_ Yuri Kofner, economist, MIWI Institute for Market Integration and Economic Policy. Munich, February 16, 2023.
Due to the war in Ukraine, the Bundeswehr is to receive funds amounting to 100 billion euros. To this end, debt, known as a special fund, was set up in this amount in the 2022 federal budget under the pretext of temporarily suspending the debt brake due to corona.[1]
With this expanded defence budget, German military spending will increase from the current 1.2 to 2 percent of GDP, as already agreed at the 2006 NATO summit. According to IW Köln, this would mean additional annual military spending of between 21.1 and 24.8 billion euros in the years 2022 to 2025.[2]
Despite the fiscal and legal dubiousness of the new special fund, this decision is still to be welcomed, since the additional expenditure could restore the desolate defence capability of the German Federal Republic[3] and potentially have a positive spill-over effect for the domestic economy and innovative strength.
Domestic armaments industry must be given preference
In the political consideration between, on the one hand, the fastest possible operational capability of the Bundeswehr with the help of foreign equipment, and, on the other hand, the sustainable strengthening of national armament competencies, and thus a long-term improved geostrategic sovereignty of the Federal Republic, the government must choose the latter.
Due to the high technological capabilities of the Bavarian armaments industry, giving preference to national or Bavarian armaments companies in the upcoming 100 billion euro modernization of the Bundeswehr would have a positive effect on the innovative strength and growth of the German and Bavarian economy.
In particular, therefore, state defence spending on research and development (R&D) should be increased from the current 0.05 to at least 0.2 percent of GDP.[4] An analysis by MIT (2019) comes to the conclusion that a 10 percent increase in defence R&D spending will lead to a 4 percent increase in R&D spending in the private sector of the economy.[5]
So far, the United States was the main benefactor from the German defence budget
Due to the decades of underfunding of the Bundeswehr by the “old” parties, especially the CDU/CSU, the domestic armaments industry was not able to develop the necessary capacities to serve the rapidly increasing procurement requirements made possible by the special fund. Foreign, especially US, armaments suppliers are likely to benefit most from the 100 billion euro budget.[6]
Unfortunately, historically too, a large proportion of government procurement contracts for the Bundeswehr have been awarded to foreign suppliers, primarily from the USA. Between 2011 and 2020, the United States was the largest foreign arms supplier to Germany. According to the Stockholm International Peace Research Institute, 26.4 percent of German imports of weapons systems went to the USA.[7]
National armaments cluster for combat drones and counter-drones
The greater part of the special fund (61.6 billion euros) will be spent on reconnaissance and aerospace in view of their increasing importance for the future national defence.[8] For example, the Luftwaffe is buying 35 American F-35A fighter jets for 8.3 billion euros, especially since their European counterpart, the Eurofighter Typhoon, is still not licensed by the US,[9] as well as Israeli Heron TP fighter drones.
The conflict in Ukraine, in particular, has shown the new prominent importance of drone warfare, both for aerial reconnaissance for artillery fire, as well as for hitting strategic military and infrastructure targets on and behind the front lines. Unmanned loiter-capable precision ammunition, colloquially known as “kamikaze drones”, is used particularly effectively. They are relatively inexpensive, making them extremely costly to shoot down with conventional land-to-air defence systems.[10]
The armaments industry with its many medium-sized companies is of great importance for the Bavarian economy. Four of the six largest German armaments companies and a third of the national defence technology production are located in Bavaria. In 2020, these four companies alone generated an international turnover of 67.6 billion euros, which corresponds to 11.1 percent of the regional GDP. In total, the more than 70 Bavarian armaments manufacturers, including many family businesses, employ around 20,000 to 30,000 people.[11],[12]
The following Bavarian companies show the highest level of technological expertise, especially in the field of air defence: Airbus Defense (Eurofighter, EuroDrone), Diehl Defense (IRIS-T SLM/SLS), Krauss-Maffei Wegmann (Gepard), MBDA Germany (TLVS, PATRIOT, STINGER, Close-range and close-range protection NNbS).[13]
In view of Bavaria’s leading potential in this area, in order to sustainably increase the integration of domestic armaments in current and future procurement orders of the Bundeswehr and in order to meet Germany’s requirements for future drone warfare, the government should develop and expand a regional, internationally competitive industrial cluster for the production of combat drones, in particular unmanned loiter-capable precision ammunition, and corresponding drone defence systems.
Policy recommendations
- Annual government R&D funding in the defence budget should be increased to 0.2 percent of national GDP. Particular attention should be paid to research and development in the field of combat drones and drone defence.
- The supply of STEM specialists required for the domestic armaments industry must be increased, especially in the field of combat drones and drone defence, through the targeted expansion of relevant (further) education and training opportunities.
- Germany is the only industrial country that has so far refrained from making compensation demands on foreign armaments suppliers, in contrast to all other partner countries, through which German companies can share in the added value. These so-called “offset” transactions in procurement orders relate to the total useful life of the affected systems. Therefore, a compensation rate of at least 60 percent must be demanded and enforced in all defence procurement.
- State armament orders must be freed from any ideological “climate” and “gender” requirements.
- The government must proactively support the interests of domestic armaments companies in the European cooperation project FACS (Future Combat Air System).
Sources
[1] BMVI (2022). Mehr als 100 Milliarden Euro für die Bundeswehr – für unsere Sicherheit. URL: https://www.bmvg.de/de/aktuelles/mehr-als-100-milliarden-euro-bundeswehr-sicherheit-5362112
[2] Bardt H. (2021). Deutschland bleibt hinter Ziel der NATO zurück. IW Köln. URL: https://www.iwd.de/artikel/deutschland-bleibt-hinter-ziel-der-nato-zurueck-504087/
[3] Kurmayer N.J. (2022). Generalleutnant: Bundeswehr steht „blank“ da und kann wenig bieten. Euractiv. URL: https://www.euractiv.de/section/eu-aussenpolitik/news/generalleutnant-bundeswehr-steht-blank-da-und-kann-wenig-bieten/
[4] Congressional Research Service (2020). Government Expenditures on Defense Research and Development by the United States and Other OECD Countries. URL: https://fas.org/sgp/crs/natsec/R45441.pdf
[5] Moretti E. et al. (2019). The intellectual spoils of war: How government spending on defence research benefits the private sector. Berkerly, MIT. URL: https://voxeu.org/article/how-governmentspending-defence-research-benefits-private-sector
[6] Hegmann G. (2022). Ernüchterung nach der Euphorie – die Probleme der deutschen Rüstungswirtschaft. Welt. URL: https://www.welt.de/wirtschaft/plus237645331/Milliarden-fuer-Bundeswehr-die-Probleme-der-deutschen-Ruestungsfirmen.html
[7] SIPRI (2022). SIPRI Arms Transfers Database. URL: https://sipri.org/databases/armstransfers
[8] ZDF (2022). Sondervermögen für Rüstungsgüter. Das kauft die Bundeswehr für 100 Milliarden. URL: https://www.zdf.de/nachrichten/politik/bundeswehr-sondervermoegen-waffen-panzer-100.html
[9] Buro A. (2018). Die nukleare Zwickmühle. US-Atomwaffen für deutsche Eurofighter? Atomwaffen A-Z. URL: https://www.atomwaffena-z.info/heute/a-z-blog/artikel/af6c52559ecdbd854732c29cb7dde66a/die-nukleare-zwickmuehle.html
[10] Boffey D. (2022). Financial toll on Ukraine of downing drones ‘vastly exceeds Russian costs’. The Guardian. URL: https://www.theguardian.com/world/2022/oct/19/financial-toll-ukraine-downing-drones-vastly-exceeds-russia-costs
[11] Wickel H.P. (2017). Die bayrische Erfolgsgeschichte, über die Bayern kaum spricht. Welt. URL: https://www.welt.de/regionales/bayern/article161354917/Die-bayrische-Erfolgsgeschichte-ueber-die-Bayern-kaum-spricht.html
[12] Breitsamer B., Muth M. (2016). Bayern – Land der Biere und Haubitzen. URL: https://www.br.de/nachricht/ruestungsexporte-bayern-spitze-100.html#:~:text=Das%20ist%20kein%20Wunder%2C%20denn,Diehl%20aus%20dem%20Raum%20N%C3%BCrnberg
[13] StMWi (2022). Antwort auf die Anfrage zum Plenum des Herrn Abgeordneten Gerd Mannes (AfD). Bayerische Luftverteidigungsindustrie.