Is Germany Planning a Shift to a War Economy?

Prominent German economist Moritz Schularick, president of the Kiel Institute for the World Economy, has suggested that Germany’s path out of its economic slump lies in a pivot toward a war economy, signaling a striking embrace of central planning over market principles.

A Call for a Centrally Planned Arms Industry

In an interview with the Neue Osnabrücker Zeitung, Schularick identified a leadership vacuum in German arms policy. He framed a state-directed industrial policy focused on weapons manufacturing as the solution to Germany's economic challenges, even calling increased arms production a potential "job booster."

Moritz Schularick, president of the Kiel Institute for the World Economy, has advocated for a centrally managed arms production push.

His argument is rooted in geopolitical strategy. "If we want Europe to truly stand on its own in defense soon and not remain dependent on the MAGA-USA," Schularick stated, "then Defense Minister Boris Pistorius must be given the order to work with European partners to eventually replace the USA and its capabilities."

This rhetoric of "orders to march" and military self-sufficiency reveals a dangerous convergence between politics and state-aligned economic research. Instead of advocating for deregulation and lower taxes to cure economic ills, the focus has shifted to centrally managed industrial policy.

Schularick proposes a top-level arms coordinator to manage investment funds, citing the Russian threat as justification. With over €500 billion in defense investments planned by the end of the decade, the goal is to reduce Germany's security dependence on the United States.

The Problem with Production Capacity

A key frustration for Schularick is the slow pace of ramping up arms production. He notes that four years into the war, little has been done to significantly boost manufacturing capacity.

"How many Taurus missiles are finished per month? Not even a handful," he lamented, diagnosing this as a clear deficit in industrial policy.

This perspective highlights a new trend in German economic thinking, where state-aligned research champions an active industrial policy directed by Berlin and Brussels. Central planners like Schularick appear to believe that idle German industrial capacity can simply be repurposed for the defense sector. The assumption is that civilian car production can be easily converted into tank production.

However, this approach creates a new subsidy-dependent industry that pulls resources from civilian manufacturing, produces goods not demanded by private households, and artificially inflates costs for consumers.

The Illusion of a State-Directed Boom

Schularick seems to find a "rediscovered" work ethic in the prospect of a war economy, noting that arms production still operates on a single-shift, five-day work week. The implication is that these state-directed jobs represent Germany's economic future.

Yet, this vision overlooks critical questions. Little thought is given to what civilian goods should be produced to prevent empty shelves during a potential conflict. Schularick acknowledges that Germany has fallen behind not just in producing armored vehicles but also in future technologies like autonomous systems, satellites, AI, and robotics.

The interview fails to address the source of this competitive disadvantage. The possibility that burdensome German policy and Brussels bureaucracy are the primary antagonists is seemingly ignored. This reveals a growing gap between economic reality and the insulated world of politics and state-backed research, which promotes massive economic mismanagement while failing to critically assess Russia's actual military capabilities.

Historical Lessons and Political Realities

The practical challenges of converting civilian production lines to military manufacturing are immense. Beyond financing, the knowledge transfer required to build a centrally planned war economy is a massive and time-consuming undertaking. Germany's political learning curve appears flat, even after decades of a green transformation that primarily succeeded in driving capital out of the country.

This raises a cynical question: Was the goal of restrictive climate policies to corner industry until it faltered, only to fill the resulting capacity with arms production?

As the climate subsidy model fails, a new one appears to be emerging: the European defense sector. Whether this experiment can survive real-world economic pressures like falling productivity and rising debt is highly doubtful.

No deep economic expertise is needed to see that such a militarization strategy is likely to fail. A brief look at 20th-century history reveals the pitfalls of massive resource mismanagement under central planning. Furthermore, modern obstacles include issues of national sovereignty, divergent geopolitical interests within the EU, and a divided union in which Eastern European nations are wary of conflict with Russia.

When economists like Schularick champion the logic of powerful central planning, it suggests a departure from sound economic principles. The allure of high-level positions, such as a ministerial-level arms coordinator, may be a powerful incentive, but it risks leading the economy down a path of short-term ambition and long-term failure.