continues only on drones and a shared data network.
The tank program followed a similar path. By July 2026, the two governments had reduced MGCS to research on shared technologies, with no reference to a common vehicle. After General Mandon's statement on October 8, his staff clarified that the program is delayed and not canceled. German Defense Minister Boris Pistorius said on October 9 that nobody had stopped the project. In practice, Germany is developing a new Leopard generation with KNDS Deutschland and Rheinmetall for the early 2030s, while France plans to launch studies in 2027 for a Leclerc successor, since the Leclerc will be withdrawn gradually from 2038.
Ownership is shifting as well. Under an agreement announced on June 22, 2026, France will cut its stake in KNDS from 50% to 40%, and Germany will buy up to 40% from the founding family of the German branch. The stock market listing tied to this deal was postponed on July 1 because of weak market conditions, and the company said it would resume the process once conditions allow. Media reports in September pointed to a possible restart this autumn.
Competition is spreading beyond weapons. Germany has pledged 35 billion euros for military space by 2030 and plans its own military satellite constellation alongside the European IRIS2 project. On September 5, 2026, Munich-based Isar Aerospace became the first private company to reach orbit from continental Europe. In early October, the Berlin search engine Ecosia dropped the French artificial intelligence company Mistral five months after selecting it.
The balance between the two defense industries is changing. According to the Stockholm International Peace Research Institute, the four French companies in the global top 100 recorded 26.1 billion dollars in arms revenue in 2024, compared with 14.9 billion dollars for the four German companies, whose revenue grew 36% in one year. Larroumec notes that the gap was close to four to one in 2015.
France has little room to match German spending. Its 10-year borrowing cost approached 5% in early October 2026, the highest level since 2002, after the government presented a 2027 budget with 54 billion euros in savings and new revenue. Parliament is due to begin debating that budget on October 13. Chancellor Merz has said he follows French public finances with concern because the common currency must remain stable, and he rejects new joint European debt. Larroumec argues that a financially weaker France may eventually have to sell further stakes in strategic companies.
Politics adds uncertainty. France will elect a new president in April 2027, and polls suggest the far right could win. A change of leadership could bring to power politicians less attached to the traditional Franco-German partnership than the current government.
For defense buyers and suppliers, the main consequence is fragmentation. Two national tank programs and two fighter programs mean separate designs, separate supplier networks and smaller production runs for engines, guns, armor steel and electronics. Suppliers may have to qualify for parallel programs or choose a side. In Germany, the rapid ramp-up is drawing skilled labor and plant capacity away from the automotive sector.