Navigating Germany’s defence and procurement industry

For investors, the opportunity is substantial. Germany has created new fiscal space for defence, lifted procurement spending, and introduced legal reforms designed to accelerate Bundeswehr contracting. The market is not simply opening up, but is being re-regulated. Faster procurement, tighter foreign investment screening, greater scrutiny of supply chains, and a more explicit preference for European defence capacity are reshaping how companies can access German defence spending. The result is a market with high expectations, though significant hurdles remain.

A constrained political environment 

The current political field is tense and under significant pressure. Merz’s coalition agreement included commitments to strengthen defence capabilities, ease burdens on business, and expand investment incentives. However, an Insa poll for Bild and Welt in May 2026 found that 49 percent of respondents wanted the CDU/CSU-SPD coalition to end. The significantly more dovish and spending-wary AfD remain the clear favourites to win the largest vote share in several key state elections this year as well as in the 2029 elections. 

As a result, Merz’s fiscal agenda has largely stalled. Although he was able to create significant new room for debt spending on defence and infrastructure in 2025 via a constitutional amendment and a EUR 500 billion extrabudgetary infrastructure and climate fund, the more extensive alterations to the debt brake have failed to progress: the expert commission tasked with examining reform could not reach an agreement, and Merz has ruled out any further loosening of borrowing rules before the next federal election in 2029.

Justus Becher, a senior procurement consultant close to the CDU, explained the risk:

‘The AfD is not necessarily weak on defence, but is ideologically more fiscally conservative and opposed to Ukraine support. Therefore, if they win Bundesrat seats in September, Merz may be further constrained even before 2029.’

How defence funding is being deployed

The regular 2026 defence budget is set at EUR 82.69 billion, supplemented by EUR 25.51 billion from the 2022 Bundeswehr special fund. Within that, procurement spending is budgeted at EUR 47.88 billion, including EUR 22.37 billion from the regular defence budget and EUR 25.51 billion from the special fund.

Despite a wealth of projects, however, the funds are often slow to leave the coffers and occasionally fill other budgetary gaps, according to Becher. Defense News correspondent Linus Höller nonetheless explained to us that the political signalling has already had a strong effect:

‘Defence firms do not need every euro to have left the Treasury to benefit from the shift. The political signal alone is already changing investment assumptions across the sector. They would not be building and retooling facilities if they expected this demand to be transitory.’

Regulatory Shift

To help stimulate the deployment of funds, the government has focused on re-regulation:

• Procurement acceleration and Europe First: A February 2026 amendment to the Act on Accelerated Planning and Procurement (BwBBG) aims to increase procurement speed, emphasising “Commercially Off-the-Shelf” (COTS) solutions and dual use technologies. The Defence Ministry can now bypass standard procedures for technology critical to Germany’s sovereignty, advance payments to high speed/quality contractors, and prioritise “Europe first” firms unless others offer unique, unmatchable capabilities, with limited legal recourse for firms excluded from tenders. Additionally, Defence Minister Pistorius announced plans in May to create streamlined processes at the Bundeswehr procurement authority (BAAINBw) and open new offices in Dresden for cyber and IT, Bremen for aerospace, and Brussels for greater European access. 
• Foreign investment screening:  The government is also preparing a new Investment Screening Act, expected in the next year, which would consolidate Germany’s foreign direct investment regime and give the government greater ability to intervene in sensitive transactions. Notably, it will allow the government to block deals based on “atypical control” by foreign entities, scrutinising factors like board representation and data access. Becher assesses that supply chains with China exposure in particular will be scrutinised, while governance equity will shape deals with US components, which Germany is still reliant on.
• Infrastructure and permitting reform: Defence procurement is also linked to wider infrastructure reform. The planned Infrastructure Future Act, also expected in the next year, is intended to accelerate planning, approval and permitting processes for major infrastructure projects, including transport, energy and industrial facilities. 

Höller believes re-regulation is more likely to weather significant shifts in 2029:

‘Institutional and regulatory changes like these matter, because they are somewhat insulated from top level political shifts. Civil servants don’t lose elections, and once offices, procedures, and funding precedents are created, their effects can outlast the government that created them.’

Opportunities and risks for investors

Becher cautioned that certain challenges will still remain in the system, but was nonetheless optimistic on what opportunities could be there for investors:

‘Germany is still in many ways as bureaucratic as ever and reform will always be an uphill battle, particularly given current political constraints. That said, the attitude change is strong and the legislation is a good start. Firms should focus on understanding how to work within this system and interact with the relevant authorities, while understanding that political will relating to causes like Ukraine should continue to produce significant headwinds provided the AfD does not come to power.’

For investors and contractors, the immediate reality of this is that the Bundeswehr is betting on agile European defence technology firms, particularly those offering COTS solutions. Höller advised that some of this may translate to contracts for established giants, while smaller firms with unique cutting-edge offerings like 3D printing, computing, and telecommunication will find new niches: 

‘Acceleration cuts both ways. Faster procurement may also mean more contracts flowing to the companies that already dominate the system with COTS solutions, and the re-regulation may tighten their grip. However, smaller defence-tech firms and dual use products will still be able to find their place, especially if they also turn to Brussels, where there is a desire to support smaller European firms that have fallen through national cracks.’

German firms like Helsing and Stark Defence are already flourishing, having recently secured drone contracts that could reach a combined EUR 4.3 billion. And a large opportunity still remains with the unrealised extrabudgetary funds; European firms in particular can take advantage of the opportunity by offering attractive defence tech solutions or dual use technologies to the government.

The challenge in this context is in successfully unlocking these funds amidst an increasingly sensitive political environment. This is a challenge that will only increase as the coalition’s agenda is ever more strained by competing visions and heightened governmental and public scrutiny of foreign investors. 

Opportunities without compromise

At The Risk Advisory Group, we support clients operating in complex defence and industrial environments through market-entry support, stakeholder mapping, partner diligence, transaction intelligence and bid strategy.