In the first half of 2026, Berlin definitively consolidated a turn in its domestic and foreign policy, which went down in history under the name "Zeitenwende" (Turning Point / Change of Eras). Germany, which for decades maintained the status of an exclusively civilian geoeconomic superpower and consciously restrained its defense sector, is rapidly transforming its own model of capitalism to meet the needs of deterrence and preparation for a prolonged global confrontation. The approved defense budget for the current year reached an unprecedented mark of over eighty-two billion euros, and taking into account the use of funds from the Special Fund (Sondervermögen), the country's total military expenditures for the first time in modern history exceeded one hundred billion euros, confidently stepping over the two percent limit of the gross domestic product established by NATO. Moreover, the government of Chancellor Friedrich Merz officially approved a long-term strategy until 2029–2030, which provides for an increase in military and security allocations to an historical three and a half percent of GDP. Such a large-scale pumping of the defense-industrial complex with state money launches deep structural reforms within the country, where signs of the formation of a so-called "peacetime war economy" are becoming increasingly clear.
The transition to a war footing significantly changes the macroeconomic profile of Germany, creating both new drivers for growth and serious systemic imbalances. Against the backdrop of a general slowdown in civilian sectors of industry due to the consequences of the energy crisis, the German defense sector is experiencing a real supercycle. Leading industrial giants, such as Rheinmetall, KNDS, and Hensoldt, are loaded with long-term state orders for years ahead — from the production of the newest Leopard 2A8 tanks to air defense systems and artillery shells. State investments in arms procurement jumped by nearly seventeen billion euros, becoming the main locomotive for the recovery of German industrial production, which in 2026 demonstrates a modest but stable growth at the level of zero point six percent. However, this militaristic boom has its price, about which analysts from the International Monetary Fund and the European Commission openly warn. The defense order washes away scarce highly qualified engineering and working personnel from classical mechanical engineering and automotive manufacturing, worsening the crisis in an already overheated labor market. The introduction in 2026 of the new Law on the Modernization of Military Service, which virtually returns elements of mandatory registration and military surveying for youth, creates additional social tension. From a financial point of view, the sharp increase in expenditures on the army and civil defense forced Berlin to expand the deficit of the general state budget, which according to forecasts may exceed three and a half percent of GDP. Since a significant portion of military expenditures is financed through borrowing, this creates medium-term inflationary risks and limits the government's capacity to finance social programs and large-scale green transition projects.
Since Germany is the main economic engine of the European Union, its reorientation toward defense needs instantly reformats the financial architecture of the entire European space. The large-scale financing of the German defense order acts as a powerful fiscal impulse for neighboring countries. Thanks to the deep integration of European supply chains, more than sixty percent of Germany's public investments in defense flow directly or indirectly through procurements to partners across the EU. This stimulates related industries in Poland, France, the Czech Republic, and the Netherlands, accelerating the implementation of the EU Defense Industry Transformation Roadmap and contributing to the creation of a joint fund to support innovative military startups. At the same time, Berlin's radical step forces other European capitals to follow a similar path, raising their own military budgets. This provokes a general growth of sovereign debt in the eurozone, as most states are forced to finance rearmament through budget deficits. The most important consequence of the transformation lies in the fact that Germany successfully converts its latent financial power into real military-strategic leadership on the continent. The creation of the strongest conventional army in Europe makes Berlin the main guarantor of EU security, weakening the region's traditional dependence on the US defense umbrella. Thus, the militarization of Germany turns it from a purely trade-export leader into a fully-fledged geopolitical superpower, which will independently determine the contours of Europe's financial and security stability for decades to come.
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