Essay , | 10/01/2025 : Guns or Butter?

Germany’s coalition government between the Christian Democrats (CDU/CSU) and Social Democrats (SPD) started with a financial bang. With the help of the Greens, it passed a debt package of billions of euro. Berlin created a 500-billion-euro special infrastructure fund, exempted military spending from the debt brake legislation, and allowed the federal states to take on a limited amount of new debt. The Merz government thus created the latitude required to finance the grand coalition’s major policy goals: investments in infrastructure, increased military spending, securing retirement pension levels, mothers’ pensions, reducing VAT in the food-service industry, and increased commuter tax allowances.

The grand coalition then revised depreciation regulation, handed out tax breaks to businesses, and reduced energy costs. This is how Berlin wants to get the engines of growth running hot again, but to date it has not been a resounding success. If the investment incentives do not work because demand for goods and services is slack, then the only thing that will grow as a result of forgone tax revenues will be the national debt.

Regarding the labour market and social welfare policy, the coalition partners agreed on a Federal Collective Agreement Compliance Act (Bundestariftreuegesetz), digital access rights for unions, a 20-kilogram limit on package deliveries, and a subcontracting liability for express courier services. The retirement benefits level will be fixed at 48 percent until 2031, and pensions will continue to be paid out without reductions after 45 years of paying for health insurance. The coalition also aims to bolster workplace retirement provisions. 

All these measures are capable of improving employees’ living conditions. The Social Democrats’ imprint on the coalition agreement is clearly recognizable here.

By contrast, the Merz government has taken an anti-worker approach regarding working hours and unemployment benefits. The grand coalition wants to water down the Working Hours Act, offer tax incentives for overtime, and introduce cuts to unemployment benefits. 

The intended abolition of the eight-hour day in favour of a weekly cap on working hours is an attack of one of the greatest achievements of the workers’ movement. In future, business would be able to oblige delivery, care, and cleaning workers to work up to 13 hours per day. Employees would thus have less time for rest, family, and their private lives. Excessively long daily working hours would also significantly increase the risks of mental illness, physical suffering, and workplace accidents.

Social security institutions need more money to maintain the services they currently provide.

Unemployment protections were once a major achievement of our welfare state. Now the grand coalition is trying to take the current unemployment benefits system (Bürgergeld) back towards the previous model, known as Hartz IV. Chancellor Merz hopes to save five billion euros on basic social security benefits.[1] To achieve that, penalties will be increased, asset exemptions reduced, and the principle of Vermittlungsvorrang will be reintroduced, meaning that unemployed people will be forced to take on any kind of work regardless of how bad or unsuited to them it may be. This weakens workers’ bargaining power and increases downward pressure on wages.

A major conflict over the future of social security is raging between the CDU/CSU and the SPD. Crucial financing issues concerning statutory retirement pensions, health insurance, and healthcare are not yet resolved. A number of “welfare state commissions” are being tasked with finding solutions.

In the summer, the CDU/CSU announced an autumn of reforms. Chancellor Friedrich Merz claims that the welfare state is no longer affordable. CDU secretary Carsten Linnemann and the leader of the CDU/CSU group in the Bundestag, Jens Spahn, are calling for “structural reforms”, which is a roundabout way of saying they want to dismantle the welfare state. Social security contributions and federal grants are to be capped and shall decline in future. Social security provisions are to be limited by a higher retirement age, higher employee contributions, and an upper limit on health insurance payouts.

The SPD remains opposed to such plans and is calling for increasing revenues for the welfare state by means of higher taxes on large incomes and wealth. Yet it is uncertain how long the junior coalition partner will hold out against cuts to social welfare. Finance Minister Lars Klingbeil has already demanded that his fellow cabinet members table concrete recommendations for cuts in the 2027 budget in order to avoid a 30-billion-euro budget blowout. In the worst-case scenario, an Agenda 2030, reminiscent of the SPD government’s attacks on social spending in the early 2000s, is already looming, with massive cuts to worker protections and social welfare.

A Risky Budget

The Bundestag is presently deliberating on the grand coalition’s budget. The people’s representatives are deciding how much money the government can spend and on what. In doing so, the German parliament is determining the direction the government will take. The future of the welfare state, the defence of the national territory, the nation’s infrastructure, and how Germany adapts to climate change are all currently dependent on the country’s financial situation.

The Merz government’s budget will be around 520 billion euro next year. Over the next four years, national spending is expected to increase by over 50 billion euro. The spending increases will overwhelmingly be for defence and infrastructure. The grand coalition will quadruple the defence budget to 153 billion euros by 2029. Just ten years ago, Merkel and von der Leyen only spent a measly 38 billion euro on the military. In addition, Klingbeil wants to invest around 120 billion euro in roads, childcare, schools, hospitals, housing, and internet. A new record!

The nation’s treasurer is financing the increased national spending on credit — tax revenues won’t cover the increase. On the contrary: the grand coalition has given millions in tax breaks to business — to boost growth — thus reducing state revenues. The hole in the budget is calculated to reach an historic high of 172 billion euro by 2029.

Military expenditure is not an investment that will bring in revenues later on. Military commodities are dead capital.

The coalition partners are fighting over how to plug the hole in the budget. The SPD treasurer is hoping for growth, more jobs, and bubbling tax wellsprings. He also wants to increase taxes on the super-rich. Merz, Reiche, Linnemann and co. want to cut social services — unemployment benefits, rent support, refugee support, etc. and are categorically opposed to tax increases.

It is clear where this is going: as the CDU/CSU aim to protect private wealth from taxation, only an economic upswing can realize the grand coalition’s goals. But if the boom fails to materialize, then the self-named investment minister would have to turn into an austerity commissar. That would be poisonous for the SPD. And yet Klingbeil and Pistorius were just recently promising guns and butter. Might this be a point of conflict for the coalition government?

SPD leadership has repeatedly declared that increased military spending will not come at the expense of the welfare state or climate change policy. This is very much in the tradition of US president Lyndon B. Johnson. The successor to John F. Kennedy increased military spending for the Vietnam War while simultaneously seeking to tackle poverty with his Great Society programmes. Johnson delivered “guns and butter”. Yet history does not repeat. Or if it does, then only as tragedy or farce.

Military Rearmaments on Credit

Putin’s attack on Ukraine set off a global rearmaments spiral. NATO’s military spending is currently at 1.3 trillion euro. This amounts to more than half of all military spending worldwide. The transatlantic military alliance’s new five percent goal will see the defence spending of the 32 member states rise to a total of 11.5 trillion euro by 2035.

Meanwhile, Germany is raining money on its armed forces (the Bundeswehr) and arms manufacturers. The country already has the world’s fourth-largest defence budget, but there is always room for more!

Merz’s pledge to increase the military budget to five percent of GDP by 2035 will mean annual spending of 215 billion euro. That is more than is currently spent on workplace relations and social services. The grand coalition is going to pay for its khaki-coloured shopping spree with its credit card.

Will the new military Keynesianism create a new khaki-coloured economic miracle?

The grand coalition can now finance all military spending above 1 percent of GDP on credit. Or in the words of Friedrich Merz: “Whatever it takes”. Yet no detailed demand planning regarding the new war toys has been done.

The additional credit-financed military spending may amount to 1.5 trillion euro over the next ten years. The Bundeswehr will also receive 100 billion euro from the special defence fund.

Moreover, the 500-billion-euro infrastructure fund will facilitate investment in physical and social infrastructure. These investments also can and ought to follow a military logic, being spent on armoured bridges and roads, military clinics, and emergency services.

Financially, funding military and infrastructure spending on credit is a paradigm shift for Germany. For decades, debt has been considered the devil’s work. Now Merz and Klingbeil can use their credit cards to prevent bitter redistribution struggles from threatening efforts to expand the military. Increasing VAT or cutting retirement pensions to fund new tanks and fighter jets would be extremely unpopular.

Can Military Expansion Drive Growth?

Economists are currently debating what effects increased military spending will have on growth. Will the new military Keynesianism create a new khaki-coloured economic miracle?

Military expenditure is not an investment that will bring in revenues later on. Military commodities are dead capital. From an economic point of view, military spending is merely state consumption. Such unproductive expenses also draw resources — experts, capital, land — away from productive usages. This puts a dampener on medium-term economic dynamics. Yet military expenditure can stimulate the economy in the short term, although for that to occur, new weaponry would have to be sourced domestically and locally manufactured. In addition to arms manufacturers, increased military spending would benefit metals production and trade as well as transport and logistics businesses. Currently, Germany is home to 230 armaments businesses with around 70,000 employees. This figure may see a dramatic rise in future.

In a recent study, the liberal Kiel Institute for the World Economy claims that raising EU members’ military spending from 2 to 3.5 percent of GDP would result in annual growth of 0.9 to 1.5 percent. The arms spending multiplier is reportedly around 0.6 to 1.5. In other words: every euro spent by the state on rearmaments increases domestic economic output by between 60 cents and 1.50 euro. In comparison, the multiplier for infrastructure investment is around 1.5, while the figure for education spending is around 3.

The industry-friendly Institut der Deutschen Wirtschaft (IW) estimates that the Merz government will manage to mobilize an additional 400 billion euro by 2028 through the exceptions to the debt brake. This short-term surge in demand would supposedly cause real GDP to increase by 5.4 percent. Yet economic momentum would then weaken: according to the IW, the higher military spending would no longer contribute to growth from 2029 onwards.

In the medium-term, the economy would also likely benefit from the spillover effects of the arms industry. High-tech military research can be transferred to other, civil industries, leading to increases in productivity throughout the economy. The US military-industrial complex is known as the midwife of the internet and GPS. Sixteen percent of Washington’s military spending goes to research and development, while in the EU that figure is just 4.5 percent. According to this logic, more military research should increase the productivity of private industry.

If economic activity continues to founder, then every euro spent on tanks, ammunition, fighter jets, interest, and loan amortization is taken away from childcare, hospitals, healthcare, affordable housing, and energy and train networks.

Recall that many of the market radical economists who now claim that funding military spending on credit would create an economic boom have until recently sharply criticized any form of credit-financed, state-funded economic growth programmes. They claimed that funding state spending on credit would only suppress private investment and be no more than a flash in the pan. The so-called turning point is thus also accompanied by an ideological softening.

Keynesian economists Tom Krebs and Patrick Kaczmarczyk have a different perspective on the impact of military spending on growth. They estimate its fiscal multiplier to be a very low 0 to 0.5, arguing that in the short term, thanks to limited competition and exhausted productive capacities, higher military spending would only drive up inflation and increase profits for arms manufacturers.

In the arms industry, the word competition is taboo. The industry is marked by an oligarchic concentration of ownership and centralization. The average number of bids per tender in defence and security declined from over seven in 2009 to just under two in 2017. Almost half of the special defence fund goes to Rheinmetall, Germany’s biggest arms manufacturer. The market clout of the few arms manufacturers allows them to freely determine prices. According to an internal arms industry report, 11 out of 13 major armaments projects are more expensive than planned. The extra costs amount to a total of around 13 billion euro.

It is no wonder then that the profits of Rheinmetall, Hensoldt, Diehl, and co. are going through the roof. Rheinmetall’s net profit margin has risen to seven percent. Hensoldt AG has a net margin of 3 to 5 percent and growing. The return on equity of the two arms manufacturers is between ten and 20 percent. Dividends paid out to Rheinmetall and Hensoldt shareholders quadrupled between 2020 and 2024. Rheinmetall shares increased from 74 to over 1,900 euro, while those of Hensoldt AG rose from 12 to 100 euro.

Moreover, the growth impacts of additional state expenditures fall flat if public contracts are awarded primarily to foreign enterprises. Almost 80 percent of European armaments contracts are fulfilled by non-EU businesses. That is good news for Lockheed Martin, Northrop Grumman, Boeing and co., but it does nothing for growth in Germany or the EU.

It is also clear that increased productive capacities in the arms industry may exacerbate skills shortages in other industries. At the same time, the jobs boom in the capital-intensive arms industry is not large enough to cushion the sales and structural crisis of the automotive industry.[2]

In short, the overall economic rate of return on military spending is very low. Rearmament is not a driver of growth.

Rearmament Strains the Public Purse

Military spending on credit can be a serious burden on public finances. Credit-financed rearmament initially increases future debt repayments. The state is currently paying around 30 billion euro in interest. This is forecast to double in the next four years.

Servicing debt also entails amortization. Old national debts can repeatedly be paid off by taking on new debts. To that extent, the state must not amortize its credit. Yet the Merz government wants to pay back the emergency loans and the special fund.

Detailed amortization plans have been written up to do that. The coronavirus pandemic loans, which total 335 billion euro, will have to be paid back starting in 2028. The amortization of the special defence fund of 100 billion euro will follow in 2031, and the first payment for the special infrastructure fund of 500 billion euro is due starting in 2037 — or 2044 at the latest. With interest, the debt repayments will almost reach a 12-figure sum.

Unions, social and environmental organizations, social movements, and progressive political parties need to prepare for this major social conflict so that they are able to mobilize people en masse for the looming defensive struggles.

Spending 100 billion euro annually on debt servicing does not necessarily constrain the state’s scope for action. Ultimately, debt-financed investments and consumption can enliven the economy as a larger social product then facilitates higher tax revenues. Despite increasing interest and amortization payments, the latter may suffice to adequately finance the welfare state. If the economy booms, then military spending and debt servicing will not come at the expense of social services. This would require an average real growth of at least two percent.

However, if economic activity continues to founder, then every euro spent on tanks, ammunition, fighter jets, interest, and loan amortization is taken away from childcare, hospitals, healthcare, affordable housing, and energy and train networks. At the same time, the margin of distribution for civil service collective bargaining rounds shrinks.

Currently, there is no powerful upswing in sight. The professional prophets are predicting economic stagnation for 2025. For next year, experts estimate a small to mid-sized recovery (1.0 to 1.7 percent real growth) not because of increased military spending but rather due to increased investment in public infrastructure. Still, the prognosis of an economic recovery remains uncertain due to the tense geopolitical situation.

The Future of the Welfare State

Independent of the state of the economy, social needs will grow in the coming years. An ageing society, many precarious and badly paid jobs, child poverty, housing shortages, increased demand for childcare, and the social configuration of the ecological transformation all demand a bigger welfare state, not a smaller one.

Social security institutions need more money to maintain the services they currently provide. In order to do this, contributions and/or federal funding need to be significantly increased. Moreover, if there are going to be better safeguards against the main risks to the population — higher retirement pensions, full health insurance, better staffing and better pay for workers in health care and social work — then insurers’ financial needs will continue to increase.

Yet the welfare state is more than just social security. Overcoming the investment lag in social and physical infrastructure will require an annual average investment of tens of billions of euro. Although the special infrastructure fund can help here, it is also true that those 500 billion euro (of which 100 billion will go to the climate adaptation fund and the same amount to the federal states over the course of 12 years) are insufficient. The federal states and municipalities alone have investments amounting to over 216 billion euro.

The unions don’t want the military to be a bottomless money pit.

Childcare centres, schools, universities, clinics, and aged care homes also need more staff. Hospitals and aged care are each experiencing staff shortages of over 100,000 people. Early childhood education and childcare will soon have shortages of 190,000 skilled workers, and the shortages in the civil service have reached over 300,000 people. Accordingly, spending on staff and materials also need to be increased by an average of tens of billions of euro.

As the demands made of the welfare state increase, the funds for the necessary expansion of public services and social security will not be there without a decent economic situation and more tax justice. Increasing military spending and the debt servicing associated with it threaten to exacerbate the welfare state’s financial difficulties.

Accordingly, redistribution conflicts over scarce budgetary resources are intensifying. Class warfare from above has already begun. Employers’ associations want to take an axe to the welfare state. They are calling for an upper limit on overall insurance contributions, the exclusion of further performance guarantees, the abolition of retirement at 63, and a higher overall retirement age. At the same time, the BDA (Confederation of German Employers' Associations), BDI (Federation of German Industries), and co., in lockstep with the CDU/CSU, reject tax increases on high incomes and wealth as well as windfall taxes for arms manufacturers.

Unions, social and environmental organizations, social movements, and progressive political parties need to prepare for this major social conflict so that they are able to mobilize people en masse for the looming defensive struggles.

The unions don’t want the military to be a bottomless money pit. The money that is being spent on rearmaments today will be lacking for quality education, social security, and climate change mitigation tomorrow. Without a powerful economic upswing and a just taxation policy, budget cuts and the dismantling of social services are already looming. Rather than guns and butter, there will be only guns. That is what we need to prevent.

This article first appeared in LuXemburg. Translated by Marty Hiatt and Joseph Keady or Gegensatz Translation Collective.