OMSWEconomic Balance Sheet← Location OutlookOMSWEconomic Balance Sheet← Location OutlookOMSWEconomic Balance SheetOn 25 March 2025, amendments to Articles 109 and 115 and the new Article 143h of the Basic Law came into force, reshaping the fiscal constitution more far-reachingly than any step since the introduction of the debt brake in 2009. At its core is a limited sectoral exemption: expenditures justified by security and defense policy – for defense, civil and population protection, intelligence services, IT security as well as aid for states attacked in violation of international law, such as Ukraine – are exempted from the regular credit limit of the debt brake insofar as they exceed a base value of 1 percent of GDP. Only up to this one percent must the expenditures be financed regularly, that is, without additional credit; anything above that may be debt-financed without further restriction. The scope for borrowing in the security sector is thus effectively open-ended, which banks and research institutes describe as a 'wide-open gateway to new debt'. For context: the regular debt brake permits the federal government only a structural net borrowing of 0.35 percent of GDP. The analysis firm Bantleon estimates that, under the new clause and with a target level of 3.0 to 3.5 percent of GDP, expenditures of 2.0 to 2.5 percent of GDP can be financed outside the debt brake. The measure is thus clearly to be distinguished from the older, capped 100-billion special fund of 2022, which is expected to expire in 2027.
The triggers were Russian aggression against Ukraine and the reorientation of US foreign policy, which in the BMF's assessment require greater security-policy responsibility on the part of Europe and Germany in particular. Under the previous debt rule, fiscal leeway in departmental budget 14 was severely constrained, and the Bundeswehr special fund would not have been sufficient to ensure the necessary capability development. The core problem was foreseeable: the €100 billion special fund established in 2022 is expected to run out in 2027, so that from 2028 the NATO target would have had to be financed entirely from the core budget – around €30 billion in additional funds, which the government itself quantified as a 'need for action'. The financial package introduced by the SPD and CDU/CSU was adopted by the outgoing 20th Bundestag on 18 March 2025 with the votes of the CDU/CSU, SPD and Greens, because in the new Bundestag the two-thirds majority required for constitutional amendments was no longer certain. Under pressure from the Greens, the sectoral exemption was extended beyond the pure defence budget and, in addition, a €500 billion special fund for infrastructure and climate neutrality was created. The Bundesrat gave its approval on 21 March, and the Federal Constitutional Court rejected several urgent applications against the procedure. Critics such as the economists Lucke and Meyer complain that questions of debt sustainability played hardly any role in the legislative process.
The defence budget is growing at a historically unprecedented pace: in 2025, departmental budget 14 provides around €62.4 billion plus €24.1 billion from the special fund, together around €86 billion. For 2026, the Bundestag adopted a defence budget of €82.69 billion plus €25.51 billion from the special fund on 26 November 2025 – over €108 billion in total, the highest figure since the founding of the Federal Republic. Adding in Ukraine aid of around €11.5 billion, Germany reaches almost €120 billion in 2026. The medium-term financial plan foresees a jump from €93.3 billion (2027) to €136.5 billion (2028) once the special fund is exhausted, and around €152 billion in 2029 – a tripling compared to 2023. The NATO ratio rises accordingly from around 2.4 percent (2025) to 2.8 percent (2026), 3.0 percent (2027) and 3.5 percent of GDP in 2029. The biggest beneficiary is military procurement, with a volume of around €47.9 billion in 2026, of which almost €15 billion for ammunition alone. At the NATO summit in The Hague in June 2025, the alliance partners also committed to increasing spending to a total of 5 percent of GDP by 2035 (3.5 percent defence plus 1.5 percent defence-related infrastructure).
The short-term demand impulse is measurable but limited. The KfW expects a fiscal-policy growth boost of around 0.8 percent of GDP for 2026, the Bundesbank a cumulative effect of around 1.3 percentage points by the end of 2028, with rising defence spending being particularly significant. The fiscal multiplier is decisive: the literature (Ilzetzki 2025) cites a range of 0.6 to 1.5, but the KfW assumes a value well below one for defence due to high import shares and already high capacity utilisation of the arms industry. The study by Krebs and Kaczmarczyk even arrives at a multiplier of only around 0.5 and warns that, with factories operating at capacity, additional funds mainly drive prices rather than production – and that armaments generate only minor technological spillover effects into the civilian economy. The Kiel Institute, by contrast, sees a cumulative GDP effect of 0.9 to 1.5 percent given an increase from 2 to 3.5 percent of GDP, but warns that tax-financed rather than credit-financed rearmament could even make growth negative. The potential effects remain small according to Bundesbank model calculations: around 0.1 percent in 2029 and 0.3 to 0.4 percent in 2035, in part even with slight crowding out of private investment through higher interest rates. Overall, the macroeconomic return per euro of debt deployed is thus lower than for civilian infrastructure or education investment.
For the defence industry, the programme acts as a strong demand boost. Rheinmetall increased its revenue in 2024 to around 9.8 billion euros (up 36 percent) and reported an order backlog of around 73 billion euros as of the first quarter of 2026 – compared with just 24.5 billion euros at the end of 2021. The group plans to double its workforce from around 28,500 (2024) to 70,000 within a few years, recorded over 361,000 applications in 2025, and is expanding capacity with the new ammunition plant in Lower Saxony. Noteworthy is the labour transfer from the crisis-ridden automotive industry: Hensoldt and KNDS are each taking on hundreds of skilled workers, and Thyssenkrupp Marine Systems plans up to 1,500 new jobs in Wismar. A study by DekaBank and EY estimates that a rise in defence spending towards 3 percent of GDP could create or secure around 100,000 industrial jobs. This is offset by structural limits: the factories are already highly utilised, a considerable share of procurement goes to imports (for example fuselage sections for the F-35), and entrepreneurs such as Papperger are demanding binding purchase guarantees before they invest in capacity. Critics such as the IfW point out that growth in the defence sector can come at the expense of civilian areas and constrain private consumption – making it economically no sure thing.
The central downside is rapidly rising debt. The federal government's net borrowing stood at 66.9 billion euros in 2025, 89.9 billion is planned for 2026, and the financial planning envisages an increase to 126.1 billion euros by 2029. Debt-financed security spending alone is growing from 32.1 billion euros (2025) to 121.2 billion euros (2029). The general government debt ratio rose to 62.2 percent of GDP in 2024 and 63.5 percent in 2025 and, according to the Bundesbank scenario, is likely to climb to around 70 percent by 2029 – well above the EU reference value of 60 percent. Interest expenditure is particularly burdensome: the Federal Court of Auditors warns of a doubling to around 66.5 billion euros by 2029, in which case interest payments would exceed the federal government's investment expenditure; the economist Lars Feld considers interest expenditure of up to 400 billion euros possible in the long term. The Bundesbank considers the permanent exemption of extensive defence spending from the borrowing limit 'not sustainable' and recommends a three-stage phase-down in which the exemption is fully eliminated from 2036. In addition, despite expanded room for manoeuvre, the federal budget shows considerable consolidation needs, which grow from 34 billion euros (2027) to 74 billion euros (2029) – around 1.5 percent of GDP.
In a European comparison, Germany starts from a relatively comfortable position: the euro area debt ratio stands at around 89 percent of GDP, Germany at around 63 percent, resulting in a lower relative interest burden. According to market analysts, rating agencies are likely to maintain the AAA rating for the time being, provided that consolidation resumes from the end of the 2030s and the bulk of military spending returns to the regular budget. At the EU level, Germany – like twelve other states – is using the national escape clause (NEC), which until 2028 exempts additional defence spending of 1.5 percent of GDP annually from the debt-level calculation. The German fiscal plan 2025–2029 and the defence exemption were accepted by the EU bodies, with the federal government working with optimistic potential growth assumptions (0.5 percent p.a.) that the Bundesbank views critically. As a central stability anchor of the monetary union, Germany is at the same time under particular scrutiny, because high German new borrowing tends to raise interest rates in the euro area and can deter other highly indebted states from consolidating. The competitiveness aspect is double-edged: in the short term, state demand supports industry, but rising social contributions and interest burdens indirectly make the location more expensive.
The financing produces side effects that increase location costs. The Bundesbank expects the social insurance contribution rate to rise from 42.4 percent today to around 44.25 percent, and the pension contribution from 18.6 to 19.8 percent, once the pension insurance reserves are largely depleted by 2028 at the latest. Higher social contributions make labor more expensive and thus place an additional burden on competitiveness – an effect that partially counteracts the growth impulse of defense spending. Also critical is the statistical softening of the concept of investment: the investment ratio dropped from 11.9 to 9.4 percent in 2024 (2025) and only reaches the self-imposed 10 percent mark because credit-financed defense expenditures are excluded from the calculation. According to the Bundesbank, only around 40 percent of the parallel infrastructure special fund flows into genuinely additional investments, while the rest relieves existing budgets – a pattern that diminishes the growth effect. Within the defense industry, it is primarily established large corporations that benefit, while the ifo Institute warns that a lack of competition and barriers for SMEs slow down innovation dynamics and the efficiency of fund utilization. Parliamentary oversight of complex billion-euro procurements (such as the €11 billion radio project or the FCAS fighter aircraft) is also considered increasingly difficult, which raises the risk of inefficient use of funds.
| Year | Defense spending (€bn) | NATO ratio (% GDP) | Debt ratio (% GDP) |
|---|---|---|---|
| 2024 | ≈ 71 | ≈ 2,0 | 62,2 |
| 2025 | ≈ 86 | 2,4 | 63,5 |
| 2026 | 108,2 | 2,8 | ≈ 65 |
| 2027 | ≈ 120 | 3,0 | ≈ 67 |
| 2028 | 136,5 | 3,3 | ≈ 69 |
| 2029 | ≈ 152 | 3,5 | ≈ 70 |
Over the next five years, the debt-financed defence turnaround is justified on security-policy grounds and delivers a real but limited economic stimulus of around 1.3 percentage points cumulatively by 2028. Economically, however, the ambivalence prevails: a low multiplier, high import shares, and low spillover effects stand against a rapidly rising debt ratio of around 70 percent (2029), doubling interest expenditure, and rising social security contributions. The decisive factor will be whether it succeeds in building domestic capacities efficiently and competitively, actually deploying the funds in a capability-oriented rather than gap-oriented manner, and embarking on a credible consolidation path from the early 2030s. If this succeeds, the location will remain robust despite higher debt and retain its top credit rating; if it fails, a combination of stagnating growth, a high interest burden, and crowded-out future investment looms. On balance, the measure is therefore slightly positive for Germany as a location, but comes with considerable implementation and sustainability risk.