A 600 billion euro increase in military spending, will Germany usher in a boom in the defense industry?

German Chancellor Friedrich Merz is officially pushing for a defense construction plan of up to 600 billion. Initially seen as a response to geopolitical tensions, the plan is now rapidly transforming into the most transformative economic stimulus engine in Germany since the end of the Cold War. Defense demand surges and business opportunities Fabian Schmidt, co-founder of German defense technology company HAT.tec GmbH, has seen a surge in demand from defense customers, eager to deploy his aircraft software. The impact of the Russia-Ukraine conflict has sparked the largest military reforms in Germany since the end of the Cold War. Companies like HAT.tec GmbH, after years of slow product launches, are now working hard to keep up. "The pressure is high," Schmidt said at an event showcasing defense startups in Munich. "But that's good because it brings momentum to the issue, and a lot is happening now." German Chancellor Friedrich Merz has allocated the first 600 billion (approximately $687 billion) for the German military. However, Donald Trump has expressed dissatisfaction with the security of Europe. Nevertheless, measures initially taken for geopolitical reasons are now evolving into significant economic stimulus measures - streamlined procurement processes have helped manufacturers secure record orders for products ranging from bullets to attack drones, and banks are more willing to provide loans. UBS analyst Felix Hufer predicts that by 2028, defense will contribute 0.5 percentage points to economic growth. Last week, the Ifo Economic Research Institute said that despite new negative factors from the Iran conflict, the rapid development of defense is supporting growth prospects this year. In addition, the Middle East conflicts are also stimulating demand for German military equipment to help Gulf countries shoot down Iranian missiles. This indicates that years after Russia launched the war, the conflict continues to affect the economy of the European continent. EU leaders will hold a summit on Thursday to discuss Iran, defense, and competitiveness. Characteristics and advantages of German military expansion In Germany, a key factor in Merz's military expansion is that it is not actually subject to the country's strict fiscal rules - meaning that it could potentially exceed parallel infrastructure spending, which has a cap of 500 billion. The biggest advantage so far is that as projects are approved one by one by parliament, the size of domestic orders continues to increase, the opposite of the initial expectation that most funds would be spent abroad (especially in the US). German companies have quickly increased their production capacity - led by the leading defense contractor Rheinmetall AG, which opened a new ammunition factory in just 15 months and their stock price has surged over 160% since the beginning of 2025. These investments are also providing a lifeline for struggling sectors of the German manufacturing industry, with struggling car companies transitioning to providing products for the military. If such spending can promote innovation in the civilian sector, as military research once drove the development of the internet and GPS, its significance becomes even greater. For years, the EU has underinvested in defense research, and the rapid technological changes on the Ukrainian battlefield are shaping defense products. At the first entrepreneur gathering held before the Munich Security Conference, exhibitors included ARX Robotics GmbH, whose autonomous Siasun Robot & Automation could be repurposed for civilian use, such as airport baggage handling. Industry trends and policy support Oliver Dore, CEO of radar manufacturer Hensoldt AG, summarized the trend in the defense sector, praising lawmakers for taking record actions last year at record speed, leading to a 62% increase in orders for his company. He told investors last month that "2025 marks a shift from political intent to structural procurement execution" on an unprecedented scale, and this shift may continue. During the early stages of the Iran war, neighboring countries have intensified their air defense systems, undoubtedly injecting new momentum into strengthening air defenses. Amin Papagehl, CEO of Rheinmetall AG, said last week: "We expect strong orders. In the past five or six days, these countries have asked us if we can deliver more systems quickly." However, domestically in Germany, the country has stressed the importance of supporting domestic and European defense companies and has allocated 85% of contracts to the region. Officials are increasingly using a clause that allows bypassing EU-wide tenders, directly awarding more contracts to German companies, along with new procurement laws to speed up spending and planning. "German taxpayers and Europeans naturally want defense contracts to stay with domestic companies," said Thomas Ender, the defense policy spokesman for Merz's party in parliament. "We are steadily progressing towards achieving this goal." German lending institutions are also providing support for this effort, with Deutsche Bank even establishing a team to gradually increase financing for the industry. This is crucial because while examples like Rheinmetall show that capacity can be increased, some are still concerned about potential capacity bottlenecks. Andreas Riss of UniCredit Bank warned that to close the gap between policymakers' spending plans and actual capacity, Germany and other European countries need more rapid construction. Potential risks and positive effects Of course, there are other risks: Trump is keen on boosting US arms sales to Europe and may not be satisfied with the current trend. However, this strategy does bring economic benefits. Driven by large orders for defense-related categories, manufacturing orders from November to January grew by 7.4%. With the government purchasing military vehicles, ships, and aircraft, more order growth is expected in the future. Tytan Technologies GmbH, a company specializing in interceptor drones founded in 2023, is expanding its production capacity in Germany, Ukraine, and other allied countries and recently completed a financing of 30 million. "In the past, private investors were almost uninterested in the arms industry," said business development director Tom Eifler. "But this situation has changed tremendously."