German debt deal paves way for increased defence spending

Andreas Haak of Pinsent Masons in Düsseldorf, who specialises in public procurement, trade and export control law, was commenting after political parties in Germany – the Christian Democratic Union (CDU) and Christian Social Union in Bavaria (CSU), a bloc led by likely next chancellor Friedrich Merz, together with the Social Democrats (SPD) and the Green Party – reached a deal that will enable Germany to take on additional debt to fund, among other things, greater defence spending.

Current rules, known as the Schuldenbremse or debt brake, mean, broadly speaking, the German government can only borrow up to 0.35% of the country’s annual gross domestic product. Under the new deal reached, which is expected to be approved by Germany’s parliament, defence spending will be lifted from the scope of that restriction.

Haak said: “Experts estimate that around €400-500 billion will be needed to modernise the Bundeswehr – Germany’s armed forces – but this figure could rise significantly in the future. The additional funds will ensure the financial basis of what has been termed the ‘Zeitenwende’, which describes a shift in German security and defence policy, as well as the long-term achievement of the NATO target of 2% of GDP spent on defence, and the continuation of military support for Ukraine.”

“All this will lead to even more extensive procurement measures for the Bundeswehr in the future. Notably, the joint exploratory paper that forms the basis for coalition talks between Merz’s CDU/CSU bloc and the SPD is committed towards greater, more effective and more targeted defence procurement. Among others, there are plans to pass a law to speed up planning and procurement, so that the money from the special fund for the Bundeswehr, the so called Sondervermögen, which was set up in the immediate aftermath of Russia's attack on Ukraine with €100bn in 2022, can be used quickly and efficiently. In addition, it is expected that the instrument will also be used for procurement activities with future funds from the financial package,” he said

“The current situation offers great opportunities not only for traditional defence companies but new market players too, including startups – all can benefit from increased investment. However, it should be noted that the defence industry is a highly regulated sector with complex legal requirements. There are major challenges, for example, in the areas of public procurement and public pricing. Yet, some of the bureaucratic hurdles in the procurement process are likely to be reduced in future. These are seen as one of the main reasons for the poor state of the German military, along with inadequate funding. Recently, the CDU/CSU bloc published a comprehensive position paper containing 71 different measures to reform the Bundeswehr's procurement system,” Haak added.

There has been pressure on European countries to increase their defence spending for years, but that pressure has come to a head recently amidst changes to the geopolitical landscape.

In the context of seeking to negotiate an end to war in Ukraine, US president Donald Trump has implied that the US is disproportionately contributing to European security via its own defence spending and security guarantees. He has called on European leaders to substantially increase their defence spending. This has been met with individual responses from some countries and a collective response from EU policymakers too, who together are seeking greater independent defence capability.

For example, UK prime minister Keir Starmer recently set out a commitment to increase UK spending on defence to 2.5% of GDP from April 2027, with aims of a further increase to 3% in the next parliament. This commitment reflects the biggest investment in defence spending in the UK since the Cold War. 

For its part, the European Commission unveiled a ‘ReArm Europe plan’, to allow for a new EU financial instrument to support member states in boosting defence capabilities, enable public funding in defence, incentivise defence-related investments and mobilise private capital.

A new white paper on the future of European defence is expected to follow this week.

Haak said: “According to Andrius Kubilius, EU commissioner for defence and space, the EU needs a ‘big bang’ approach. This entails more joint defence projects and a preference for European suppliers – a ‘buy European’ mantra – according to a leaked version of the white paper. Yet, the diplomatic battle about the latter is still underway. A planned revision of the EU’s Defence and Security Procurement Directive is expected to reinforce this paradigm shift. The current upheaval could thus mark the beginning of a new era for the European defence industry.”