In Europe, the 2020s are the new 1930s

Key Markets report for Friday, 14 March 2025

In Europe, things have taken a turn towards the darkness, eerily reminiscent of the second half of 1920s and 1930s. The developments seem to follow the patterns leading up to World War 2. This week, the CEO of VolksWagen overtly embraced the opportunity for VW to become a weapons manufacturer as part of the EU's ReArm Europe plan. The recently idled production capacities in the German economy will be repurposed for military production. This will be the outcome of Ursula von der Leyen's plan to militarize Europe and create two large funds allocating up to €870 billion to military spending.

It’s forward to the past for Europe.

This all will ease political pressures off of the new German government. Recall, in 2023, the German economy contracted by nearly 0.5%, making it the worst performing developed economy in the world that year. The recession has continued into 2025. Germany is now looking to military spending to boost its economy with the largest economic stimulus package since the fall of the Berlin Wall, and it is nearly all predicated on military spending. Rheinmetall has a massive backlog: as of 31 Dec. 2024, Rheinmetall's orders backlog reached €55 billion, up from €38 billion one year prior. Sales are expected to grow by 25% to 30%.

Rearmament is now the new business model for Europe and the military industrial complex are the big winners. Said Rheinmetall CEO Armin Papperger: "With a 50% sales growth in the defence business, Rheinmetall is on its way from being a European systems supplier to a global champion."

Incoming Chancellor Merz is pushing to enable unlimited borrowing for defence spending and to create a €500 billion fund for infrastructure investments, particularly favoring allocations to the military industrial complex. The plans must be approved by at least 2/3rds majority in the parliament, but if it passes, it could free up up to €1 tn of additional borrowing over the next decade. That would boost German economy's output to an estimated 2% of the GDP, double the current projections. Such fantastic news, one wonders how come they haven't though of this sooner?

For companies like VW, the plan to move to military production makes business sense given that EU leadership has resolved to mobilize vast financial resources for that purpose. It also makes sense for workers: instead of ending up on the street, they'll be able to retain their jobs rather than ending up on the street. In other words, we can't blame the workers; we can't even blame the corporations - it's those that move capital and decide on how to allocate it that bear the responsibility for what might follow.

If the continent prepares for war and empowers defense industries and militaries, it becomes much more likely that we'll have war. One of the unintended consequences of this turn for militarization is that Germany's rearmament might be a cause of concern for Germany's neighbours, particularly France and Poland whose predictable knee-jerk reaction will be to boost their own militarization and defense spending. Truly a dark turn back to the 1930s.

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Trading signals for Key Markets, 14 March 2025

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