Münchhausen's Heirs

In Germany, rearmament is now seen as a way out of the economic crisis. The car industry’s factories are to build tanks, the debts are called special funds, and the stock market cheers. We have done the arithmetic to see whether the sum adds up.

I. 27 February 2022

It was a Sunday. Three days earlier Russian troops had invaded Ukraine. The Bundestag met in a special session, and Chancellor Olaf Scholz spoke the sentence that has shaped policy ever since: “We are experiencing a turning point. And that means: the world afterwards is no longer the same as the world before.”

What followed was the largest rearmament announcement in the history of the Federal Republic: a special fund of 100 billion euros for the Bundeswehr, anchored in the Basic Law with a two-thirds majority in June 2022. In March 2025, even before Friedrich Merz was elected chancellor, the CDU/CSU, SPD and Greens in the outgoing Bundestag opened the way for further debt: a special fund of 500 billion euros for infrastructure, and an exemption from the debt brake for defence spending above one per cent of economic output.

The stock market understood at once. Rheinmetall’s share, an unremarkable stock for years, has risen more than twentyfold since 2020. In March 2023 the company entered the DAX.

II. The return of the triad

“The Birth of Industry from the Destructive Spirit of War” spoke of the old alliance between Mars and Mercury, between the god of war and the god of trade. A third is missing: Hephaestus, the god of smiths and invention. He is the only manual worker among the Olympian gods. He made the bronze giant Talos, who was to guard Crete, the first robot of mythology.

Hephaestus is an outsider. He was born lame, and his mother Hera threw him off Olympus because he was ugly. He does not work in the halls of the gods but in a workshop beneath the volcano. He is called when the powerful need weapons. Now they are calling for him again.

III. The converts

The real story of the turning point is not taking place at Rheinmetall but in the Mittelstand, Germany’s small and mid-sized firms. In November 2024 the Federal Association of the German Security and Defence Industry had 243 members; a year later it had 440. Two thirds of them come from the Mittelstand.

Trumpf, the Swabian laser maker, had excluded any participation in the production of weapons in its 2015 shareholder agreement. Now it supplies components for lasers that blind drones or overheat their drives, expressly no lethal weapons. Peter Leibinger, co-owner of Trumpf and president of the industry federation BDI, said at the Munich Security Conference: “We in business, too, must reassess our contribution to a democracy that can defend itself.” Bosch is holding back for now. Its chief executive Stefan Hartung said in February 2026: “The arms business is also about our identity.”

Among engineers the switch is already under way. Rheinmetall is seeing “quite clearly” an influx from the car industry, a team leader at the company said at a VDI event at the end of October 2026. Anyone who has developed drivetrains for cars can develop drivetrains for tanks: “We use the same physics.” On the same day the VDI and the German Economic Institute reported 65,427 unemployed engineers and computer scientists, more than at any time since records began in 2011.

As late as 2021, arms were a stigma in Germany. Banks were reluctant to finance them, sustainable funds excluded them. Today they are called defence capability, and rearmament is industrial policy.

IV. What a euro spent on tanks brings in

The hope is that the billions for the Bundeswehr will rescue industry. Whether that is true can be measured. Economists ask how much additional economic output a euro spent by the state generates. They call this the multiplier.

For German military spending, according to a 2025 study by Tom Krebs and Patrick Kaczmarczyk of the University of Mannheim, it is at most 0.5, perhaps zero. A euro spent on tanks thus brings at most fifty cents of additional output. According to the same authors, a euro spent on roads, bridges and railways brings about two euros, a euro spent on childcare about three. The European Central Bank reached a similar result in September 2026: the additional defence spending of the euro area from 2025 to 2028 amounts to about 1.5 per cent of economic output and raises it by only about 0.4 percentage points in total.

Think of it as a bucket into which water is poured. In the case of arms, the bucket has three holes.

The first hole is abroad. According to the ECB, about half of the suppliers of Europe’s defence industry are located outside the EU. According to the peace research institute SIPRI, 58 per cent of the arms imports of European NATO states from 2021 to 2025 came from the United States. For the American F-35 fighter jets alone, the 2027 defence budget contains about 1.75 billion euros.

The second hole is prices. The defence industry is working at capacity, fragmented and short of competition. Additional orders therefore raise prices first and quantities only later. An example from the United States shows how strongly: before 1990 the Pentagon bought about ninety cents’ worth of defence goods for each additional dollar, after capacity was cut at the end of the Cold War only about forty. Johannes Binder of the Kiel Institute for the World Economy warns that additional money in Germany could above all drive up prices. Kaczmarczyk reads Rheinmetall’s share price the same way: investors expect profits from higher prices, not from more production.

The third hole is what is missing as a result. A tank stands in a depot. It transports no goods, trains no one and produces nothing that goes on being used. And every billion that goes into arms is missing elsewhere. Kaczmarczyk points out that North Rhine-Westphalia, Hesse, Berlin and Hamburg plan to cut their university budgets. According to some studies, about 3,800 jobs are created per billion euros, fewer than with spending on education, health or infrastructure. The data on this, however, are thin.

V. The counter-calculation

Fairness requires hearing the other side. Geraldine Dany-Knedlik of the German Institute for Economic Research argues that the multiplier depends on the situation. In a slump, when factories stand idle and companies do not invest, public money has a stronger effect, and Germany is in its third year of industrial weakness. Her main argument is research. As examples of military research with civilian benefits she names the jet engine, radar, GPS and the internet. When the state raises its research spending by one per cent, private research spending rises by about half a per cent in the following year.

The ECB calculates the same way: if the EU spent as much on defence research as the United States, the euro area’s output would in the long run be about half a per cent higher. A euro of research would then bring about two and a half euros.

The argument is correct, but it describes a budget Germany does not have. The EU spends about 0.03 per cent of its economic output on public defence research, the United States about 0.3 per cent, ten times as much. In Germany’s 2027 defence budget, research funds rise from 1.6 to almost 3 billion euros, about two per cent of the budget. In the United States the share is over ten per cent, in Britain about five. Binder sums up the budget in one sentence: “The budget is growing, its structure remains yesterday’s.” Dany-Knedlik herself names the conditions under which arms bring growth: a high share of investment and research, competition in procurement, a high share of European value added. So far the budget meets none of them.

VI. The special fund, or: debts are now called assets

For 2027 the federal government plans about 110 billion euros in the regular defence budget and about 30 billion from the special fund, together almost 140 billion, more than at any time since the end of the Cold War. By 2029 it is to reach about 152 billion, 3.5 per cent of economic output, six years earlier than NATO requires. The increase is largely financed by borrowing.

“Sondervermögen”, special fund, literally “special assets”, is a masterpiece of language. It sounds like treasure, like something one has. In truth it is debt. And nobody asks who will repay it.

There used to be an answer. In 1871 defeated France had to pay five billion gold francs in war reparations, and in the German Empire the notion lingered that war was a business. Rearmament from 1933 was financed with hidden credit through the so-called Mefo bills. In the end it was paid for by plundering the occupied countries. Today there is no answer, only silence.

VII. Failed twice

Twice in Germany, rearmament was at the same time economic policy. The naval build-up of the Empire, backed by heavy industry and the Navy League, led into the race with Britain and into the First World War. Rearmament from 1933 ended mass unemployment and led into the Second World War, the Holocaust and total destruction.

Nobody claims that this must repeat itself. But one lesson holds regardless of the outcome. An arms industry is not a tap that can be turned on and off as needed. It creates jobs, profits and associations that depend on it, and with them people who have an interest in the demand continuing. That is no reproach to individuals. It is the logic of what we call the Megamachine.

VIII. Münchhausen and his pigtail

Baron Münchhausen, as he told it himself, once got stuck in a swamp with his horse. He grabbed himself by his own pigtail and pulled himself out, horse and all.

German economic policy is attempting the same. It borrows money and spends it on goods of which at most half arrives as additional output, a large part ends up abroad and another part seeps away in higher prices. The structures that created the swamp remain untouched: fragmented procurement, small production runs, little research. At fifty cents on the euro, no one pulls himself out of a swamp.

Münchhausen, incidentally, also rode on a cannonball. That fits too.

Further reading: War as the Father of All Things? · The Birth of Industry from the Destructive Spirit of War · From the V1 to Iron Dome · The Peace-Loving · The Unpolitical Association · The Megamachine – where to start?