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German states push defense industry for economic boost

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Some states in Germany are making intense efforts to expand the defense industry and rearmament to escape economic contraction.

For example, Baden-Württemberg wants to turn the state into a new industrial hub and is trying to become a “technology leader” in as many defense sectors as possible.

The Saarland government is preparing an “armament summit” and is meeting with leading arms manufacturers to establish new factories.

According to a recent study by the Munich-based ifo Institute, only five federal states achieved economic growth in the fourth quarter of 2024, and in three of these, the rise in the defense industry played a central role.

The hope for a new surge in defense is based on the fact that up to 1 trillion euros in additional spending on armaments will be made in Germany and the EU by 2030.

However, experts warn that it is uncertain whether industrial capacities and existing personnel will be sufficient to convert these sums into actual weapons production. For example, the benefits of taking over previously civilian factories and skilled labor from the weakening automotive industry are being emphasized.

The economic contribution of militarization

Current figures on the economic situation in Germany are giving new momentum to the move towards the defense industry.

According to a calculation published last week by the ifo Institute, only five of the 16 federal states recorded economic growth, albeit quite moderate, in the fourth quarter of 2024.

For three of these (Lower Saxony, Mecklenburg-Vorpommern, and Schleswig-Holstein), the rise in the defense industry played a central role, the institute writes, stating that given the billions of euros expected to be invested in the German Armed Forces (Bundeswehr), the northern German industry is diverging from overall German development thanks to coastal naval shipyards and other armaments facilities.

The three states mentioned above are also located on Germany’s northern coasts.

Growth in these states contrasts with the decline in states where, for example, the automotive industry is traditionally strong (Baden-Württemberg, Bavaria) or where energy-intensive sectors like parts of the chemical industry hold a significant position (Rhineland-Palatinate, North Rhine-Westphalia).

Last week, Lower Saxony State Premier Stephan Weil of the SPD announced that his government would continue to focus on the defense industry and said, “You have to make sure you can do what is possible for your economic structure.”

State governments are engaging with defense companies

Meanwhile, the governments of other federal states have also announced that they are accelerating their efforts to promote defense companies.

At the beginning of March, Baden-Württemberg State Premier Winfried Kretschmann of the Green Party announced that he wanted to “get involved” in the rapid expansion of the defense industry across Europe, stating that the sector should become a new industrial focus in the state.

Kretschmann referred to Diehl Defence, based in Überlingen on Lake Constance, known for its IRIS-T air defense systems, which managed to increase its turnover by 50% in 2024 compared to the previous year, reaching 1.5 billion euros.

The Green politician argued that the entire Baden-Württemberg defense industry should strive for “technological leadership” in the future.

Saarland, bordering Luxembourg and France, is now also clearly focusing on arms manufacturers. Last week, the state parliament adopted a motion submitted by the SPD that foresees making the state more attractive for the defense industry.

It was announced that SPD Economy Minister Jürgen Barke had sent invitations to leading companies in the sector, while SPD State Premier Anke Rehlinger was preparing an “armament summit.”

The AfD parliamentary group is also calling for a determined “door-to-door” approach within the sector.

Militarization of civilian production at full throttle

On the other hand, it is uncertain whether German industry can truly meet the targeted rapid growth in armaments.

One reason for this is the insufficient availability of industrial capacities. Defense companies have begun expanding their factories and building new facilities: For example, Rheinmetall CEO Armin Papperger recently stated, “In Europe, we currently have ten factories whose size we are doubling or building entirely new ones.”

However, this expansion cannot be accelerated at the push of a button as desired. Experts say that German industry can handle “an increase in defense spending,” and if the increase is much higher than that, which is Berlin’s goal, capacities will have to be shifted from other defense-related sectors.

This shift has already begun. For example, the French-German tank manufacturer KNDS announced that it would take over a railway factory from the French company Alstom in Görlitz.

Rheinmetall is also considering buying the Volkswagen factory in Osnabrück. The same company also announced that its facilities in Neuss and Berlin, where vehicle parts for civilian use are currently produced, will be used for military equipment production in the future.

Number of workers in the defense sector is increasing

In the long term, securing the necessary personnel increase in the defense industry may also be difficult. The number of direct and indirect employees in the sector varies.

Klaus-Heiner Röhl, a defense expert at the German Economic Institute (IW) in Cologne, estimates that final manufacturers like Rheinmetall, KNDS, TKMS [ThyssenKrupp Marine Systems], and Diehl currently have about 60,000 employees in Germany; when suppliers are included, this number rises to about 150,000.

The number of employees in the sector is already increasing significantly. For example, Rheinmetall reported having about 26,000 employees at the beginning of 2023; today it has 32,000 personnel and expects at least 40,000 by 2027.

Diehl Defence increased its employee count from just under 3,800 in 2023 to about 4,500 at the beginning of 2025. Hensoldt increased its employee count from less than 6,600 to 8,400 during the same period and plans to hire at least 1,000 more people this year.

Renk, a company producing armored gearboxes, had about 3,300 employees at the end of 2022; today it has 4,000.

Automobile manufacturers are becoming arms manufacturers

Just one year after the start of the Ukraine war, in March 2023, a “talent scout” pointed out that public acceptance of the defense sector was increasing, and interest among applicants was rising.

In addition, an expert from the job platform Indeed recently argued that the large defense spending planned in Berlin “increases employer attractiveness”; according to him, jobs in the arms industry are now considered crisis-resistant.

Defense companies have long been reporting record numbers of applications. Despite all this, insiders are skeptical. An expert from the recruitment consultancy Heinrich und Coll says that “hundreds of thousands of additional positions” will need to be filled and adds that not everyone who applies is suitable in terms of expertise.

Agreements reached by defense companies like Rheinmetall or Hensoldt with automotive companies and suppliers to hire personnel laid off by these companies may help, but it is acknowledged that even this may not completely solve the problem.

The issue of qualified immigrant workers

On the other hand, the personnel problem of the German arms industry has not yet been solved.

Citizens from countries such as Russia, China, Iran, Syria, and Afghanistan are not allowed to work in German defense companies due to their origins.

This situation excludes refugees as well as labor migrants from certain countries of origin who help fill the shortage of skilled workers and other laborers in other sectors in Germany.

For this reason, there is doubt as to whether the increase in development and production output in the sector can be managed with the existing personnel.

Europe

Fico accuses Merz of blackmail over threat to veto EU budget

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Slovak Prime Minister Robert Fico has hit back after German Chancellor Friedrich Merz threatened to veto the EU budget unless funding for Ukraine is secured.

Merz said he would block the EU’s seven-year budget if no agreement is reached on financial assistance for Ukraine.

The chancellor’s intervention has angered Central European leaders who are net beneficiaries of EU funds but do not want to take part in the next round of funding to support Ukraine’s war effort.

“What the chancellor is doing is typical blackmail, and I will not bow to it,” Fico told reporters in Bratislava.

Fico spoke alongside his Czech counterpart, Andrej Babiš, whose government has refused to participate in a future loan to Ukraine.

“I do not know why he said this,” Babiš said, referring to Merz’s stance.

Merz wants EU leaders to discuss Ukraine’s financing needs at a summit in Dublin on Friday.

In a letter to European Council President António Costa, who will chair the meeting, obtained by The Guardian, Merz wrote:

“We must maintain our support for Ukraine in its struggle to defend itself. This is our shared vital interest. Yet bilateral aid provided to Ukraine is distributed unevenly, with the burden shouldered mostly by only a few member states.”

The EU agreed last year to provide a €90 billion loan to Ukraine, intended to cover two-thirds of its military and civilian spending for 2026 and 2027.

Since then, however, Russia’s relentless bombardment has placed a heavier financial burden on Kyiv, prompting President Volodymyr Zelenskyy to ask for €70 billion to plug the budget deficit.

The EU has endorsed Zelenskyy’s figures and pledged to find €45 billion. Ukraine’s other allies, such as Britain and Canada, are expected to cover the rest.

Last year, Merz launched an initiative to tap €210 billion in frozen Russian state assets held in the EU, but the plan fell through due to opposition led by Belgium, which holds most of the funds in Brussels.

The €90 billion loan was the backup plan. Having opted out of that loan, Hungary, Slovakia, and Czechia indicated that they would not take part in the next round either.

Bulgaria joined these three member states following the election of Prime Minister Rumen Radev last April.

The question of funding for Ukraine is now spilling over into the fraught negotiations on the 2028-34 EU budget.

Germany, the largest net contributor, wants substantial cuts to the proposed budget and opposes the EU providing generous funding to member states that refuse to contribute to Ukraine’s financial needs.

Merz states in his letter that a “collective commitment without exceptions” is a “fundamental prerequisite” for closing Ukraine’s financing gap and for “discussing other matters, particularly those with financial implications.”

He also notes that, in the context of the EU’s next seven-year budget, known as the Multiannual Financial Framework, all member states must contribute to a “robust” financial perspective for Ukraine from 2028 onwards.

A German government official said:

“For the Multiannual Financial Framework (MFF) to be successfully concluded, it is vital that all EU member states provide financial support to Ukraine.”

Berlin is also aiming to shift decision-making on funding for Ukraine from unanimity to qualified majority voting, in an effort to prevent a single government from blocking EU decisions.

The letter reflects mounting frustration among the EU’s northern member states, Ukraine’s most generous backers, over lower contributions from other EU countries in Central and Southern Europe.

The task of brokering an agreement on the budget falls to Costa, the former Portuguese prime minister.

Costa wants a deal by the end of the year, ahead of elections in France, Poland, and Italy in 2027 that could complicate the process.

A spokesperson for Costa confirmed receipt of the letter without elaborating on details. “President Costa will dedicate time to the Ukraine issue at the informal European Council meeting in Dublin this week,” the spokesperson said, adding that funding for Ukraine would be addressed at a dedicated summit on the EU budget scheduled for 26-27 November.

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EU expects next Israeli government to adopt less aggressive posture

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The EU expects the next Israeli government to mend its “difficult relationship” with Brussels and adopt a more constructive approach toward Gaza and illegal settlements.

Israeli President Isaac Herzog tasked Gadi Eisenkot, the leader of the anti-Netanyahu bloc, on Sunday with forming a government.

Eisenkot stated that the country faces a “catastrophic diplomatic crisis” as traditional allies begin to reassess their relations with Israel.

Speaking to Rapporteur, several European diplomats stationed in Tel Aviv said they expect ties to get back on track.

“Whatever government comes in, we can try to revitalize relations because Israel is clearly a very important partner,” one European diplomat said, adding that Brussels expects the next administration to be “less aggressive”.

The diplomat noted that relations with Europe are currently “not very good”.

Israel cut off communication with Kaja Kallas, the EU high representative for foreign affairs and security policy, after Rapporteur revealed in June that she had compared Israel to apartheid-era South Africa during a visit to Mexico.

The diplomat stated that this decision, taken ahead of elections, was political in nature. A second European diplomat based in Brussels explained that the announcement came only a few days before an official visit by Dubravka Šuica, the European commissioner for the Mediterranean.

“This could have been interpreted as a tactic to divide Europe, but Israel had asked Kallas to deny the report; she did not do so,” the second diplomat said.

Brussels has repeatedly voiced its frustration with Israel over the humanitarian crisis in Gaza and the expansion of West Bank settlements.

However, EU governments blocked almost all sanctions proposed by the European Commission.

A third diplomat said opposition parties would “almost certainly take the issue more seriously” when it comes to tackling violence by West Bank settlers:

“We see Palestinians being expelled from their homes and new illegal settlements being built in the West Bank. There is a reluctance on the part of the current government to address this issue, which causes problems in our relations.”

The new government is expected to ease pressure on Palestinians and halt construction of the E1 settlement project, a controversial plan to build settler housing in the West Bank east of Jerusalem.

“They will probably try to deal with the problem of extremist settlers in the West Bank,” the diplomat added.

On Gaza, the diplomat described the situation as “a complete nightmare”, with two million Palestinians crowded into an area that accounts for roughly 35% of the territory.

“There are not enough tents for the winter, and not enough vaccines are reaching the area despite an increase in diseases,” the diplomat said.

The European official argued that Donald Trump’s peace plan met all the conditions for Europe. Although the EU had much to offer, neither the US nor Israel appeared interested in EU involvement in the process.

“We are currently training Palestinian police in the West Bank, and if permitted, we could do the same in Gaza,” the diplomat said.

The diplomat disclosed that Israel had agreed with Šuica that Europe would finance two projects aimed at improving sewage and water infrastructure in Gaza, continuing:

“However, none of these projects has started yet because there is a serious problem with dual-use goods. Getting materials into Gaza is very difficult because the Israelis say they could be misused if they fall into the wrong hands of Hamas.”

Israel insists that Hamas must be disarmed before subsequent phases of Trump’s plan can proceed.

With disarmament unlikely to happen in the near term, the EU argues that certain measures can be carried out in parallel.

“We can begin rebuilding sanitation systems in Gaza. We can start building desalination plants. We can begin providing energy and water to Gaza,” one diplomat said.

While Brussels hopes for progress on Gaza and the West Bank, it maintains that expectations regarding the establishment of a Palestinian state need to be “managed”.

The EU continues to advocate a two-state solution, yet most leading Jewish parties oppose the creation of a Palestinian state.

The diplomat noted that the next Israeli government will likely have “a very slim majority and not much room for manoeuvre”.

There is also a “major misunderstanding” between the EU and Israel that must be addressed. According to the diplomat, Europeans fail to recognize the “psychological impact” of 7 October on Israelis.

“This event changed the country and made the two-state solution even more distant than before,” the diplomat said.

In return, some Israeli politicians believe Europe has betrayed Israel despite what they view as a fight against “Islamist terrorism”.

“Their argument is that European politicians are somewhat afraid of the Muslim population in Europe,” the European diplomat said.

Europe strongly opposes Iran and the possibility of Tehran acquiring nuclear weapons, imposing sanctions in response.

However, the diplomat argued that the EU would not participate in a war because it lacks a common army:

“We are a diplomatic and economic power, which is why we resort to sanctions and diplomacy. The expectation that we would take part in a military operation is unrealistic.”

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Germany threatens EU budget veto over long-term Ukraine aid

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Germany has threatened to veto the European Union’s joint budget for the 2028-2034 period, which is currently under negotiation, unless every member state commits to providing financial support to Ukraine in 2027 and subsequent years, German Chancellor Friedrich Merz warned.

According to a report by the Financial Times (FT), Chancellor Merz set out Berlin’s condition for the budget talks in a letter addressed to European Council President António Costa.

In his letter, Merz wrote: “A collective commitment that every single one of us, without exception, will make a fair contribution to closing Ukraine’s budget deficit is an indispensable prerequisite for resolving this budget issue and, in particular, for addressing subsequent matters that carry financial implications.”

The German Chancellor stressed that a formula backed by all member states must be established to provide Ukraine with a reliable, multi-year financial perspective starting from 2028.

Merz also insisted that any agreed solution must cover the interest payments on debts incurred to finance the assistance provided to Kyiv.

Conversely, several countries within the bloc have cut financial aid to Ukraine, and the number of capitals adopting this stance is projected to rise next year.

In December 2025, Hungary, Slovakia, and the Czech Republic approved the EU’s 90 billion euro loan package for Kyiv only on the condition that they would not contribute to its costs themselves.

Alongside these three countries, Bulgaria has also stated that it does not plan to participate in subsequent financial assistance packages for Ukraine.

In France, far-right leader Marine Le Pen, who could potentially win the presidential election scheduled for spring 2027, recently told the FT that Paris has run out of funds.

Le Pen assessed: “The honest approach is to tell Mr Zelensky clearly, and even warn him: ‘Look, we cannot do more. We have already allocated the 90 billion euro EU loan, in which France’s share amounts to 18 billion euros. 18 billion euros is genuinely a huge amount of money.'”

The EU’s 90 billion euro loan, covering the 2026-2027 period, aims to meet two-thirds of Ukraine’s financing requirements.

Brussels expects the remaining 45 billion euros to be covered by other partners, including Canada, the UK, Norway, Japan, South Korea, and Australia.

Germany remains the largest net contributor to the EU budget.

In contrast, the four Eastern European countries seeking to avoid financing Ukraine rank among the largest net beneficiaries of the bloc’s budget.

Leveraging this balance, Chancellor Merz aims to use his influence in the EU budget negotiations to secure uninterrupted support for Kyiv in 2027 and the years beyond.

According to the FT, Berlin is also demanding that future aid packages be decided by qualified majority voting rather than unanimity, which is required under the current system.

A German government spokesperson told the newspaper:

“The issue of Ukraine’s financial needs must be resolved within the framework of the next EU budget. Financial support for Ukraine from all EU members is decisive for the successful conclusion of the budget talks.”

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