Defense spending remains a hot topic in Germany’s fragile three-way coalition of Chancellor Olaf Scholz’ Social Democrats (SPD), the Greens, and the pro-business Free Democrats (FDP). In early July, the three parties agreed a 2025 budget that conforms with the constitutionally-enshrined “debt brake,” which limits the budget deficit to 0.35 percent of GDP.
Among those who were most disappointed was Defense Minister Boris Pistorius (SPD). He had asked for the regular defense budget to increase from €52 billion to €58 billion, but only received an additional €1.2 billion. Finance Minister Christian Lindner, who is also the FDP leader, defended the move last weekend, calling on Pistorius to better manage the funds available to him (in 2022, the government set up an additional €100 billion special fund to finance urgently-needed military hardware purchases). Earlier, the defense minister had said that “the government needs to discuss again on a fundamental level how to safeguard our security.”
Strategic Imperative
This seems both prudent and necessary. Maintaining the conventional military balance in Europe and denying Russia victory in Ukraine are critical to German and European security. Strategically, a credible commitment by European NATO members to match increases in Russian defense expenditure offers the best prospect of maintaining the military balance of power as well as ending hostilities in Ukraine.
Russia’s best policy option is to weaken the West’s resolve and thereby undermine vital support for Ukraine. If, on the other hand, European NATO members credibly committed to matching (or outmatching) any Russian defense spending increases and to channeling a sufficiently large share of the increase to Ukraine as to make a Russian victory impossible, Moscow’s political and military objectives would be thwarted. As a result, its incentive to continue the war would diminish—if not immediately, then certainly over the medium and long term.
European NATO members have a far larger economic resource base than Russia. NATO’s combined purchasing-power-parity (PPP)-adjusted GDP is about 12 times larger than Russia’s. The combined economies of France, Germany, Italy, and the United Kingdom (or E4) are three times larger. Germany’s economy alone is slightly larger than Russia’s. Moreover, the per capita income in the E4 is higher than in Russia, which, economically, if not necessarily politically, translates into a greater ability to mobilize economic resources in support of national security. E4 per-capita income ranges from $57,000 to $67,000, compared to only $38,000 in Russia. A substantial resource advantage is particularly salient in the case of long-term security competition, where the side with the greater resources prevails (e.g., the end of the Cold War).
Economically, a larger resource base puts Europe in a position to outspend Russia. The Stockholm International Peace Research Institute (SIPRI) estimates that Russia spent $100 billion on defense in 2023, measured in current dollar terms (at market exchange rates), compared to a combined $200 billion in France, Germany, and the UK. Adjusted for PPP, however, Russia spent $250-300 billion, or roughly as much as Germany, France, Italy, the UK, and Poland combined. To be able to do so, however, Russia needed to mobilize nearly 6 percent of GDP, compared to an average of less than 2 percent of GDP in the E4.
If the major European NATO countries doubled their defense spending as a share of GDP, Russia would be forced to raise defense spending to 12 percent of GDP to match it. This would force Russia to curtail private consumption or investment, or both, which would risk stoking domestic discontent and economic stagnation, at least over the longer term.
Economic size is of course only a rough proxy for the ability to “buy” security and prevail in long-term strategic competition. Available economic resources need to be mobilized politically and they need to be converted efficiently and efficaciously into relative security gains. A sufficiently large economic resource base does not guarantee strategic success. It also requires an effective security strategy. But any credible and effective security strategy needs to be supported by adequate resources.
Financially Viable
Germany has a pivotal role to play in bolstering Europe’s security. Among NATO European members, Germany has the largest population and the largest economy. It has the largest and likely most advanced technological-industrial base. It also benefits from far greater fiscal space and fewer economic-financial constraints than its European allies, and its defense expenditure has been sorely lagging in the past few decades.
German defense expenditure is low by historical standards and on a comparative basis. In 2023, it amounted to 1.6 percent of GDP, which ranked Germany 21st out of 30 NATO countries. Looking back, German defense spending peaked in the early 1960s at just over 4 percent of GDP, and it has not exceeded 2 percent of GDP since 1991. Germany also spends tangibly less than France and the UK, where defense expenditure stood for 2.1 and 2.3 percent of GDP, respectively. By comparison, Poland spent almost 4 percent of GDP and the United States spent 3.5 percent of GDP last year.
German defense spending is now set to reach 2 percent of GDP this year and exceed the 2-percent target by 2028, but only thanks to a further drawdown of the €100 billion special defense modernization fund (“Sondervermögen”) established in 2022.
Germany has ample financial room to increase defense expenditure, even without having to cut other expenditures or raise additional revenues. At just over 60 percent of GDP, German government debt is comparatively low and the debt-to-GDP ratio is set to fall by more than one percentage point a year until the end of the decade, according to the International Monetary Fund (IMF). A one-percentage point increase in spending would therefore help keep the debt-to-GDP ratio roughly unchanged. Germany is therefore well-positioned to raise defense expenditure “on the cheap” without having to raise additional taxes or cut non-defense expenditure. A permanently larger fiscal deficit would not undermine the outlook for debt sustainability, certainly not in the near to medium term.
Germany also has far greater fiscal flexibility than its major European allies to increase defense spending, making it a pivotal player in European defense. German government debt is far lower than in other large European NATO countries. Last year, German debt stood at 63 percent of GDP, compared to 111 percent in France, 137 percent in Italy, 108 percent in Spain, and 101 percent in the UK. Even if future pension and healthcare spending are added to the debt stock (and suitably discounted), German debt is tangibly lower than in Europe’s other large NATO countries. Finally, German debt is less costly to finance, while continued large current account surpluses suggest that the German economy is not savings-constrained, which should help limit the impact on investment.
Challenging, But Possible
Although European NATO members produce collectively far more economic output than Russia, high debt levels in countries like France, Italy, and the UK constrain the degree to which these countries are politically willing to further increase defense expenditure and provide support to Ukraine. But this constraint is political, not economic or financial, in the sense that Western countries are wary of raising taxes or cutting non-defense expenditure to free up financial resources.
Nevertheless, for some countries, the near-term economic, financial, and political constraints are more immediate due to higher debt levels and more limited fiscal space (France, Italy, Spain, UK). For others, financial challenges are more of a long-term nature (Germany), meaning that politically difficult choices, whether to cut non-defense expenditure or raise taxes to increase defense spending, can be pushed further into the future.
Germany faces political and legal rather than economic and financial constraints in terms of increasing defense spending. A lack of agreement within the ruling coalition combined with the constitutionally-mandated “debt brake,” which forces the government to limit new debt to 0.35 percent of GDP, are the main political and legal constraints on higher spending.
The recent commitment to spend 2 percent of GDP on defense notwithstanding, a substantial increase in defense expenditure requires reducing non-defense spending or increasing taxes, unless the debt brake is temporarily suspended. However, polls also suggest that the German public supports higher defense expenditure. A recent poll showed that 68 percent of Germans support higher defense spending, while 29 percent oppose it. It is quite possible that popular support would weaken somewhat if it had to be financed by higher taxes or a reduction in government expenditure. But this is far from obvious.
Nevertheless, the constraints on higher German defense spending are legal, namely the “debt brake,” and political, less in the sense of a lack of public support and more in in terms of a lack of political leadership, rather than economic or financial. Two things are therefore required for Germany to raise defense expenditure: a reform (or suspension) of the “debt brake,” which would allow for a better balance between short- and medium-term budgetary flexibility and a continued commitment to the long-term the sustainability of public finances; and political leadership in Berlin to push for such a modification and sustainably increase defense expenditure in support of European security.
Markus Jaeger is a research fellow at the Center for Geopolitics, Geoeconomics, and Technology of the German Council on Foreign Relations (DGAP) and adjunct professor at Columbia University in New York.
