by Christoph Steitz

Frankfurt (Reuters) – This can be perceived as the first concrete sign of a switch to the German economy to get out of two years of recession: companies in the defense sector are now eyeing the capacities of a formerly powerful automotive industry to respond to the will of Europeans to increase their military budgets.

While the United States of Donald Trump has froze its military aid to Ukraine and demand from European countries that it assume the financial burden of their own defense, armaments specialists in Germany strive to increase their production, from tanks to radar systems.

At the same time, car manufacturers, a symbols for decades of the power of the German economy, multiply the cuts of stations and factories with their difficult transition to electric vehicles.

Rheinmetall, the first European ammunition manufacturer, announced last week that it was going to redirect the production of two factories currently devoted to automotive parts mainly to defense equipment.

Hensoldt, which manufactures the TRML-4D radar systems used by Ukraine against Russia, negotiates the recruitment of around 200 employees with Bosch and Continental automotive suppliers.

“We take advantage of the difficulties of the automotive sector,” the chairman of the executive board of Hensoldt, Oliver Dörre, told Reuters, adding that new investments could more than double the annual production of the TRML-4D to carry it between 25 and 30 units.

About fifteen European leaders gathered in emergency in London on Sunday have agreed with the need for rapid rearmament of Europe, two days after an altercation at the White House between American presidents Donald Trump and Ukrainian Volodimir Zelensky nourishing fears of a total disengagement from the United States.

Falling the brake on debt

The leaders of the twenty-seven must participate Thursday in an extraordinary summit in Brussels during which they should debate proposals unveiled Tuesday by the European Commission to mobilize up to 800 billion euros for this rearmament, in particular via a community loan of 150 billion euros.

The German conservatives, winners of the legislative elections on February 23, and the social democrats, with whom they negotiate a government agreement, agreed on Tuesday evening on the creation of a fund of 500 billion euros in favor of infrastructure and on a relaxation of the constitutional brake on debt in order to be able to invest massively in the defense.

The actions of the armaments like Rheinmetall, Thyssenkrupp, Hensoldt and Renk earned between 8% and 14% Wednesday morning on the Frankfurt Stock Exchange, while the European Defense sector has already stopped climbing since the start of the week.

The Bruegel reflection center estimates that European armies may need 300,000 additional soldiers and an annual increase in military budgets of at least 250 billion euros “to dissuade Russia from an attack”.

Such a boom in the defense industry could timely give new impetus to the German economy, now among the least dynamic in Europe due in particular to high energy costs and more intense international competition on its traditional strengths.

The Kiel Institute for the Global Economy (IFW) estimates that the European Union Gross Domestic Product could increase by 0.9% to 1.5% per year if the Member States brought their military spending to 3.5% of their GDP, against a current objective of 2% within NATO, and favored the acquisition of European equipment.

“In the medium and long term, American economic history in particular has shown that such military expenses could have a powerful effect in terms of productivity gains, fallout and technological progress,” said Johannes Binder, of IFW.

Preserve the German industrial base

For Germany, with its existing industrial base, growth would probably be at the top of this range, he added.

If Germany brought its defense expenses to 3% of its GDP, this would more than double its annual investments in this area at 25.5 billion euros, would create 245,000 direct and indirect jobs and generate almost 42 billion euros in activity, in terms of production and services, each year, according to EY.

The most recent available statistics show that the German Defense sector employed 387,000 people in 2022, about half of the automotive industry workforce this year. The total turnover of companies in the sector was 47 billion euros that same year, compared to 506 billion for the automobile.

“We must consider the defense industry as an economic engine for Germany,” said Oliver Dörre. “The sector will play a more important role than in the past.”

According to the boss of Hensoldt, which has already started to outsource the production of printed circuits and could do the same with cable beams and electric boxes, the use of excess capabilities in the automotive sector would both preserve the industrial footprint of Germany and develop its production of military equipment.

The automotive supplier ZF Friedrichshafen, currently in the midst of a restructuring likely to lead to factory closings, is in contact with defense companies for personnel transfers, he said, evoking “industrial synergies”.

A fragmented sector compared to the United States

Renk, who manufactures speed boxes for tanks and was a subsidiary of Volkswagen until 2020, said he looked more towards the automotive sector, in particular with a view to increasing production capacities, without providing details.

KNDS, a Franco-German supplier of land forces systems, plans to assemble the Leopard 2 combat tank and the PUMA infantry combat vehicle in a German tram factory that he recently decided to buy in Alstom. He did not answer Reuters’ questions.

Deutsche Bank analysts, however, warned in a note published last month that the increase in defense budgets in Europe was not necessarily going to significantly benefit local players, the European sector being more fragmented than its American counterpart.

In his report rendered last year on competitiveness in Europe, the former president of the European Central Bank Mario Draghi reported that, between mid-2022 and mid-2023, nearly four fifths of the purchases of military equipment in the EU had been made to non-European suppliers.

Armin Papperger, Chairman of the Rheinmetall Management Board, who discusses the hiring of a hundred employees with Continental, told Reuters in February that massive investments were necessary in the fields of missiles, ammunition and vehicles to strengthen Europe’s defense capacities, which he considers very late in terms of expenses.

“(Russian president Vladimir) Putin also knows it, of course, and that is why we have to act,” he said.

(With Alexander Huebner, Matthias Inverardi and Sabine Siebold, Bertrand Boucey, edited by Blandine Hénault)

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