Germany to Spend Billions on Infrastructure, Climate, Defense

---

Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--The incoming German government has upended decades of fiscal conservatism by approving a 500 billion-euro (US$546 billion) fund for infrastructure, climate transition and defense.

The historic move, which was spearheaded by the incoming centrist coalition government formed by the conservative Christian Democrats (CDU) and center-left Social Democrats (SPD), centers around a constitutional change to remove the existing strict budget rules, known as the "debt brake," which was designed to stop government overspending except in emergencies. The rules typically limit Germany's budget deficits to no more than 0.35% of gross domestic product (GDP).

The changes will allow Germany's 16 states to borrow up to 0.35% of GDP and also allow the state to spend significantly more on defense. That amounts to 42 billion euro (US$47 billion) per year, over 12 years. It overturns Germany's strict financial austerity of the past few decades and comes as a response to weak economic growth in recent years, Russia's war in Ukraine and the weakening of relations between Europe and its traditional ally, the United States. Germany is the largest economic power in the European Union (EU). Defense spending going forward will be effectively unrestrained since all expenditures above 1% of GDP will now be exempted from the debt brake and defense spending already exceeds that level.

How the fund will be allocated

• Federal government: 300 billion euro (US$335 billion) for national infrastructure projects
• State governments: 100 billion euro (US$112 billion) for regional infrastructure initiatives
• Climate and economic transformation: 100 billion euro (US$112 billion) reserved for the Climate and Transformation Fund (KTF), focusing on climate action and energy transition projects

Key Investment Areas
Transport: Modernization and expansion of transport networks
Many feel it's long overdue and there is strong support. Railway operator Deutsche Bahn is already seeking a third of the 500-billion-euro infrastructure fund. It wants 150 billion euro (US$170 billion).

Energy: Development of sustainable energy infrastructure
Solar, wind, hydrogen and grid modernization will be the main sectors to benefit, followed by more investment in alternative clean sources including bioenergy, hydropower and geothermal energy, as well as the growing battery energy storage system (BESS) sector. The funding aligns with the coalition's climate and energy goals, which at its core wants low, predictable and internationally competitive electricity prices. The coalition has also promised more funding for nuclear fusion research and deployment and, although not green, it has pledged to add 20-gigawatts (GW) of gas power plant capacity by 2030.

Digitalization: Improvement of infrastructure and digital services
Key opportunities will be in automation, robotics and smart systems. There has been a strong push for more data centers--many to support artificial intelligence (AI) applications--and high-speed internet. Béla Waldhauser, spokesperson of the Internet Association, eco Alliance, said: "Whether in patient administration in the healthcare sector, industrial automation or supply chain management in logistics, without data centers, everything would come to a standstill." She has called for a "suitable infrastructure landscape," which applies in particular to Germany's international competitiveness in the field of AI location. "We need feasible regulations as well as planning and legal certainty in order to keep Germany well connected in the AI era."

Other areas to benefit from the spending include healthcare, through the modernization of hospitals and healthcare facilities, and education, with more investment in schools and research facilities.

Civil protection: Strengthening defense and civil protection mechanisms
Defense is a key market going forward. Incoming German Chancellor Friedrich Merz highlighted the vital need for defense spending in his call for the changes, accusing Russia of engaging in "hybrid" warfare against Germany and others. "Russian President Vladimir Putin is waging a war not only against Ukraine's territorial integrity. This is a war against Europe. It is also a war against our country, which is taking place daily." He has alleged that Moscow is behind widespread cyberattacks on German institutions, arson incidents, sabotage of key supply lines, disinformation campaigns on social media and illegal drone incursions over military bases. He added: "Now we must rebuild our defense capabilities, partly from scratch, with a technology-driven defense and procurement strategy, with automated systems, with independent European satellite surveillance, with armed drones and with numerous modern defense systems." Merz maintained that defense contracts should prioritize European manufacturers from now on.

Current state of Germany's defense sector
Germany's military spending has always been low for historical reasons dating back to 1945 and the aftermath of World War II, but it dropped off noticeably during the Cold War in the 1960s. At its height, German military spending was 4.9% of GDP, but in the following decades it dropped continually to just 1.1% of GDP by 2005. Last year was the first time in over 30 years that Germany's defense spending hit 2% of GDP--the NATO threshold. The military--or Bundeswehr--is in a poor state of repair and continues to be the victim of chronic underinvestment, according to the latest 2024 report by Eva Högl, the parliamentary commissioner for the armed forces. It owns 1,500 properties and most are in "a disastrous state," Högl wrote, and it will cost an estimated 67 billion euro (US$72 billion) to renovate all barracks in the country. The military has a standing force of 182,000 but the Defense Ministry target is 203,000, and recruitment is an ongoing problem.

On the hardware front, much of it dates to the Cold War, according to Germany's main newsgroup DW, and investment has lagged. A 100 billion-euro (US$112 billion) package agreed upon after Russia's 2022 invasion of Ukraine is being used to close the biggest gaps. This includes an order for 35 F-35 fighter jets from U.S. manufacturer Lockheed Martin to replace 1980s-era Tornado fighter jets at a cost of more than 8 billion euro (US$9.1 billion). The government is spending around 5 billion euro (US$5.7 billion) on 60 Boeing CH-47 heavy transport helicopters. The country's weak air defense system will be bolstered by a variety of interception systems, including Patriot and IRIS-T. The Navy is awaiting new frigates, submarines and P8 Poseidon maritime reconnaissance aircraft. Elsewhere, the old Marder infantry fighting vehicle will be replaced by cutting edge Leopard 2A8 tanks. But nothing is happening fast. According to Defense Minister Boris Pistorius, "It will take seven to eight years for submarines, six years for frigates, 2.5 years for tanks and the same for self-propelled howitzers." Ammunition, much of which has been sent to help Ukraine, is also severely lacking.

Defense/Construction/Engineering/Energy
German and European markets have soared on Germany's proposed fiscal changes. The Dax 30 index, which follows the largest German companies, jumped by 3.6%, as industrial stocks rose. The euro strengthened to its highest level since last November and the yield, or interest rate, on long-term German government bonds surged to their highest levels since the late 1990s. Companies operating in Germany's and Europe's defense sectors recorded spikes in their share values, which had been increasing in recent months since the EU started talking about more homegrown defense following President Donald Trump's anti-NATO stance. The White House has said that it will no longer be the main guarantor of European security and added that European nations should be responsible for their own defense and pay for it.

The fortunes of European defense companies have been on the rise this year, with a notable spike on the back of Germany's announcement. Leading the way is Germany's Rheinmetall, which has seen its stock double this year, according to investment tracker Morningstar. Germany's Renk and Thyssenkrupp AG also made notable gains. Defense players in other countries riding the wave include U.K. companies Rolls-Royce and BAE Systems, France's Thales, Italy's Leonardo and Sweden's Saab.

Germany's plan is just one boost for the defense sector, with the EU announcing in March its ReArm Europe Plan, backed by planned spending of up to 800 billion euro (US$911 billion) for what it called "a safe and resilient Europe." European Commission President von der Leyen said: "We are in an era of rearmament. And Europe is ready to massively boost its defense spending. Both, to respond to the short-term urgency to act and to support Ukraine but also to address the long-term need to take on much more responsibility for our own European security."

Germany's biggest construction and engineering companies posted big gains on the back of the news. Shares in Heidelberg Materials, Bilfinger and Hochtief all jumped significantly.

With regard to the 100 billion euro (US$112 billion) earmarked for climate and clean energy investments, there are many groups already looking for a cut. The country's offshore wind industry group, the Federal Association of Offshore Wind Energy (BWO), has called for the funds allocated under both energy and transport infrastructure to be "urgently" used to expand the nation's ports, which are "essential elements for the expansion of offshore wind energy." Stefan Thimm, managing director of the BWO, added: "Ports play a central role in both the energy transition and security policy. Their heavy-duty areas can be used both for the expansion of offshore wind energy and for military purposes. Unfortunately, such areas are still too scarce in Germany. Such expansion would improve the location conditions for the German offshore wind industry and at the same time contribute to strengthening security policy."

Germany's utilities association BDEW welcomed the news, reaffirming its call for greater investment into the nation's grid. Kerstin Andreae, chair of BDEW said: "Billions of dollars in investments are pending for grid expansion. The expansion of controllable power plants must be facilitated. Investments in grids, generation plants and storage facilities are key prerequisites for the hydrogen ramp-up. Water and wastewater infrastructure must be considered in light of climate change. It is also important that future defense investments also cover investments needed to provide and protect critical infrastructure in the energy and water sectors."

On the transport front, Germany's railway operator Deutsche Bahn has already called for almost one third of the 500 billion-euro infrastructure fund. It wants 150 billion euro (US$170 billion) to modernize and expand Germany's railway system over the next 10 years, according to documents seen by the news group dpa.

The German Construction Industry Association has cautiously welcomed the quick formation of the new government and the proposed new spending fund. "The coalition agreement is in place--40 days after the start of exploratory talks," said Tim-Oliver Müller, managing director of the association. "A negotiation outcome in such a short time is, first and foremost, a positive signal, something that German business and industry have been waiting for. Given the challenges at home and internationally, a time of stability, the courage to make good decisions, and reliability with a capable federal government is needed. Whether the negotiation outcome will also pave the way for growth, de-bureaucratization, and simplification remains to be seen." He added: "The course for the construction and infrastructure sector seems to be set correctly: as we have demanded, there will be two strong cabinet departments--a Ministry of Construction and a Ministry of Transport--for construction in Germany and for an industry that will be more important than ever in terms of economic policy in the coming years."

Regarding funding for increased digitization, eco - the Association of the Internet Industry, has called on the coalition government to create a Ministry of Digitalization to coordinate the spending and sector development. Oliver Süme, chair of the board of eco, stated: "In the upcoming legislative period, the clear vision for a digital Germany by 2030 must already be enshrined in the coalition agreement. There is also a need for clear structures and responsibilities for a Ministry of Digitalization 2.0, which will consistently drive Germany's digital transformation forward with its own budget and cross-departmental competencies."

In a stark warning to the new government, though, a coalition of more than 100 industry groups--led by the Confederation of German Employers' Associations (BDA), the Federation of German Industries (BDI), German Chamber of Industry and Commerce (DIHK) and Central Association of German Skilled Crafts (ZDH), wrote: "One thing is clear: debt alone will not solve problems. Without far-reaching reforms, there will be no sustainable recovery. And only through new economic growth can jobs and training opportunities be secured. Decisive action is therefore required now."

It highlighted the issues facing Germany now and said: "In recent weeks, the economic situation has dramatically worsened. Trade conflicts are escalating, inflation is rising, growth is continuing to weaken--signs of crisis are mounting everywhere. Unemployment has now reached the three million mark. While the global economy continues to grow, Germany remains mired in recession. Companies and businesses are increasingly falling behind in the competition for attractive locations. Our country is losing economic strength--strength that Germany needs to ensure its prosperity, social cohesion, and security. The facts are undeniable: Germany is in the grip of a severe economic crisis."

Almost all of the major industrial groups have highlighted that the plan will only succeed if it is implemented quickly, and many have reiterated their calls for fundamental changes in Germany's overly bureaucratic structure to speed up many of its permitting and funding processes. They have also called for greater transparency in spending plans, a more attractive investment framework for future investors, lower energy costs and business taxes.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 Trillion (USD).