Germany's Defense Spending: A Chance for Growth and Security

German Finance Minister Christian Lindner has expressed optimism about the potential for increased defense spending to contribute to the country's economic growth and security. In an interview with Reuters, Lindner stated that the additional funds could be freed up if Germany can reduce its debt levels, potentially leading to a defense spending splurge.

Lindner's comments come as Germany is set to increase its defense budget to meet NATO's two percent GDP target. The country is budgeting for a debt repayment of 9 billion euros per year from 2028 and 10.8 billion euros per year from 2031. However, if the burden of the pandemic on the debt level has already been overcome by then, the repayment could be significantly reduced, making billions available for defense spending.

The potential increase in defense spending could have both positive and negative impacts on Germany's overall economic growth and fiscal balance in the short and long term. In the short term, increased defense spending could have a positive impact on economic growth through the multiplier effect. According to the Kiel Report, if Europe could develop the next generation of defense tech and other weapons at home instead of buying them from the US, the economic effects of additional defense spending could go far beyond short-term fiscal multiplier effects and boost growth in the medium term. However, this would require a reorientation of European research and development (R&D) policy and organizing military spending at the EU level to promote dual sourcing and foster smaller "dual-use" defense contractors.

In the long term, increased defense spending could have a negative impact on the fiscal balance if it is financed from the outset by higher taxes. According to the Kiel Report, GDP growth will be lower, possibly negative, if increases in defense spending are financed from the outset by higher taxes. Therefore, European governments should instead borrow to fund any temporary extra spending or the ramp-up to permanent budget increases, since it is more expensive to buy than to service and maintain weapon systems.

Additionally, the success of governments in sustaining private activity depends on a number of factors. The Kiel Report argues against the widely assumed "guns or butter" trade-off: more money, labor, and raw materials channeled to military uses have not traditionally come entirely at the expense of private consumption. However, the success of governments in sustaining private activity depends on a number of factors, including the financing of defense spending and the promotion of domestic defense production.

In conclusion, Germany's potential increase in defense spending presents an opportunity for the country to contribute to NATO's collective defense and European security, while also fostering domestic economic growth and innovation. To maximize the positive impacts and minimize the negative impacts, Germany should ensure that defense spending is properly financed and that it promotes domestic defense production and technological spillovers to other industries. By doing so, Germany can strike a balance between its defense spending priorities and other budgetary needs, such as social welfare and infrastructure development.