“Europe is ramping up defence spending, led by Germany, with economists expecting a modest boost to growth. While rising orders support activity, long production lags and structural headwinds may limit the economic pay-off.”
European governments are embarking on a sustained increase in military investment, raising questions about its broader economic impact at a time when the eurozone struggles to maintain momentum. Germany is at the forefront, planning to raise defence spending to almost 3.5% of GDP by 2029, up from 2.1% in 2024. The plan would see Berlin spend more than €100 billion annually on equipment and maintenance, marking one of the largest post-war military programmes in Europe.
Niklas Garnadt, economist at Goldman Sachs, said the fiscal push could meaningfully support growth. “We expect defence spending to boost the 2029 level of German GDP by around 0.8%, and defence orders picked up materially in the fourth quarter after the 2025 budget was passed in September,” he noted.
Once approved by parliament, defence contracts flow to manufacturers and show up in official factory order data. Domestic German orders linked to defence industries jumped more than 50% in late 2025, building on elevated levels seen after Russia’s invasion of Ukraine.
Defence expenditure supports GDP in several ways. On the production side, value is added across manufacturing and supply chains. On the expenditure side, the acquisition of weapons systems increases government investment once ownership is transferred, while purchases of ammunition and unfinished equipment register as changes in inventories. Garnadt said, “We expect defence spending to drive a stronger pickup in government equipment investment going forward.”
Goldman Sachs forecasts a modest eurozone recovery in 2026, projecting GDP growth of 1.3%, slightly above European Central Bank projections. Analysts cite fiscal support, resilient consumer spending, and easing trade frictions as factors underpinning the recovery. Germany’s fiscal push, heavily weighted toward defence, is expected to offset contractionary forces in other economies and help stabilise the region’s policy stance. Falling energy prices and real wage gains should further bolster household demand, and a potential ceasefire in Ukraine could ease energy costs.
However, economists caution that defence production has long delivery cycles, with order books often covering four to five years. The effect on output and GDP is gradual. Higher military spending alone will not solve Europe’s structural challenges, including competition from China, high energy costs, underinvestment in high-tech sectors, regulatory burdens, and ageing populations. Garnadt noted, “We expect China’s renewed export push to weigh on European trade via rising imports and higher export competition, particularly in Germany and Italy.”
While military investment is emerging as both a strategic and economic tool, analysts say it is unlikely to reshape Europe’s long-term growth prospects. For Germany and other manufacturing-heavy economies, it may provide a meaningful, if temporary, stimulus, acting as an unexpected support in an otherwise uneven recovery.
