Germany Building Up Military Following Russian Invasion, Defense Stocks Surge

German Bundeswehr armed forces recruits receive a debriefing by an instructor during a drill at a military training area in Viereck, Germany, on Aug. 8, 2018. (Fabrizio Bensch/Reuters)

Stock prices of defense companies rose after German Chancellor Olaf Scholz announced that his country would raise military spending, and build up its forces and capabilities, as a response to Russia’s invasion of Ukraine.

Germany’s 2022 federal budget will set aside a one-off sum of 100 billion euros for the country’s military, Scholz said in a policy statement on Feb. 27. The country will invest “more than two percent” of its GDP into defense “year after year,” he added. Berlin had spent roughly 1.53 percent of its GDP on defense last year according to data from NATO. By raising military spending, Germany aims to match targets set out by NATO back in 2006.

According to some analysts, Russian President Vladimir Putin ordered the invasion of Ukraine due to the mounting fears of NATO expansion on the Russian border. The German solution to build arms could encourage other European allies to follow suit leading to a renewed arms race on the continent.

Defense stocks in various markets traded much higher on Monday than Friday’s close. Share prices of Germany’s Rheinmetall, an automotive and arms manufacturer, peaked at 160 euros ($178) from Friday’s close of 107 euros ($119), an increase of 49.5 percent. Hensoldt, a major German military sensor manufacturer, surged over 88 percent to hit a peak of 27.95 euros ($31) from 14.80 euros ($16.50).

Thales, a French multinational company engaged in defense and aerospace industries, saw share prices rise from 91.50 euros ($102) at Friday’s close to hit a peak of 105.55 ($117.71) euros in Monday trading.

Italian defense company Leonardo’s share price increased from 6.93 to 8.20 euros ($7.73 to $9.14). BAE, Britain’s largest defense company, saw its share price rise from 650.40 GBX to 749.40 GBX ($8.71 to $10.04).

Shares of Northrop Grumman increased from $409.66 to $442.14 in the United States. Raytheon shares hit a high of $102.70 from $98.12. Lockheed Martin, which manufactures the F-35 fighter jet, saw share prices rise 5.94 percent to reach a peak of $433.82 on Monday.

“More resources for defense among U.S. allies in Europe combined with the challenge from Russia could contribute to the development of a larger, more capable ... European defense industrial base that could ... become more competitive with that of U.S.,” Seth Seifman, an analyst at JP Morgan, wrote in a note.

“However, and in the near-term we see Germany’s announcement as an opportunity for U.S. defense contractors.”

After the Cold War, several European nations cut back on their military capabilities due to the belief that economic interdependence would make war meaningless. Germany’s “Wandel durch Handel” doctrine proposed that commercial ties with Russia will keep Kremlin’s expansionism under check.

Germany slashed its armed forces from around 500,000 in 1989 to just 180,000 at present. The number of main battle tanks declined from 5,000 to 300 during this time.

However, Russia’s invasion of Ukraine has forced Scholz to declare a historic shift in the country’s defense policy.

In his policy statement, Scholz accused Putin of wanting to build a “Russian empire” and redefine the status quo in Europe “in line with his own vision” by using military force if required. As such, Germany intends to invest “much more” in security to protect “our freedom and our democracy,” the Chancellor added.