The historic turning point in German financial and security policy – tripling of defense spending – Image: Xpert.Digital
The new German government is focusing on record investments: defense, infrastructure and climate protection are the main priorities
Germany's biggest budget reform in decades
Germany is facing the most significant financial and security policy realignment since reunification. The new federal government under Chancellor Friedrich Merz has announced an unprecedented increase in spending that will fundamentally change the country. At the heart of this transformation is a dramatic increase in defense spending, combined with massive investments in infrastructure and climate protection.
The scale of this realignment is impressive: Germany's defense budget is slated to gradually increase to €152.8 billion by 2029 – a threefold increase compared to current spending. This development marks a paradigm shift in German policy, driven by the changed security situation in Europe and the new requirements of NATO membership.
Finance Minister Lars Klingbeil, who took office in May 2025, faces the Herculean task of financing these ambitious plans. His first major policy decision as Finance Minister is clear and focuses on three key areas: modernization, security, and growth. This prioritization reflects the understanding that Germany can only secure its position as a leading European power through massive investments in the country's future viability.
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Germany's new security architecture
From the turning point in history to reality
The increase in defense spending is not happening in a vacuum, but is a direct response to the changed geopolitical situation in Europe. An increase from €51.95 billion to €62.4 billion is planned as early as 2025, followed by a further jump to €82.7 billion in 2026. These growth rates underscore the urgency with which Germany must expand its defense capabilities.
Defense Minister Boris Pistorius, who remains in office under the new government, has already announced concrete measures. The personnel strength of the German armed forces is to be significantly increased in the coming years through the introduction of the so-called "New Military Service." This innovative approach stipulates that all young men must complete a questionnaire upon reaching the age of 18, providing information about their willingness to perform voluntary military service and their physical fitness.
According to Pistorius, the German armed forces must become "sustainable" in terms of personnel. This wording underscores the seriousness of the situation and the necessity of equipping the German armed forces for a long-term threat scenario. The minister also announced legislation to further accelerate the planning and procurement of weapons systems and equipment for the German armed forces, as well as security laws to protect against espionage and drones from hostile powers.
NATO commitments and international expectations
Germany has committed itself not only to meeting but significantly exceeding NATO's defense spending targets. Finance Minister Klingbeil is planning for defense spending of 3.5 percent of gross domestic product by 2029. This figure is considerably higher than the current NATO target of two percent and reflects the alliance's new expectations.
NATO recently reached an agreement on a new target for the minimum level of national defense spending. The 32 member states intend to increase their annual defense-related expenditures to at least five percent of their gross domestic product (GDP). At least 3.5 percent of GDP is to be allocated to traditional military spending, while additional expenditures for counterterrorism and military-grade infrastructure can be included.
Germany first met NATO's previous two percent target in 2024, with estimated defense spending of €90.6 billion, equivalent to 2.12 percent of its gross domestic product. This achievement was made possible by the €100 billion special fund for the Bundeswehr (German Armed Forces), established in 2022, which is now almost entirely committed to contracts with the defense industry.
Financing strategies and debt policy
Historic new debt as a necessity
The Merz government's ambitious plans are being financed through unprecedented levels of new debt. According to the draft budget for 2025, the federal government is to take on over €140 billion in new debt – a figure unparalleled in the history of the Federal Republic. This new debt, however, is not an end in itself, but rather serves the strategic realignment of Germany in the areas of defense, climate protection, infrastructure, and modernization.
According to plans from the Finance Ministry, total debt is expected to rise to around €185 billion annually by 2029. This development will be achieved through the combination of the core budget and special funds and represents a fundamental departure from Germany's previous austerity policy.
Reform of the debt brake as a basis
The implementation of these ambitious financing plans only became possible with the reform of the debt brake in March 2025. The Bundestag and Bundesrat voted in favor of an amendment to the Basic Law that provides an exception to the debt brake for expenditures related to external and internal security. This exception covers not only defense spending but also other areas such as aid for Ukraine, civil protection, and intelligence services.
The new regulation stipulates that expenditures for defense, civil protection, and intelligence services above a certain threshold are no longer subject to the debt brake. Specifically, expenditures exceeding one percent of nominal gross domestic product will not be counted towards the debt brake. This regulation creates the necessary fiscal leeway for the planned investments.
Special funds as innovative financing instruments
Financing comes not only from the regular budget but also from two large, debt-financed special funds. The Special Fund for Infrastructure and Climate Protection (SVIK) comprises an impressive 500 billion euros, of which 37.2 billion euros are slated for expenditure by 2025. This special fund is established for a period of twelve years and may only be used for additional investments in infrastructure and to achieve climate neutrality by 2045.
Of the total volume of 500 billion euros, the federal states are to receive 100 billion euros for investments in their infrastructure. Another 100 billion euros will flow into the special fund "Climate and Transformation Fund." This leaves 300 billion euros available for additional federal investments over twelve years, which translates to an average of 25 billion euros in additional funding per year.
The special fund for the German Armed Forces will also be utilized to the tune of billions, with the aim of including all defense spending in the core budget from 2028 onwards. This change marks the transition from extraordinary financing via special funds to the structural anchoring of higher defense spending in the regular federal budget.
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From a peace power to a leading power: Germany's historic change of strategy
The new governing coalition and its actors
Friedrich Merz as Federal Chancellor
Friedrich Merz was elected the tenth Chancellor of the Federal Republic of Germany by the German Bundestag on May 6, 2025. His election was dramatic: For the first time in the history of the Federal Republic, a chancellor candidate failed to secure the necessary majority in the first round of voting. Merz initially received only 310 votes, although 316 were required. He only achieved the necessary majority in the second round with 325 votes.
The 69-year-old lawyer from Brilon in the Sauerland region is thus the oldest chancellor since Konrad Adenauer took office. Merz had never previously held concrete political leadership responsibility – he was neither a federal minister nor a state premier. This lack of experience in governing makes his ambitious reform plans all the more remarkable.
The new government consists of a black-red coalition between the CDU/CSU and the SPD. Following the federal election of February 23, 2025, this constellation was the only mathematically possible option that would secure a majority in the Bundestag. In that election, the CDU/CSU, under Merz's leadership, became the strongest party with 28.5 percent of the vote, while the SPD, with 16.4 percent, suffered its worst post-war result.
Lars Klingbeil as Vice Chancellor and Finance Minister
One of the most surprising personnel decisions of the new government is the appointment of Lars Klingbeil as Vice Chancellor and Finance Minister. The 46-year-old SPD politician, who previously served as party chairman, thus assumes one of the most important portfolios in the federal government. His task is to finance the historic increases in spending while simultaneously ensuring the stability of German public finances.
Klingbeil took office on May 7, 2025, succeeding Jörg Kukies, who had served as acting Finance Minister since November 2024. In his first official act, Klingbeil emphasized the importance of his task: “It’s about responsibility for Germany. It’s about renewed economic strength. And it’s about clarity: We are putting Germany back on a growth path.”
The challenge for Klingbeil is immense: He not only has to present the 2025 federal budget, but also develop key figures for 2026 and a financial plan extending to 2029. This planning includes net borrowing in the core budget, which will increase from 33 billion euros to 81.8 billion euros in 2025 – more than double the previous year's figure.
Infrastructure and climate protection as the second pillar
The 500 billion euro program for the future
Alongside defense spending, the special fund for infrastructure and climate protection forms the second pillar of the new German policy. With a volume of 500 billion euros over twelve years, it is the largest investment program in the history of the Federal Republic. This program aims to make Germany fit for the challenges of the 21st century.
The investments will focus on several key areas: modernization of weapons systems and equipment, sustainable procurement and logistics structures, infrastructure and barracks modernization, and strengthening cyber defense. Particular emphasis will be placed on the digitalization of the armed forces and the development of new technologies for national defense.
The climate investment gap, documented by various studies, is even larger than the planned expenditures. Analyses show that the additional annual public funding required for climate protection measures is estimated at between 30 and 90 billion euros per year. The average of ten billion euros per year earmarked in the Climate and Transformation Fund until 2035 therefore covers only a portion of the actual need.
Acceleration of planning and approval processes
A key component of the new investment strategy is the acceleration of planning and approval processes. The coalition has committed to fundamentally reforming planning, construction, environmental, procurement, and administrative procedure law. The digitalization of all planning and approval processes is a central focus.
The introduction of a uniform procedural law for infrastructure projects, along with planning approval as the standard procedure, is intended to streamline processes. Replacement construction projects should generally be able to proceed without formal planning approval in the future. These reforms are necessary to actually achieve the ambitious investment targets.
Past experience shows that despite having available funds, Germany often struggles to actually spend them. In recent years, the federal budget has consistently shown surpluses in investment spending. The planned reforms aim to eliminate these structural obstacles and enable the efficient use of funds.
However, there is much controversy surrounding the planned fast-track procedures:
- Environmentalists warn that this will not only accelerate climate protection projects, but also climate-damaging projects (e.g., highways). Furthermore, they see democracy as being at risk because citizens and associations will have less say and less opportunity to file lawsuits.
- Legal experts doubt whether the laws are compatible with EU law. There could be many lawsuits – which would ultimately slow everything down even further.
- The business community is even calling for tougher measures against environmental lawsuits in order to push projects through.
Overall, it's clear that there's no concrete plan for what exactly is supposed to be sped up. And the entire project rests on shaky legal ground – with the risk that everything will be blocked instead of accelerated.
Furthermore, one should be aware of the dependence on and fatal impact of external consultants:
Social and economic impacts
Challenges for German society
The planned increases in spending will have profound effects on German society. Raising defense spending from approximately two percent of GDP to 3.5 percent by 2029 represents a fundamental reprioritization of public spending. Consequently, these funds will be available only to a limited extent for other areas such as education, social services, or culture.
At the same time, the massive investment program opens up new opportunities for the economy and the labor market. Modernizing infrastructure, expanding renewable energies, and digitizing the country can make Germany more competitive in the long term. The planned investments, averaging an additional €25 billion annually, could increase current federal investments by 50 percent.
Intergenerational equity and debt burden
The dramatic increase in national debt raises questions of intergenerational fairness. Annual new borrowing of up to €185 billion until 2029 means that future generations will have to shoulder a considerable debt burden. Proponents, however, argue that investments in security, infrastructure, and climate protection are necessary to keep Germany competitive in the future.
Per capita debt in Germany has already risen by approximately €5,000 since the start of the coronavirus pandemic, most recently reaching €27,922 per citizen. The planned additional spending will further increase this burden. However, the government argues that investments in the country's future viability will generate higher returns in the long run than the costs of the debt.
International classification and comparisons
Germany in an international context
The planned increase in German defense spending to 3.5 percent of GDP would catapult Germany into the top group of NATO countries. Currently, only a few countries, such as Poland at 4.12 percent and Estonia at 3.43 percent of GDP, meet such high spending quotas. Even the USA, traditionally the largest military spender, was at 3.38 percent of GDP in 2024.
This development reflects the changed security policy realities in Europe. NATO member states have recognized that current spending is insufficient to address new threats. The planned increase in NATO's spending target to five percent of GDP by 2035, of which 3.5 percent is earmarked for traditional military expenditures, underscores this trend.
Impact on the European security architecture
Germany's massive military buildup will fundamentally change the European security architecture. As the most populous and economically strongest country in the European Union, Germany plays a key role in continental defense. The planned modernization of the Bundeswehr into one of the most powerful armies in Europe will further strengthen this position.
Chancellor Merz has set the goal of making the Bundeswehr the “strongest conventional army in Europe.” This ambition requires not only increased spending but also a fundamental realignment of German defense strategy. The Bundeswehr must be transformed from an intervention force, primarily designed for deployments abroad, into a territorial defense force.
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Implementation risks and success factors
The implementation of the Merz government's ambitious plans faces considerable challenges. The German defense industry must massively expand its capacities to handle the planned procurements. At the same time, the legal and bureaucratic hurdles that have thus far prevented the rapid implementation of major projects must be dismantled.
A critical success factor is the public acceptance of the new policy. The German population must be convinced that the high defense spending and the associated debt are necessary and justified. The government's communication will be crucial in this regard.
Long-term perspectives
The planned reforms will fundamentally change Germany in the coming years. By 2029, the country will have one of the most modern and effective armies in Europe and will have made massive progress in modernizing its infrastructure and combating climate change. This transformation, however, will come at a price – both financial and social.
The question will be whether Germany can successfully meet this challenge without neglecting its other strengths such as social security, education, and innovation. The coming years will show whether the Merz government's gamble on massive investments in security and modernization pays off and truly makes Germany fit for the challenges of the 21st century.
The historical dimension of this transformation cannot be overstated. Germany is undergoing the transition from a reserved, economically focused middle power to a leading European power, both militarily and politically. This change will have a lasting impact not only on Germany itself, but also on the entire European and international order.
Advice - planning - implementation
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Advice - planning - implementation
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