From Austerity to Arms: Europe’s Recurring Escape from Deflationary Paralysis

On the morning of February 27, 2022, a stunned silence settled over the Bundestag as then-German Chancellor Olaf Scholz approached the podium. Only three days earlier, Russian tanks had crossed into Ukraine, shattering post-Cold War security assumptions. Now, in a special session hastily convened in Berlin, Scholz delivered a speech that broke with decades of German policy. “We will now—year after year—invest more than two percent of our gross domestic product in our defense,” he declared. “The goal is a powerful, cutting-edge, progressive Bundeswehr that can be relied upon to protect us.”

Television cameras captured Members of Parliament (MPs) exchanging glances; a few covered their mouths, stunned by the Chancellor’s words. Then came the number: a €100 billion special fund, earmarked for rebuilding Germany’s military. For a country long defined by a degree of postwar pacifism and fiscal restraint, the speech marked something more than a policy pivot. It was a moment of historic reorientation: the “Zeitenwende”—a turning point—had arrived.

Just ten years earlier, in the summer of 2012, amid the lingering fallout of the Eurozone crisis, Berlin had ruled out Eurobonds, mutualization of debt, or fiscal expansion. Southern European economies at the time were to liberalize, cut labor costs, minimize public spending, and prove their discipline to global markets. But a rapidly changing geopolitical environment eventually forced even the most rigid assumptions to bend.

Three years after the Zeitenwende speech, in March of 2025, the President of the European Commission, Ursula von der Leyen, affirmed this policy shift at the European Union (EU) level, by announcing “ReArmEU,” quickly rebranded “Readiness 2030.” It is an €800 billion defense plan for the expansion of Europe’s military capabilities, allowing member states sufficient flexibility to increase their defense budget without triggering excessive fiscal deficit concerns, under certain restrictions.