German rearmament is a welcome 'war dividend'

Japan Times

19-05-2025

Germany's new chancellor, Friedrich Merz, has started with a dramatic promise: "The German government will provide all the financial resources the Bundeswehr needs to become Europe's strongest conventional army.'
That commitment, made in his inaugural speech to the Bundestag last week ((correct)), follows through on his election pronouncement that "Germany is back' and will now "really achieve independence from the USA.'
The excruciating historical echoes of a new and assertively militarist German chancellor need not be rehearsed. Merz's planned arms buildup means the definitive end to the "peace dividend' that the western world had enjoyed since the fall of the Soviet Union in 1991, which paved the way for that decade's great prosperity.
And yet the response suggests that people now expect some kind of "war dividend.' Capital markets are showering the German economy with funds and there's no sign that bond vigilantes will balk. The euro has gained. European stock markets are booming. Germany's few defense contractors have enjoyed the kind of rally that even the likes of Nvidia and Tesla might envy. Since the election of Donald Trump, shares in Rheinmetall, the old-line industrial group that is Germany's biggest weapons producer, have risen by 260%.
Is this collective amnesia? How can the return of a rearmed Germany possibly be regarded so positively?
The peace dividend
The economic boon from the end of the Cold War was very real, especially for the U.S. In Europe, it enabled the end of compulsory military service, which lasted in Germany until 2011. It is hard to picture the prosperity of the 1990s without it.
In 1991, defense spending accounted for 6.8% of American gross domestic product. Before the Sept. 11 terror attacks a decade later led to "forever wars' in Iraq and Afghanistan, that number had dropped to 3.8%. The budget had reversed a deficit of 4.3% of GDP to a surplus of 2.5%. Other factors were also at work, but the ability to slash defense spending unquestionably helped enable a period of startling prosperity.
Though U.S. growth has slowed this century, it has picked up elsewhere, despite a major financial crisis and pandemic. During the peace-dividend decade, global GDP rose at 3.5% per year. Since 9/11, it has been growing at 5.4%. The rise of China provided the fuel — and Chinese defense spending has risen directly in line with the stratospheric growth of its economy, changing the west's strategic priorities.
Germany's new chancellor, Friedrich Merz, has pledged to make the Bundeswehr Europe's strongest army, marking a sharp departure from post–Cold War pacifism. |
REUTERS
Academic research finds that there is a true economic dividend when peace comes to countries previously at war, as the need for reconstruction acts as a powerful stimulus. Germany and Japan after 1945 are prime examples. The huge human benefit of avoiding war comes with economic benefits; extra defense spending acting as a deterrent may obtain them.
The dangers of escalation
When Britain and Germany raced to produce dreadnought battleships at the turn of the last century, it culminated in the catastrophe of the First World War. Re-militarization under Hitler created an unstoppable momentum for the sequel. The truths of these historical episodes are undeniable.
The victorious Allies initially blocked Germany from having armed forces until 1955. Once Eastern Europe's communist governments fell in 1989, the U.K.'s Margaret Thatcher and France's Francois Mitterrand both opposed reunification, worried about the prospect of a large and potentially destabilizing Germany in the center of Europe. Thatcher told Mikhail Gorbachev in 1990 that "Europe is watching this not without a degree of fear.'
Adam Tooze, a Columbia University professor and historian of Germany, suggests that the previous militarism could be "fata morgana, dark mirages of the past,' obscuring today's discussion.
First, there is a difference in scale between what Kaiser Wilhelm and then Hitler did and what Merz is proposing now. According to Tooze, military spending accounted for about 3.3% of German GDP in 1913 (compared to 3.0% for the U.K.). As in many things, Hitler was an aberration. In 1938, he poured 20.5% into his arms complex, while France and Britain belatedly attempted to catch up with 8%.
Germany currently spends about 2% of its wealth on defense (much the same as the U.S. under FDR in 1938). It's aiming to meet a U.S.-set target of 5%. This is an immense escalation, but nothing compared to Hitler's war economy. To quote Tooze:
It is not Nazi rearmament but British appeasement-era levels of spending that offer a sensible reference point for Europe today. Nazi rearmament spending was unbalanced, helter-skelter, lacked strategic direction and stirred the German military leadership to the edge of mutiny.
Beyond that, history offers examples where, to use Merz's words, "strength deters aggressors, while weakness invites aggression.' Despite NATO's current unpopularity in the U.S., it allowed the west to win the Cold War and kept the peace in Europe for almost 75 years. Deterrence worked. Nobody has used a nuclear weapon since Nagasaki.
National weaponry is not like Chekhov's gun. Once displayed, it does not have to be fired in the final act.
The opportunity for balance
Still, it seems bizarre that a military expansion can be so popular. It has been forced on Germany by Russian aggression and what many regard as American betrayal. But how far can it be pushed? The issue of conscription — a bedrock of Cold War European militaries — hasn't been broached. Merz barely got his defense spending approved in a lame-duck parliamentary maneuver. The votes wouldn't have been there in the Bundestag that Germans just elected.
This was not European democracy at its finest. But it might yet deal with the imbalances that have bedeviled the global economy for decades. China's overinvestment and American over-willingness to borrow are key factors, but so was Germany's reluctance to spend. If it took boorish behavior by the new U.S. leaders to get Europe's largest economy to fill the hole, so be it; the world really thinks it can live with the latest incarnation of German rearmament.
Germany's establishment has long put far too much emphasis on the Weimar Republic's hyperinflation of the early 1920s. After the Global Financial Crisis, fear of inflation and debt led to a constitutional amendment under Angela Merkel to limit government borrowing.
That debt brake dictated years of austerity and underinvestment not only in Germany, but in the wider euro zone as countries struggled to keep budgetary commitments. Yields on bunds remain far lower than for the rest of Europe or the U.S.; meaning effectively that investors are inviting the country to borrow more.
One survey of economists for the Financial Times found that they believed Berlin could raise the fiscal burden from 63% to 86% of GDP without negative repercussions. No other country has anything like as much fiscal space. Meanwhile, the U.S. is aggrieved that the dollar is too expensive, making it harder for exporters.
A dynamic Germany should strengthen the euro and weaken the dollar. That explains why the world is comfortable with German rearmament this time. It's not at levels that imply anything like a Nazi war economy and it could allow escape from a cycle of slow growth while helping Europe — and the United States — get their houses in order.
The 1991 peace dividend didn't deliver all the benefits that had been hoped; it's just possible that the war dividend, if Germany succeeds in converting its massive manufacturing capacity to a new purpose with greater innovation, could have a more lasting positive impact.
John Authers is a senior editor for markets and Bloomberg Opinion columnist. He is author of "The Fearful Rise of Markets.'