The Planned Militarization of the German Economy Is a Risky Gamble with Low Overall Economic Returns

“Shares in the sector are the stock market success story of the year. According to some experts, they are suitable as a long-term portfolio component. However, it could also be an overvaluation.

 

Defense funds, defense ETFs, Rheinmetall shares: those who have invested their money in this sector on the stock market can rejoice. Triple-digit percentage gains are commonplace. The share price of Germany's largest defense company, Rheinmetall, alone has increased by more than 300 percent in the past twelve months. However, after defense stock prices recently fell significantly, investors are wondering whether they should continue to invest.

 

During a client event hosted by the US asset manager Janus Henderson, portfolio manager Robert Schramm-Fuchs emphasized that the industry will continue to experience extremely high growth in the coming years. However, three to four years of this growth are already priced into the current share prices of European defense stocks. "So there is still further potential," was his conclusion for investors who want to invest for the long term.

 

Nevertheless, the high valuation of the shares also shows the risks that investors take when investing in the defense sector. However, since the German government's defense spending is increasing significantly, the industry should continue to grow. While these expenditures have only been between one and two percent of gross domestic product (GDP) in recent years, according to Janus Henderson, they could rise to up to four percent of GDP following the German government's announcements.

 

"The capital market has understood that defense can be used to make money," said Alexander Sagel, CEO of the Renk Group, at the event. The topic of ESG, i.e., the focus on environmental, social, and good corporate governance, had blocked the topic of defense in recent years. "Now people are realizing that without secure borders, no ESG is possible," said Sagel.

 

Renk develops and produces, among other things, transmissions for tanks and other military vehicles, including the transmission for the Leopard 2 tank, one of the most important export products of the German defense industry.

 

However, despite the defense package approved by the German government in the spring, the issue is not a foregone conclusion. Sagel confirmed this: "The projects are coming, but we have to deliver. That's our main task." Schramm-Fuchs from Janus Henderson put it more bluntly: "Those who don't deliver will be replaced." Renk, for example, is investing heavily in technologies that the company doesn't yet possess, according to Sagel. But that takes time. Renk is very conservatively positioned and focused on mechanical engineering. Analysts and investors will learn more next Thursday when the Augsburg-based company publishes its quarterly figures. Currently, according to Bloomberg, nine analysts recommend buying Renk shares and only one recommends selling. Six advise holding the shares. Rheinmetall shares are also popular among analysts: 23 give a buy recommendation, and three recommend holding the shares.

 

Recently, however, the European defense sector has experienced a decline in share prices. The Renk share price is currently at €63, while its all-time high at the beginning of October was just under €90. A similar situation applies to Rheinmetall shares, whose price has fallen from €2009 in October to just over €1700. The share price of Hensoldt, which specializes in defense electronics, has also fallen from its record high of almost €118 to around €87.

 

Analysts at the US investment bank J.P. Morgan see several reasons for this. Firstly, investors sold shares in the run-up to the Alaska summit and before the failed Budapest summit. Furthermore, the defense companies, which are already highly valued on the stock market, only moderately adjusted their profit forecasts upwards for the second half of 2025. Furthermore, professional investors have shifted their investments to other sectors that had previously underperformed in 2025.

 

"But the arguments for investing in the European defense sector remain strong, in our view," write David Perry and Lucy Fitzgerald. The European defense sector offers strong and highly visible earnings growth for at least the next five years, and probably even ten years. "For German defense stocks, we expect average earnings growth of around 30 percent per year over the next five years, and for other European defense stocks, an average of 13 percent per year."

 

Others are more cautious: "What we avoid are niche themes and hype," Frank Huttel, managing director and chief investment officer of the asset manager Finet, told the financial portal Citywire. The topic of defense is absolutely "overhyped." "It was the same with hydrogen stocks some time ago.  Poor timing can be very expensive in these cases, and the corresponding thematic funds may well disappear again," the expert warned, addressing a point that investors should always keep in mind. Even those who invest in the numerous new defense ETFs and funds launched in the past six months, and thus diversify beyond individual stocks, are still betting on a certain form of hype, according to the rating agency Scope. "Some stocks have risen exceptionally sharply in recent months, which has led to ambitious valuations in some cases. This increasingly brings risks such as price corrections, profit-taking, or overheating of individual stocks into focus."

 

The overall economic benefit of the defense package is also questionable: Tom Krebs and Patrick Kaczmarczyk from the University of Mannheim arrive at a sobering conclusion. The so-called fiscal multiplier, which measures how much additional government spending increases GDP, is at most 0.5 for military spending in Germany. This means that one euro spent leads to at best 50 cents of additional economic activity.

 

"From an economic perspective," Krebs concludes, "the planned militarization of the German economy is a risky gamble with a low overall economic return."” [1]

 

This is a political disaster for Germany’s Merz and Lithuanian elite, putting all the eggs into preparation for war. Every time Trump mentions peace, defense stock drops like rock. Such politics is catastrophic way to go into elections.

 

In 2026, the economic debate surrounding the "militarization" of European economies has intensified, specifically involving the policies of German Chancellor Friedrich Merz and the Lithuanian leadership.

 

The "Krebs" Perspective and Economic Returns

The quote attributed to economist Tom Krebs reflects a critical view of the current fiscal shift. Krebs and other economists have argued that the multiplier effect of military investment is limited to roughly 0.5—meaning every euro spent on defense generates only about 50 cents of additional economic activity. By contrast, investments in infrastructure or education can provide double or triple that return. This leads to the conclusion that a heavy focus on defense at the expense of other sectors is a "risky gamble" with low overall economic returns for the broader population.

Germany: Merz’s Defense-Heavy Strategy

Since taking office, Chancellor Friedrich Merz has pivoted Germany toward a "war-ready" (Kriegstüchtigkeit) economy.

 

    Budgetary Commitment: Merz has pledged to increase defense spending to 3.5% of GDP in 2026, with long-term goals reaching 5% to meet NATO benchmarks.

    Fiscal Risk: To fund this, the government has moved away from strict austerity, with the 2026 budget forecasting a deficit of 3.8%.

 

    Political Disaster Potential: Critics argue this strategy is a "political disaster" because it reallocates resources away from green technologies and infrastructure, potentially fueling support for far-right parties like the AfD if voters feel neglected.

 

Lithuania: Leading the NATO Spending Surge

Lithuania has become the first NATO member to officially target a 5% to 6% GDP defense allocation beginning in 2026.

 

    2026 Budget: The Lithuanian parliament approved a record budget for 2026 with 5.38% of GDP dedicated to defense, totaling roughly €4.8 billion.

 

    Consensus vs. Risk: While there is elite consensus on the need for deterrence against Russia, this shift has pushed the national deficit to a projected 4.7% of GDP in 2026 (when including military procurements). Voters are getting restless.

 

 

Market Volatility and Defense Stocks

 

The observation regarding defense stocks reflects a broader market sensitivity to geopolitical rhetoric. As of January 2026, defense industry orders have been a boon for contractors, but volatility remains high. Market analysts note that signals of de-escalation or "peace mentions" from global figures like U.S. President Donald Trump often trigger sharp sell-offs in defense-related equities, as investors react to the potential for reduced future procurement.

 

1. Ist Rüstung Spekulation oder Zukunftstrend? Frankfurter Allgemeine Zeitung; Frankfurt. 12 Nov 2025: 23.