The historical turn in German finance and security policy- tripling of defense spending

Germany's largest budget reform in decades

Germany faces the largest financial and security policy realignment since reunification. The new federal government under Chancellor Friedrich Merz has announced an unprecedented increase in expenditure that will fundamentally change the country. At the center of this transformation is a dramatic increase in defense spending, combined with massive investments in infrastructure and climate protection.

The dimensions of this realignment are impressive: the German defense budget should gradually increase to 152.8 billion euros by 2029 - a tripling compared to current expenses. This development marks a paradigm shift in German politics, which is due to the changed security policy situation in Europe and the new requirements of NATO membership.

Finance Minister Lars Klingbeil, who took over from his predecessor in May 2025, is about to finance this ambitious plans before the Herculean task. His first major course as finance minister is clear and focuses on three central areas: modernization, security and growth. This priorities reflects the realization that Germany can only secure its position as a leading European power through massive investments in the state's future viability.

Suitable for:

• Duplication of NATO support skills by private sector and dual-use logistics in logistics, replenishment and transportation

The new security architecture in Germany

From the turn of the time to reality

Defense expenditure is not increased in a clear space, but is a direct answer to the changed geopolitical situation in Europe. As early as 2025, an increase of 51.95 billion euros is planned to 62.4 billion euros, followed by a further leap to 82.7 billion euros in 2026. These increase rates illustrate the urgency with which Germany has to expand its defense skills.

Defense Minister Boris Pistorius, who has also remained under the new government, has already announced concrete measures. The personnel strength of the German armed forces is to be significantly increased by the introduction of the so -called “new military service” in the coming years. This innovative approach stipulates that all young men have to fill out a questionnaire at the age of 18, in which they provide information about their willingness for a voluntary military service and their physical fitness.

According to Pistorius, the Bundeswehr must become “persistent” in terms of personnel. This wording underlines the seriousness of the situation and the need to prepare the German armed forces for a long -term threat situation. The minister also announced a law on further acceleration in planning and procuring weapons systems and equipment for the Bundeswehr as well as security laws to protect against espionage and drones of enemy powers.

NATO obligations and international expectations

Germany has undertaken not only to fulfill NATO requirements for defense spending, but to clearly exceed. Finance Minister Klingbeil is planning for 2029 with defense spending of 3.5 percent of gross domestic product. This quota is well above the current NATO target of two percent and corresponds to the new expectations of the alliance.

NATO recently achieved an agreement on a new target for the minimum height of national defense spending. The 32 alliance states want to increase their annual defense -relevant expenditure to at least five percent of gross domestic product. An amount of at least 3.5 percent of GDP is to be eliminated on classic military spending, while additional expenses for fighting terrorism and militarily usable infrastructure can be counted.

Germany first reached NATO's two percent goal in 2024 with estimated defense spending of 90.6 billion euros, which corresponded to a share of 2.12 percent in the gross domestic product. This service was made possible by the 100-billion euro assets for the Bundeswehr, which was set up in 2022 and is now practically completely bound to contracts with the military technology industry.

Financing strategies and debt policy

Historical new debt as a necessity

The Merz government's ambitious plans are financed through a historically unique debt. According to the budget draft for 2025, the federal government is expected to accept new debts of over 140 billion euros - a value that is unprecedented in the history of the Federal Republic. However, this new debt is not an end in itself, but serves to strategic realigning Germany in the areas of defense, climate protection, infrastructure and modernization.

According to plans from the Ministry of Finance, the total debt is expected to increase to around 185 billion euros a year by 2029. This development is achieved through the combination of core budget and special funds and represents a fundamental departure from the previous German austerity policy.

Reform of the debt brake as the basis

The implementation of these ambitious financing plans was only possible through the reform of the debt brake in March 2025. The Bundestag and the Federal Council voted for a change in the Basic Law that provides for an exception to expenditure of external and internal security from the debt brake. In addition to defense spending, this exception also includes other areas such as help for Ukraine, civil and population protection or intelligence services.

The new regulation stipulates that expenses for defense, civil and population protection as well as for the intelligence services from a certain amount are no longer comprised from the debt brake. Specifically, expenditure that exceeds the amount of one percent in relation to the nominal gross domestic product will not be counted towards the debt brake. This regulation creates the necessary fiscal scope for the planned investments.

Special funds as innovative financing instruments

The financing is not only through the regular household, but also by two large credit -financed special funds. The special fund infrastructure and climate protection (SVIK) comprises impressive 500 billion euros, of which 37.2 billion euros are to be spent in 2025. This special fund is set up for a period of twelve years and may only be used for additional investments in the infrastructure and to achieve climate neutrality by 2045.

From the total volume of 500 billion euros, the federal states should receive 100 billion euros for investments in their infrastructure. 100 billion euros also flow into the special fund “Climate and transformation funds”. For additional investments in the federal government, 300 billion euros remain to twelve years, which means average of 25 billion euros in additional funds.

The special fund of the Bundeswehr will also be exhausted at a billion dollar height, whereby the total defense expenditure in the core budget is to be mapped from 2028. This change marks the transition from extraordinary financing via special funds for the structural anchoring of higher defense spending in the regular federal budget.

The hub for security and defense offers well-founded advice and current information in order to effectively support companies and organizations in strengthening their role in European security and defense policy. In close connection to the SME Connect working group, he promotes small and medium -sized companies (SMEs) in particular that want to further expand their innovative strength and competitiveness in the field of defense. As a central point of contact, the hub creates a decisive bridge between SME and European defense strategy.

Suitable for:

• The Working Group Defense of the SME Connect - Strengthening SMEs in European defense

The new government coalition and its actors

Friedrich Merz as Chancellor

Friedrich Merz was elected tenth Federal Chancellor of the Federal Republic of Germany on May 6, 2025. His choice was dramatic: for the first time in the history of the Federal Republic, a candidate for Chancellor missed the necessary majority in the first ballot. Merz initially only received 310 votes, although 316 were required. It was only in the second ballot that he was able to achieve the required majority with 325 votes.

The 69-year-old lawyer from Brilon, Sauerland, has been the oldest chancellor since Konrad Adenauer when you took office. Merz had never borne concrete political management responsibility before - he was neither Federal Minister nor Prime Minister. This inexperience in the government makes its ambitious reform plans all the more remarkable.

The new government consists of a black and red coalition between the CDU/CSU and SPD. After the Bundestag election of February 23, 2025, this constellation was the only arithmetical possibility that a majority received in the Bundestag. In this election, the CDU and CSU under Merz 'leadership became the strongest force with 28.5 percent of the vote, while the SPD made its worst post -war result with 16.4 percent.

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 acted as party chairman, thus takes over one of the most important departments of the federal government. His task is to finance the historical expenditure increases and at the same time ensure the stability of German state finances.

Klingbeil started office on May 7, 2025 and took over from his predecessor Jörg Kukies, who had acted as finance minister since November 2024. In his first official act, Klingbeil emphasized the importance of his task: "It is about responsibility for Germany. It is about new economic strength. And it is about clarity: we bring Germany back on growth course."

The challenge for Klingbeil is immense: he not only has to present the federal budget in 2025, but also create corner values ​​for 2026 and a financial plan until 2029. This planning includes a net credit recording in the core budget, which increases from 33 billion euros to 81.8 billion euros in 2025 - a more than double increase within one year.

Infrastructure and climate protection as a second pillar

The 500 billion euro program for the future

In addition to defense spending, the special fund for infrastructure and climate protection is the second load -bearing pillar of new German politics. 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 should concentrate on several key areas: modernization of weapon systems and equipment, sustainable procurement and logistical structures, infrastructure and barrack moderation as well as the strengthening of cyber defense. Particular attention is paid to the digitization of the armed forces and the development of new technologies for national defense.

However, the climate investment gap, which was documented by various studies, is even greater than the planned expenses. Analyzes show that the annual additional financial needs of the public sector for climate protection -related measures are estimated at 30 to 90 billion euros per year. The an average of ten billion euros per year until 2035 in the climate and transformation fund therefore only cover part of the actual needs.

Planning and approval acceleration

A central component of the new investment strategy is the acceleration of planning and approval procedures. The coalition has decided to fundamentally reform the planning, construction, environmental, awarding and administrative procedural law. The focus is on digitization of all planning and approval processes.

With the introduction of a uniform procedural law for infrastructure projects and the planning approval as a rule, processes are to be made more efficient. Replacement new buildings should usually do without planning approval in the future. These reforms are necessary in order to actually achieve the ambitious investment goals.

The previous experiences show that, despite available means, Germany often has difficulty output. The conclusion of the Federal Balance has been investigating the residue of outputs in recent years. The planned reforms should eliminate these structural obstacles and enable efficient use of funds.

However, there is a lot of disputes about the planned quick procedures:

• Environmentalists warn that not only climate protection projects, but also climate -damaging projects (e.g. motorways) will be accelerated. They also see democracy in danger because citizens and associations are less able to have a say and complain.
• Lawyers doubt whether the laws are compatible with EU law. There could be a lot of complaints - which in the end makes everything even slower.
• The economy demands even tougher measures against environmental lawsuits to push through projects.

Overall, it shows that there is no clear plan, which should really go faster. And the whole project is on a shaky legal ground - with the risk that everything will be blocked instead of accelerating.

In addition, one should know about the dependency and fatal impact of external advice:

• The central contradiction: Deburocratization, advise on the profiteers of bureaucracy - the error in the system of bureaucracy reduction

Social and economic effects

Challenges for German Society

The planned increase in expenditure will have profound effects on German society. The increase in defense expenditure from currently around two percent of GDP to 3.5 percent by 2029 means a fundamental re -prioritization of public expenses. Accordingly, these funds are only available to other areas such as education, social issues or culture.

At the same time, the massive investment program opens up new opportunities for the economy and labor market. The modernization of the infrastructure, the expansion of renewable energies and the digitization of the country can make Germany more competitive in the long term. The planned investments in the amount of average annual 25 billion euros in addition could increase the previous federal investments by 50 percent.

Generational justice and debt burden

The dramatic increase in public debt raises questions of generation justice. The annual new debt of up to 185 billion euros by 2029 means that future generations will have to take over significant debt burdens. However, supporters argue that investments in security, infrastructure and climate protection are necessary to keep Germany future -proof.

The per capita debt in Germany has increased by around 5,000 euros since the beginning of Corona pandemic and was most recently at 27,922 euros per citizen. The planned additional expenses will further increase this load. However, the government argues that investments in the state's sustainability will generate higher yields in the long term than the costs of 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 with 4.12 percent and Estonia with 3.43 percent of GDP meet such high spending rates. Even the United States, traditionally the largest military editor, was 3.38 percent of GDP in 2024.

This development reflects the changed security policy realities in Europe. The NATO countries have recognized that the previous expenses are not sufficient to counter the new threats. The planned increase in the NATO target to five percent of GDP by 2035, which should be 3.5 percent to classic military spending, is underlining this development.

Effects on European security architecture

Germany's massive upgrade will change the European security architecture sustainably. 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 given the goal of turning the Bundeswehr into a “conventionally strongest army in Europe”. This ambition not only requires higher expenses, but also a fundamental realignment of the German defense strategy. The Bundeswehr must be converted into a territorial defense army by an intervention army that was primarily designed for missions abroad.

Suitable for:

• Defense logistics: Germany's key role in the NATO strategy-how AI and robots can advance the Bundeswehr

Europe's new leadership: How Germany finally gives up its reserved role

Implementation risks and success factors

The implementation of the ambitious plans of the Merz government faces significant challenges. The German armaments industry must massively expand its capacities in order to be able to cope with the planned procurement. At the same time, the legal and bureaucratic hurdles must be broken down, which have previously prevented large -scale implementation.

A critical success factor is the social acceptance of new politics. The German population must be convinced that the high expenses for defense and the associated debt are necessary and justified. The government's communication will be crucial.

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 powerful armies in Europe and at the same time have made massive progress in modernizing its infrastructure and climate protection. However, this transformation will have its price - both financially and socially.

The question will be whether Germany can successfully master this challenge without neglecting its other strengths such as social security, education and innovation. The coming years will show whether the Merz government's bet will be on massive investments in safety and modernization and Germany actually makes fit for the challenges of the 21st century.

The historical dimension of this turn cannot be overestimated. Germany takes the transition from a reserved and relying medium power to a militarily and politically leading European major power. This change will not only shape Germany itself, but the entire European and international order.

I would be happy to serve as your personal advisor.

Head of Business Development

Chairman SME Connect Defense Working Group

LinkedIn

 

 

I would be happy to serve as your personal advisor.

contact me under Wolfenstein ∂ Xpert.digital

call me under +49 89 674 804 (Munich)

LinkedIn