BERLIN — Germany is beginning a historic industrial pivot, redirecting parts of its struggling manufacturing base toward the business of rearming Europe. After years of weak growth, high energy costs, and mounting pressure on carmakers, Berlin has loosened fiscal rules, opened the door to much higher defense spending, and watched companies from the auto and heavy-industrial sectors move toward military production. The shift is considered a major policy break, one aimed both at reviving Europe’s largest economy and scaling up the continent’s defense capacity.
The economic backdrop is bleak. Germany’s main industry federation, BDI, said this week that German industry is expected to stagnate at best in 2026, after industrial production fell every year since 2022. BDI warned that high energy costs, supply-chain risks, and structural weaknesses have left manufacturing well below earlier levels, with capacity utilization only a little above 78%. The car sector, which has been the backbone of German industry is also under intense strain. In February, Germany’s automotive lobby viewed the industry as being in crisis, with 72% of surveyed suppliers planning to scale back investment in Germany by moving it abroad, postponing it, or cancelling it.
Defense companies are already moving into that industrial gap. In February, Rheinmetall said it intended to repurpose two automotive plants in Berlin and Neuss to make mostly defense equipment. The sites currently produce auto parts, but under the plan they would shift into Rheinmetall’s weapon and ammunition division as hybrid plants, keeping some civilian production while making protection and mechanical components for military use. The move reflects the rise in expected defense spending across Europe and comes as Germany’s carmakers battle high costs, foreign competition, and capacity cuts. Another industrial conversion is already underway in eastern Germany, where KNDS agreed to take over a plant from Alstom and use it to make military equipment, including Leopard 2 tanks and Puma infantry fighting vehicles.
Volkswagen, too, is testing what a defense future might look like. Reuters reported in March that the company had brought military-style vehicle prototypes developed at its Osnabrueck site to a defense trade fair as it explores ways to repurpose the factory. The plant, which employs about 2,300 people, is set to lose production of the T-Roc Cabriolet in 2027, and Volkswagen has been looking at options to sell or reconfigure it. The company said it had developed several vehicle concepts to explore market opportunities, though no concrete production plans have yet been announced. Even so, the sight of a major German carmaker using a defense expo to test interest in military vehicles underscored how far the industrial mood has shifted.
Berlin’s policy choices have accelerated that change. In March 2025, Germany’s upper house approved a landmark spending package that created a €500 billion infrastructure fund and eased strict borrowing rules so the country could spend more on defense. Reuters called it the final hurdle in a historic policy shift, ending decades of German fiscal conservatism. Separate Reuters reporting in January said Germany also created a €100 billion special fund for defense procurement, while the European Union’s overall defense spending climbed to €343 billion in 2024 and was projected to reach €381 billion in 2025. Investors have followed the money: Reuters said Europe’s aerospace and defense index rose about 55% over the past year as governments increased military budgets and capital markets showed greater appetite for defense companies.
The result is that Germany’s industrial future is being redrawn in real time. A country once defined by exporting cars, machine tools, and heavy industrial goods is increasingly using that same factory expertise, workforce, and engineering base to produce military vehicles, armored components, ammunition, and other defense systems. The shift is not complete, and it remains politically sensitive in a country with deep historical caution about military expansion. But the direction is becoming unmistakable as autos and heavy manufacturing falter, Germany is turning more of its industrial strength toward becoming one of Europe’s main defense producers.
