German Chancellor Friedrich Merz is formally advancing a defense development plan with a scale as high as 600 billion euros. Initially viewed as an emergency response to geopolitical tensions, the initiative is now rapidly transforming into Germany's most significant economic stimulus engine since the end of the Cold War.
The surge in defense demand is creating corporate opportunities. Fabian Schmidt, co-founder of German defense technology firm HAT.tec GmbH, has observed a sharp increase in demand from defense clients eager to deploy his aircraft software. The impact of the Russia-Ukraine conflict has triggered Germany's largest military overhaul since the Cold War. Companies like HAT.tec GmbH, accustomed to product development cycles that often spanned years, are now striving to keep pace. "The pressure is intense," Schmidt remarked at an event in Munich showcasing defense startups. "It's positive because it brings momentum to the topic; a lot is happening now."
Chancellor Merz has allocated an initial 600 billion euros (approximately $687 billion) for the German military, coinciding with expressions of dissatisfaction from Donald Trump regarding U.S. security guarantees for Europe. However, what began as a geopolitical necessity is evolving into a major economic stimulus measure. Streamlined procurement processes are helping manufacturers secure record orders for products ranging from artillery shells to attack drones, and banks are becoming more willing to extend loans.
UBS analyst Felix Hüfner estimates that defense spending could contribute 0.5 percentage points to economic growth by 2028. The Ifo Institute stated last week that, despite new headwinds from the Iran conflict, the rapid expansion in defense is supporting this year's growth outlook. Furthermore, the Middle East war has stimulated demand for German military equipment, as Gulf states seek to intercept Iranian missiles. This indicates that, more than four years after Russia launched its war, conflicts continue to influence the European economy. EU leaders are scheduled to hold a summit on Thursday to discuss Iran, defense, and competitiveness.
A key feature of Merz's military expansion in Germany is that it is largely exempt from the country's strict fiscal rules. This means it could ultimately far exceed the parallel infrastructure spending program, which is capped at 500 billion euros. A significant positive development so far is the growing scale of domestic orders as projects are approved individually by parliament, contrary to initial expectations that much of the funding would be spent abroad, particularly in the U.S. The reason is that German companies have rapidly increased their production capacity. Leading the way is top defense contractor Rheinmetall AG, which opened a new ammunition plant in just 15 months. Its stock price has surged more than 160% since the beginning of 2025.
These investments are also providing a lifeline for parts of Germany's struggling manufacturing sector, with troubled automotive companies pivoting to supply products for the military. The significance is even greater if such spending can spur innovation in the civilian sector, similar to how military R&D once gave rise to the internet and GPS. The EU has underinvested in defense research for years, while rapid technological changes on the battlefield in Ukraine are shaping defense products. At a startup gathering ahead of the Munich Security Conference, exhibitors included ARX Robotics GmbH, whose autonomous robots can also be adapted for civilian uses, such as airport baggage handling.
Oliver Dörre, CEO of radar manufacturer Hensoldt AG, summarized the boom in the defense sector, praising lawmakers for acting at record speed last year. His company's order volume grew by 62% as a result. "2025 marks the shift from political intent to structural procurement execution," he told investors last month, describing the scale as unprecedented and likely to persist. The early stages of the Iran war injected new momentum as neighboring countries rushed to strengthen their air defense capabilities. "We anticipate strong orders," said Rheinmetall CEO Armin Papperger last week. "In the last five or six days, these countries have been asking if we can deliver more systems quickly."
Domestically, Germany has stated that supporting its own and European defense firms is crucial and has allocated 85% of contracts to the region. According to an informed source, officials are increasingly utilizing a clause that allows bypassing EU-wide tenders to award more contracts directly to German companies. A new procurement law has also been introduced to accelerate spending and planning. "German and European taxpayers naturally expect major defense contracts to go to domestic companies," said Thomas Endell, defense policy spokesperson for Merz's party in parliament. "We are making steady progress toward that goal."
German lenders are also supporting the effort, with Deutsche Bank even establishing a dedicated team to gradually increase financing for the sector. This is vital because, although Rheinmetall's example shows capacity can be expanded, some still worry that production bottlenecks may soon emerge. Andrea Riss of UniCredit warned that Germany and other European nations need more rapid construction to close the gap between policymakers' spending plans and actual industrial capacity.
Of course, other risks exist: Donald Trump, keen to boost U.S. arms sales to Europe, may be dissatisfied with the current trend. Nevertheless, the strategy is yielding economic benefits. Manufacturing orders grew by 7.4% between November and January, driven by large-scale goods and defense-related categories. Further order growth is expected as the government procures military vehicles, ships, and aircraft.
Tytan Technologies GmbH, a drone interceptor manufacturer founded in 2023, is expanding production capacity for markets in Germany, Ukraine, and other allied nations, having recently completed a 30 million euro funding round. "In the past, private investors had almost no interest in the arms industry," said Tom Aifler, Head of Business Development. "But that has changed dramatically."
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