Germany’s plan to borrow €800bn over the next four years may buy a lot of much needed hardware. It also threatens to make equally needed joint EU debt more difficult to introduce.
German Chancellor Friedrich Merz’s cabinet approved, in the first week of July, a draft budget committing Berlin to borrowing more than €838bn between 2027 and 2030. Defence spending rises from €82.2bn this year to €183.6bn by 2030. It is the largest departure from fiscal restraint since the constitutional debt brake was introduced. The plan signals a genuine structural break, not merely a budget adjustment.
The financing splits across three streams. Next year alone, Berlin will borrow €203.6bn: €118.7bn from the core budget, €54.9bn from a new infrastructure fund, and €30bn from a special defence fund. Borrowing rises each year after that, reaching €219.5bn in 2030. Interest payments double over the same period, from €41.9bn to €80.7bn.
Sovereign choice, European consequences
Mr Merz’s coalition frames the plan as a “protective shield for growth and security”, targeting 3.5 per cent of GDP for defence from 2029. German Finance Minister Lars Klingbeil defended the approach at press conferences on 7 and 8 July, calling it “an investment in security and growth” and citing energy shocks from the US–Iran conflict as additional justification.
Germany funds its rearmament almost exclusively through national debt. Mr Merz’s coalition has ruled out new joint EU debt, labelling NextGenerationEU-style borrowing a one-off crisis tool. That choice sits in direct tension with the EU’s ReArm/Readiness 2030 package, which aims to mobilise roughly €800bn across the bloc by 2030, lift joint procurement to 40 per cent, and source 50 per cent of equipment from within the EU defence-industrial base.
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The EU’s financial toolbox for ReArm is modest by comparison. The SAFE instrument offers up to €150bn in Commission-issued loans backed by the EU budget. EDIP grants cover just €1.5bn for 2025–27, supplemented by redirected EU programmes and a European Investment Bank security window. The Commission and several member states press for larger European defence bonds to scale the package. Without German consent, that ambition stalls.
The result is a two-speed rearmament. Germany surges ahead on national borrowing. The EU-level effort remains fiscally constrained and institutionally experimental. Some capitals, Paris, Warsaw, and Rome among them, fear this gives German industry a structural head-start and undermines the drive for an integrated European defence market.
The bond market problem
Germany’s extra €200bn-plus per year of sovereign bond issuance creates a deep, liquid AAA benchmark. That can attract private investors. It can also absorb the risk appetite that the EU would need for new supranational instruments. Large Bund supply is already adding an estimated 10 to 15 basis points to the ten-year yield curve. If the Commission issued a further €150bn to €300bn in defence bonds, investors would demand a premium unless Germany provided stronger guarantees, which is precisely what Berlin resists.
Legal scholars note that Brussels already relies on creative hermeneutics to accommodate large-scale defence spending without a treaty revision. The revised Stability and Growth Pact, in force since 1 January 2025, keeps the core thresholds of a deficit no greater than three per cent of GDP and debt no greater than 60 per cent of GDP.
We are closing a significant strategic gap in our defence, while simultaneously working to develop and deploy our own European systems. — German Bundeskanzler Friedrich Merz
A new defence escape clause allows temporary exceedances of up to one per cent of GDP per year. Germany uses that clause to exempt a growing share of its borrowing from the constitutional debt brake, rising from €85.4bn in 2027 to €151.8bn in 2030.
Fault lines, old and new
On 13 July, the European Commission confirmed it was examining the plan’s conformity with the new Stability Pact, but pointed to the already-activated escape clause. No formal Excessive Deficit Procedure is imminent. That outcome is politically unlikely while Berlin remains the EU’s largest net contributor. The risk grows, however, if other large economies follow suit without a compensating EU-level instrument.
Member states are already splitting along familiar lines. The Netherlands and Sweden welcome Germany’s defence efforts but urge strict adherence to the 60 per cent debt target by 2035. Southern member states, including Italy and Spain, push for equal treatment of energy and climate costs under the escape clause. Greece and Portugal, with little fiscal room of their own, object to what they see as a German special arrangement. That friction could complicate the next round of EU fiscal rule reform in 2027 and 2028.
Because Berlin is self-financing, it can veto larger common borrowing without jeopardising its own build-up. That gives Mr Merz strong leverage in the next Multiannual Financial Framework negotiations for 2028 to 2034. In response, a loose grouping of France, Poland, Italy, and the Baltic states is exploring intergovernmental defence bonds outside the EU budget entirely, a route that could reopen old fault lines about fiscal solidarity.
Industrial winners and political signals
The borrowing plan is already reshaping German industry. Companies see clearer, long-term demand signals from Berlin’s special fund than from Brussels’ still-negotiated instruments. German small and medium-sized enterprises are pivoting into defence production.
The car industry, struggling with plunging profits and Chinese competition, is also moving in. Mercedes-Benz is set to partner with Munich-based start-up Tytan Technologies on a mobile drone-defence system called Drone Defender, using the Sprinter van and military G-Class as its chassis. Tytan aims to reach production of thousands of systems per year and hopes to sell to multiple European governments.
A slap in the face of hard-working Germans. — Alternative für Deutschland, German opposition party
Mr Merz also secured a deal to buy American Tomahawk cruise missiles during the NATO summit in Ankara, Financial Times reports. “We are closing a significant strategic gap in our defence, while simultaneously working to develop and deploy our own European systems,” he said.
An interest trap?
The purchase caps months of effort after Washington scrapped plans to deploy a long-range missile battalion in Germany and withdrew 5,000 troops following a public row between Mr Merz and US President Donald Trump. The Tomahawk deal suggests a partial thaw, though Mr Merz did not say when deliveries would begin.
The Federation of German Industries (BDI) warns that rising interest costs could consume one in every five euros of tax revenue. That could subtract 0.3 to 0.4 percentage points of annual GDP growth through crowding-out effects on private investment. The Institute for the World Economy estimates an infrastructure spending multiplier of 1.4, adding roughly 0.5 percentage points to GDP growth between 2027 and 2029. Germany’s debt-to-GDP ratio rises from 66 per cent today to an estimated 78 to 80 per cent by 2030. It remains manageable, but it reduces Berlin’s future capacity to underwrite EU bonds.
Domestic opposition is vocal. The AfD called the plan “a slap in the face of hard-working Germans”. The Greens criticised the reallocation of funds away from climate programmes. The Bundestag budget committee has scheduled special sessions for August. Early polling suggests 54 per cent of Germans consider the borrowing level too high, and only 39 per cent consider it appropriate.
Questions without answers (so far)
The Commission’s attempt to steer capability planning through ReArm is viewed in Berlin as overreach into a core sovereign domain. If Germany holds firm on national financing, the EU may shift toward regulatory tools, including state-aid waivers and fast-track permits, rather than financial ones, moving the debate from who pays to how to remove bottlenecks.
Whether the programme ultimately becomes a growth engine or an interest trap depends less on the borrowing total and more on the quality of what Berlin builds with the money. The other question is whether Europe can agree, before 2030, on a common architecture to match it.
