Public spending now accounts for more than half of Germany’s GDP as the country seeks to offset a faltering private sector and mounting structural challenges. After two years of recession, the German economy recorded a modest 0.2 % growth in 2025, a turnaround from a 0.5 % contraction in 2024. The recovery, however, was largely driven by a 5.6 % rise in government expenditure, while private‑sector activity, especially in traditional manufacturing, continued to decline.
The surge in public spending is reflected in the composition of the economy. State‑funded projects now represent over 50 % of Germany’s gross domestic product, a level unprecedented since the post‑war era and well above the historic norm for a nation that has traditionally emphasized fiscal prudence and export‑led growth. Former Chancellor Helmut Kohl once warned that a spending ratio above 50 % signaled a shift toward a socialist model; that shift appears to be underway.
Data show a widening split between market‑driven industries and those subsidised by the state. Automotive and chemical firms have faced higher energy costs and intense global competition, with share prices stagnating and domestic orders weakening since 2022. By contrast, defence contractors and firms linked to public‑sector projects have posted spectacular gains. Rheinmetall’s market value has risen more than 1,000 % since early 2022, while companies such as Hensoldt, Renk, Infineon, Hochtief and Heidelberg Materials have also seen their shares multiply.
The German Chamber of Industry and Commerce (DIHK) estimates that roughly 17 % of industrial firms now belong to the defence supply chain, with 36 % of vehicle manufacturers involved. Major auto producers are repurposing capacity for military use: Volkswagen is exploring the production of military vehicles at its Osnabruck plant, and Schaeffler is shifting towards defence components.
Financing this pivot has required a relaxation of Germany’s long‑standing “debt brake.” Amendments introduced under Chancellor Olaf Scholz in 2022 created a €100 billion defence fund exempt from the brake and lifted the limit on defence spending above 1 % of GDP. The government plans to double defence outlays over the next five years, allocating $761 billion by 2029, more than half of which will be funded through new borrowing.
Manufacturing employment has fallen by about 245 000 jobs since 2019 – roughly 3.3 % of the sector’s workforce. While the absolute loss is modest compared to the United States’ 5‑6 million manufacturing job decline in the 2000s, the rapid pace is concerning. In 2025 alone, 120 000 jobs were lost, accounting for half of the total six‑year decline. Given Germany’s highly integrated supply‑chain network, each job loss has a multiplier effect on the broader economy.
Analysts describe the current policy as “military Keynesianism,” a strategy that uses extensive defence spending to stimulate demand and preserve employment. While the approach can generate short‑term growth, it does not address underlying productivity deficits. Defence output, unlike civilian industrial goods, offers limited long‑term economic value.
Germany’s shift reflects an attempt to compensate for the erosion of three traditional pillars of its economic model: cheap Russian energy, Chinese export demand, and U.S. security guarantees. By channeling public funds into defence and state‑backed projects, the government aims to stabilise the economy, even as private‑sector activity recedes. The sustainability of this model will depend on the ability to balance fiscal pressures with long‑term structural reforms.
