"Better tanks than cars" - Military equipment production could "revive" the German economy
German defense companies seeking more capacity as Europe prepares to increase military spending are eyeing the ailing car industry, the first sign of a turnaround that could help revive the continent's largest economy after two years of contraction.
Tank, radar and weapons makers are looking to ramp up production as Europe responds to U.S. pressure to bolster its defenses. Meanwhile, carmakers, which have powered Germany's economy for decades, are cutting jobs and closing factories due to slowing demand and the transition to electric vehicles.
Rheinmetall, Europe's largest munitions maker, said last week it would repurpose two factories that currently make car parts to produce mainly defense equipment. Hensoldt, which makes radar systems, is in talks to take on about 200 workers from major auto parts suppliers Bosch and Continental.
European leaders have agreed they must spend more on their militaries at an emergency summit in London, following a public clash between presidents Donald Trump and Volodymyr Zelenskiy.
A few days after the meeting, the parties in talks to form Germany's new government announced proposals to create a 500 billion euro fund for infrastructure and to change borrowing rules to massively increase defense spending.
According to estimates by the Bruegel think tank, Europe may need 300,000 additional troops and a short-term annual increase in defense spending of at least 250 billion euros "to deter Russian aggression."
A shift toward defense production could provide a boost to the German economy, which has been struggling as businesses grapple with high energy costs, bureaucracy and aggressive competition from abroad.
The Kiel Institute for the World Economy estimates that the European Union's gross domestic product could grow by 0.9-1.5% per year if EU countries expanded military spending to 3.5% of GDP from NATO's current target of 2%. For Germany, with its existing industrial infrastructure, GDP growth is likely to be greater than for other countries.
Increasing defense spending to 3% of GDP would double Germany's annual investment to 25.5 billion euros, create 245,000 direct and indirect jobs, and stimulate nearly 42 billion euros in manufacturing and service activity each year.
The latest available figures show that the security and defense industry in Germany employed 387,000 people in 2022, about half the total in the automotive sector that year. Sales in the defense industry reached 47 billion euros in 2022, compared with 506 billion euros for the car sector.
Using spare capacity in the car sector would help preserve Germany's manufacturing infrastructure and increase the production of military equipment.
Analysts at Deutsche Bank warned, however, that the increase in EU defense spending may not bring significant benefits to the domestic industry, which is more fragmented than its American counterpart.
Former European Central Bank chief Mario Draghi, in a recent report on Europe's competitiveness, said that from mid-2022 to mid-2023, nearly four-fifths of EU defense procurement spending went to suppliers outside the EU.
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