Overview
Germany is currently undertaking an extensive and long-term defense modernization program that has the potential to position Germany as Europe’s dominant military and security player. Berlin is investing money across a range of different capability areas, developing its defense industrial base and defense technology sector, and planning to become Europe’s largest military power by 2039. Defense expenditures have surged this decade and will continue to do so, although over time the focal points of Berlin’s defense investment will change.
Berlin’s new orientation in defense and security policy will play a fundamental role in shaping European security in the coming years. While Germany is well positioned to live up to its NATO commitments, its modernization drive also comes with downside political risks: increased tensions with neighbors like France and Poland, concerns about German industrial dominance in Europe, and greater potential for policy friction with Washington. Meanwhile, its approach to defense partnerships and international procurement is also in flux. German defense investment will play out in line with Europe’s growing focus on reducing external dependencies and boosting its own economic and industrial system. On the upside, Germany’s spiking need for defense and technology products will create sustained demand across many sectors, and Berlin remains open to defense industrial partnerships and foreign procurement, especially for needs that do not yet have a strong European alternative.
Germany’s Defense Modernization: Europe’s Strongest Army
Since 2022, Germany has been investing in modernizing its military and strengthening its defense industrial base, both with an eye to the future and to correct decades of underinvestment. Germany’s economic size, its relatively low debt burden, and its cheap borrowing costs have enabled it to place significant financial resources behind its defense modernization. Following Russia’s full-scale invasion of Ukraine, Germany created a special financing vehicle for defense expenditures, and in 2025, Berlin exempted defense spending from Germany’s debt ceiling. The German government’s Startup and Scaleup Strategy, published in July, envisions direct government investment in promising defense companies seeking to scale. Since 2020, German defense expenditures have more than doubled, rising from slightly over €50 billion to an anticipated €117 billion defense budget in 2026.
Germany is investing across many capability areas, such as space, drones, AI, long-range strike capabilities, air defenses and logistics. In late 2025, Germany’s defense ministry announced a €35 billion package for space security, and earlier this month, Germany’s defense minister Boris Pistorius expressed interest in establishing a permanent space launch site for the military. Berlin is also pursuing procurement of Tomahawk missiles from the US, establishing logistics partnerships with German companies, and investing in partnerships with Kyiv to take advantage of Ukraine’s hard-won expertise in drone warfare. In April, Germany’s defense ministry released an “overall concept of military defence” with three phases that outline Germany’s priorities through 2039. The goal is to maximize readiness by 2029, focus on capability growth through 2035, and achieve technological superiority by 2039.
Germany is trying to bring as much capital into its defense industrial base as it can, as rapidly as it can. Over 80% of German defense expenditures were staying in Germany by the end of 2025. Berlin is also trying to partner with private capital to invest in its defense industry, including from companies in the US. Germany’s Economy and Energy Minister Katherina Reiche reportedly met with private equity executives in New York to try and mobilize outside investment for Germany’s defense industrial base.
Germany’s newfound defense power creates political risks if other European countries interpret this as advantaging Germany’s defense industry or if it affects multinational European defense projects. In the last year two major defense projects have pivoted to German industry due to cancelled international procurement or development initiatives. The program for Germany’s next-generation frigate, originally contracted to a Dutch shipbuilder, was recently cancelled and will be replaced by ships from Germany’s own TKMS. The Future Combat Aircraft System (FCAS), a multinational next-generation fighter jet project under French leadership, was also cancelled. However, Berlin has signaled its intention to continue with a next-generation jet that would likely see a greater workshare go to German companies.
Disrupting Europe’s Defense Equilibrium
Germany’s increasing importance as a defense actor will be a double-edged sword for Europe’s security architecture and for European politics. Other European powers, like France and the UK, spend far less on defense than Germany will in the coming years: Paris’ defense budget for 2026 is €68.5 billion and London’s is £74 billion, compared to Berlin’s €117 billion. Both France and the UK also have limited room to scale up defense spending due to high deficits and public debt. Germany’s rearmament is therefore critical to European defense. Berlin stepping up on defense is also necessary in the context of transatlantic political friction around unequal burden sharing in NATO.
However, a militarily ascendent Germany also creates tension between Berlin and its neighbors, specifically France and Poland. Berlin’s financial resources and economic weight, when combined with a large and technologically advanced military, will reinforce concerns that Berlin's resources are making Germany too dominant.
France has historically seen itself as Europe’s leader in security and defense issues. Paris’ greater focus on military strength, its nuclear weapons, and a UN Security Council seat have reinforced this. Germany, for its part, has been wary of military strength and asserting a claim to regional leadership. However, as this changes, there is increasing room for dispute between Paris and Berlin over who should play the leading role in European security.
Defense leadership competition also comes at a moment when the Franco-German engine is already struggling across several policy fronts. In defense industrial policy specifically, the Franco-German relationship has had several setbacks recently. The failure of FCAS leaves Germany, with its larger economy and lower debt, more able to pivot to new partnerships and direct investments into a new project. Paris has technical expertise and industrial knowledge but lacks the financial firepower to easily shift. The Franco-German Main Ground Combat System, a joint project for future ground vehicles, also faces an unclear future. While these issues are unlikely to cause a significant break in the bilateral relationship, they will weigh on Paris and Berlin’s ability to align policy.
Warsaw also has ambitions to be Europe’s leading military power, and Poland’s relationship with Germany has gone through rough patches in recent years. Poland’s Law and Justice (PiS), which was in power from 2015 until 2023 and still holds the country’s presidency, is highly critical of Berlin wielding too much power in Europe. The current Polish government sees German military modernization as critical for deterring Russia. However, if PiS reenters government after 2027 parliamentary elections, Warsaw may emphasize military competition with Germany and skepticism of German leadership.
For Washington, defense modernization makes Berlin a better ally, but it could also bring greater strategic misalignment and friction over defense procurement. The “Buy European” push, an initiative to create European alternatives to American defense products, aims to both boost the continent’s economy and reduce external dependencies. Germany has shown itself open to defense deals with the US when practical, but it also wants to procure and develop European alternatives in many areas going forward. The Trump administration has consistently objected to anything it views as disadvantaging American defense companies in Europe and will likely continue to oppose “Buy European” pressures.
Risks and Opportunities
For companies operating in the defense sector, there are several risks arising from Germany’s modernization. Germany’s defense industrial policy and major development projects could diverge from other European partners around issues like work-sharing and strategic project goals. This creates higher chances of large projects, like FCAS or MGCS, either becoming bogged down in political disputes or falling through entirely due to divergences. If perceived as unilateral, Germany’s modernization could hurt regional bilateral relationships and create a more fragmented defense industrial environment in Europe. Berlin is also increasingly aware of the long-term and strategic nature of defense cooperation, which will tilt Germany towards European and German procurement options when available. That means US defense businesses may need to adapt to increased “Buy European” procurement rules.
Germany’s defense ministry will also have to adapt to managing rapidly increasing investment flows. The procurement office in the ministry of defense is undergoing restructuring to make it more flexible, and the ministry has switched from emphasizing reducing bureaucracy and simplification to growth in order to manage growing investment needs. While reforms could make cooperation with the ministry easier, they could also create new bureaucratic issues and make businesses relearn how to navigate the ministry’s processes. Businesses and investors interested in benefiting from Germany’s rearmament will have to track this reform process closely as it continues to play out.
There are also significant potential opportunities present. There is, and will continue to be, spiking demand across a range of different sectors tied to defense and security policy, and Berlin remains open to both foreign procurement and long-term defense industrial partnerships, especially when there are no European alternatives, such as with Tomahawk missiles. Defense innovation and startups are also receiving increased focus from the government, and Germany will likely want to attract private capital into its defense industrial base going forward. Moreover, the changes to Berlin’s defense outlook are here to stay, creating certainty for long-term investments. The defense plans are by and large supported by the entirety of Germany’s political establishment and backed up by a high willingness to channel Germany’s industrial and economic capacity into defense policy as Berlin pivots to asserting leadership in European defense.
