Defense Budget Forecast
As per GlobalData’s Germany Defense Market - 2022 report, Germany’s defense budget stands at $60.1 billion in 2022, an 8.7% increase from the previous year. Whilst it is one of the leading economies in Europe, Germany has experienced sluggish levels of growth in its defense budget due to domestic apathy towards the topic. Yet, the election of Scholz as chancellor and the invasion of Ukraine have led to the German government announcing a plan for increasing the defense budget in forthcoming years.
By 2024, Germany has now promised to spend 2% of its GDP on defense and has created a special off-budget fund worth €100 billion to equip the Bundeswehr. In order to reach the 2% target, the budget will have to increase by 36.4% against 2022 levels. This would see Germany spending $82.0 billion on defense in 2024 (2% of GDP) and $85.7 billion in 2027 (provided Germany maintains the 2% target). Since the announcement, there has been some level of retraction from the initial promises of ground-breaking growth. Instead, Scholz has since announced that the 2% figure will be maintained as a rolling five-year figure.
In May 2022, the German parliament approved the creation of a one-off €100.0 billion ($119.5 billion) fund to aid the modernization of German forces. In order to be passed, the fund required changes to the German constitution and will be debt-financed. The fund will supplement the acquisition portion of the defense budget which currently stands at $14.6 billion in 2022.
The defense procurement agency, BAAINBw, has the potential to reduce the impact that the increased defense budget can have. In the past few years up to 10% of the acquisition budget has gone unspent due to severe systematic failings, overly bureaucratic procedures, and staff shortages. Due to the size of the new funds, it can be expected that they will have at least some level of tangible impact despite the shortcomings of the procurement department.
Drivers of Defense Expenditure
As per GlobalData’s Germany Defense Market - 2022 report, the threat of Russia, commitment to international organizations, and modernization requirements are key drivers of German defense spending.
The threat of Russia is one of the primary drivers of German defense expenditure. The war in Ukraine led Germany to announce the biggest increase in its defense budget since the end of the Cold War. The invasion is the first-time industrial warfare has been seen on European soil to this extent since the end of WWII and demonstrates the continued importance of maintaining a conventional fighting force. Not only did Chancellor Scholz announces that Germany would aim to spend 2% of GDP on defense by 2024, but also that a €100.0 billion ($119.5 billion) fund would be created in order to help modernize the Armed Forces in order to provide a strong conventional deterrent. The importance of improving the readiness and strength of the Bundeswehr has been brought into the spotlight following the Russian invasion of Ukraine, with conventional and traditional warfare once more the focus of policy makers.
Much of Germany’s fleet requires substantial modernization and updating due to years of low spending levels. As readiness levels are now so low and with platforms reaching the end of their life span, Germany is forced to modernize platforms across all domains. Years of political apathy and indifference towards investments in the defense sector have eroded the overall capabilities of the German defense forces since the country cut its defense spending after the end of the Cold War. The German defense forces have borne the brunt of severe underfunding, owing to budgetary cutbacks, which are further aggravated by the poor management of funding allocations. As a result, the German military’s capabilities have declined significantly. The promised substantial increase in funding has the potential to reform the state of the forces.
Access the report: Germany Defense Market - 2022.
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