Despite the defense boom, economists remain cautious about its economic impact.

BERLIN, Aug. 16 (Xinhua) -- Germany is ramping up defense spending to levels unseen in decades, hoping a thriving arms industry will boost national security and revive an economy mired in two years of contraction.

Experts noted the boost from military spending may prove fleeting and moderate as arms output will hardly lead to lasting economic momentum, warning that relying on defense as a growth engine could deepen structural imbalances.

POLICY SHIFT

For decades, the largest economy in Europe has relied heavily on exports, particularly in the automotive and machinery sectors, a model vulnerable to soaring energy costs, supply chain disruptions and trade frictions.

Recent U.S. tariff offensives have added further uncertainty, with German exports to the United States having fallen for three consecutive months, reaching their lowest since February 2022.

In an unusual move, the Bundestag, Germany's lower house of parliament, on March 18 approved a historic easing of the country's debt limit to enable higher defense spending, allowing Berlin to raise defense expenditure to 3.5 percent of gross domestic product (GDP) by 2029, or 162 billion euros (187.92 billion U.S. dollars), a sharp increase from the 2 percent North Atlantic Treaty Organization (NATO) quota it met in 2024 for the first time in three decades.

Chancellor Friedrich Merz has envisioned building up "the strongest conventional army in Europe" amid the Ukraine crisis as well as pressure from U.S. President Donald Trump triggering concerns across Europe about Washington's security commitments and encouraging Europe to boost its defense capabilities.

Embarking on its largest military buildup in decades, Germany plans to spend around 83 billion euros (96.28 billion dollars) on defense in 2026, up about 55 percent from 2025, resulting in a wave of large arms procurements.

The defense ministry is preparing more than 60 orders for parliamentary approval by the end of this year, including 20 Eurofighter jets from a consortium of Airbus, London-based BAE Systems and Rome-based Leonardo, as well as thousands of Boxer armored vehicles from Rheinmetall, the largest German and fifth-largest European arms manufacturer.

ECONOMIC LIMITS

Germany's policy shift has reshaped the outlook for its defense industry, which contracted sharply after the Cold War. Economy Minister Katherina Reiche described the industry as an indispensable but long-time underestimated component of economic resilience as well as a potential major engine of recovery amid broader stagnation.

Despite the defense boom, economists remain cautious about its economic impact.

The gross domestic product (GDP) multiplier for military investment is limited, at roughly 0.5, said Tom Krebs, an economics professor at the University of Mannheim in Germany. That means every euro spent generates only around 50 cents of additional economic activity. By contrast, investments in infrastructure, education and childcare can double or even triple the return on investment.

Moreover, a surge in military orders is more likely to grow arms companies' profit margins instead of boosting economic growth, Krebs added, warning the oligopolistic nature of the defense market could further inflate prices without strict oversight.

Experts also highlight structural constraints of defense projects, with long production cycles, years of training, and highly automated production limiting short-term employment gains.

Greater arms spending could help offset losses in other sectors, but overall economic gains could be limited as companies outside the defense sector are potentially switching to arms production, said Zheng Chunrong, director of the German Research Center at Tongji University in China.

"Defense spending cannot be sustained indefinitely," he said. "Relying solely on military stimulus will not boost lasting growth."