Germany is undergoing a major shift in fiscal and defence policy, moving away from decades of strict budget discipline as it seeks to address security and infrastructure challenges. But experts warn that ambitious borrowing plans may falter when confronted with bureaucratic and industrial realities.
From Peace Dividend to Defence Urgency
For decades after the Cold War, Germany kept defence spending low, averaging just 1.2% of GDP compared to nearly 3% during the West German era. This left its military capabilities underfunded. Russia’s war on Ukraine and growing uncertainty about US security commitments to Europe have now pushed Berlin to change course.
Former chancellor Olaf Scholz declared a Zeitenwende (historical turning point) in 2022, setting up a €100bn special fund for defence. The new government, led by Chancellor Friedrich Merz, has gone further, softening the long-standing debt brake by allowing borrowing above 1% of GDP for defence. Meeting NATO’s 3.5% of GDP target could push federal debt up by more than €100bn annually, in addition to a €500bn infrastructure fund.
A Surge in Borrowing
Berlin is currently planning €143bn in net new borrowing, equivalent to more than 3% of GDP. From 2026 onwards, borrowing is projected to rise to between 3.5% and 4% of GDP. Factoring in state, municipal, and social security deficits, Germany’s overall shortfall could climb well above the Maastricht Treaty’s 3% ceiling — a sharp departure from its traditional fiscal conservatism.
Infrastructure borrowing accounts for just over 1% of GDP annually and is seen as justified, given the country’s deteriorating transport networks and utilities. Defence spending, however, poses a more complex challenge. Unlike infrastructure, it does not generate future tax revenues, making the debt harder to justify economically.
Spending Bottlenecks
Despite headline figures, markets may overestimate Germany’s ability to spend. Scholz’s €100bn military fund is a case in point: halfway through its planned life, only a quarter has been disbursed. The bottlenecks are clear:
- Procurement delays: Germany’s defence acquisition system is widely seen as bureaucratic and slow.
- Industrial limits: Rheinmetall, Germany’s largest defence contractor, has annual revenues under €10bn, while the top 10 defence firms together generated €36bn in sales last year. Scaling up to meet government ambitions will take years.
- Infrastructure hurdles: Similar delays plague civil projects, where complex planning and approval processes often leave capital budgets underspent. Even in years of budget surpluses, infrastructure spending remained low.
The Bottom Line
Loosening borrowing limits alone will not automatically lead to higher public debt or rapid expansion of Germany’s military and infrastructure capacity. Without parallel administrative reforms to speed up procurement and project delivery, much of the allocated money may remain unspent.
For now, Germany’s challenge is not only financial but also structural — turning borrowed billions into tangible results.
