Time to spend smart

• Europe is the world's second largest defence spender after the U.S., ahead of China. Yet despite substantial financial inputs, Europe has a fraction of the military capabilities of others. So far, it has also failed to update its rearmament strategy to include new defence technologies and associated mass production of low cost autonomous systems. • At the root of European military weakness lies a blatant inefficiency: Europe fields 14 different main battle tank models to America's one, 23 howitzer variants to America's two, 16 submarine types to 4 in the U.S. The fragmentation of European defence planning and procurement along national lines, and the artisanal nature of national defence production condemns Europe to low volumes, high unit costs, limited interchangeability, and technological backwardness. • The imperative to focus on outputs, not inputs, is nowhere more consequential than in Germany, where defence spending is set to triple over the coming years. Germany should pursue a defence strategy in line with its comparative advantage - mobilizing its capital base (i.e., German industry) to allow for the rapid scaling-up of military capabilities, including the expansion of production capacities to sustain a longer conflict. At the same time, Germany must invest massively in upgrading its technological potential to pursue a technology and automation-driven defence strategy. • Taking this yardstick to the publicly available German budget numbers as well as future appropriations passed by the Bundestag leads to a sobering conclusion. Germany so far has neither invested heavily in next generation defence capabilities, nor has it used capital (its industrial base) to substantially increase defence output. Nearly all of the Bundeswehr's €100 billion Special Fund - around 95% - has been committed to traditional crewed platforms while production capacity increases have been slow and small. At the same time, the share of the defence budget allocated to R&D stagnates at around 2% - less than 1/5 of the U.S. share, limiting technological renewal. • We set out five principles for smart German spending on defence: (i) prioritise the procurement of innovation and raise R&D expenditure to at least 10% of the defence budget; (ii) focus on increased production capabilities and industrial scale through capacity contracts rather than classic procurement; (iii) expand support for Ukraine in the short-run as the cheapest and most effective way for security in Europe in the shortrun; (iv) centralise procurement and create a common European defence equipment market; (v) establish joint financing, including Eurobonds, for joint ownership of next generation defence technologies as a first step toward integrated European defence.