German Chancellor Friedrich Merz has stepped up scrutiny of military procurement amid mounting concerns that large manufacturers such as Rheinmetall will benefit disproportionately from the country’s €500bn defence budget.
Merz and his finance minister Lars Klingbeil are seeking greater oversight of the defence ministry and of procurement decisions, according to five people familiar with the matter.
They want to ensure that hundreds of billions of euros in debt-funded spending do not simply benefit groups such as Rheinmetall, which produces ammunition, armoured vehicles and components for the Leopard 2 tank, but also reach start-ups focused on unmanned systems and military applications for AI and quantum technology.
One government insider voiced concern that the defence ministry was “spending a huge amount of money” on conventional weapons such as armoured vehicles and fighter jets.
“We want them to increase the R&D part of it, and be more transparent about awarding processes,” the person said. “We want to make sure that this money is spent efficiently with maximum spillover on the whole economy.”
Another said: “We want it to be geared towards new tech and civilian applications as much as possible.”
Merz last week told his fellow Christian Democrats that “many key innovations don’t originate in large corporations but in young, highly-specialised companies”.
The finance ministry has asked defence ministry officials to supply data on how much of the money so far has gone into R&D.
Merz freed military spending from the country’s strict rules on borrowing after winning nationwide elections last year, when he promised that Germany would build the continent’s strongest conventional army.
That move has allowed the government to commit to spending €550bn on defence between 2026 and the end of 2029, when military support for Ukraine is included.
Germany has leapfrogged into fourth place behind the US, China and Russia in the league of the world’s biggest defence spenders — up from seventh in 2022, when Russian President Vladimir Putin launched his full-scale invasion of Ukraine.
Military officials have in the past four years prioritised filling capability gaps as quickly as possible, choosing existing products from whoever can supply them in a bid to ensure that the army is ready to “fight tonight”.
They have ordered US F-35 fighter jets that can carry American nuclear warheads, the Israeli Arrow 3 air defence system as well as heavy-lift Chinook helicopters and multiple batches of tanks and armoured vehicles, as well as hundreds of thousands of rounds of ammunition.
Critics worry that some orders — such as a €21bn multiyear deal in December to procure not just protective equipment for soldiers but also bath towels and flip-flops — risk simply encouraging price inflation and will do little to boost the stagnant German economy.
Others warn that the war in Ukraine, where drone warfare has taken centre stage on the battlefield, has shown the need to invest in unmanned systems and other new technologies.
Germany’s economy minister, Katherina Reiche, has long harboured concerns about the nature of the spending. Last autumn, she appointed a panel of experts — including Airbus chair René Obermann — to oversee a defence industrial strategy and “provide impetus for growth and innovation in civilian sectors of the economy”.
One panel member, Kiel Institute president Moritz Schularick, estimates that more than 95 per cent of German defence spending since 2022 has gone into “traditional legacy procurement”.
A further worry is Germany’s bureaucratic maze: parliament and multiple ministries are involved in defence procurement, security checks for defence industry workers, export licences for arms sales and funding for research.
Merz’s concern was on display at the Munich Security Conference earlier this month. He asked representatives of German start-ups to air any concerns in front of defence minister Boris Pistorius and Jens Plötner, the minister responsible for weapons procurement, according to two participants.
One executive who was present said the chancellor was in “problem-solving mode”. Another said: “Slowly but surely, there is a change happening.”
A third person present said that Plötner promised to give more young companies a chance — and draw up new types of contracts to enable that.
The defence ministry told the FT that its foremost priority was making the armed forces combat-ready as quickly as possible. There was “no foreseeable development that would allow us to do without fighter jets, warships or armoured fighting vehicles in the coming decades”, it said.
But it added that innovation was of “crucial importance”. It pointed to recent changes to procurement rules aimed at facilitating collaboration with start-ups, the launch this month of a new armed forces innovation centre in Bavaria and ongoing work on innovative systems, including the development of AI-supported reconnaissance and combat networks.
The ministry said it was not possible to provide a breakdown of the spending on established defence contractors versus start-ups due to the complex multinational nature of defence procurement projects.
The economy ministry said collaboration between start-ups, SMEs and established defence industry players was “crucial”.
“The conflict in Ukraine shows that AI and drones, in particular, are the defining defence technologies of the present and future.”
The finance ministry said it was key to combine the needs of the military with the “dynamic developments in venture capital and start-ups”.