Dual Use: The merging of civilian and military innovation

A particularly strategically important interface between security and economic policy is the world of so-called dual-use technologies – that is, goods, technologies, or software that, due to their technical parameters, can be used for both civilian and military purposes. In November 2025, the European Commission updated Annex I of the EU Dual-Use Regulation, thereby placing numerous new technology areas under control – from quantum computing and semiconductor technologies to additive manufacturing and biotechnology.

Behind this regulatory measure lies a deeper strategic logic. The separation between civilian and military innovation is no longer tenable in the 21st century. The experiences of the Ukrainian drone industry demonstrate how quickly civilian innovations can be transferred into military applications and how much operational learning cycles and production reinforce each other. Companies are increasingly integrating artificial intelligence, commercial manufacturing methods, and start-up models into military applications—a fundamental break with the traditional separation between the civilian and military sectors. For German economic policy, this means that anyone investing in key technologies such as quantum computing, semiconductors, robotics, or autonomous systems is simultaneously pursuing security policy.

This requires a rethink in economic development. The €500 billion modernization fund, which the federal government under Chancellor Friedrich Merz approved after reforming the debt brake, provides the financial framework for this. If used wisely, this capital can not only modernize the German armed forces but also strengthen the technological base of the German economy: through investments in rail infrastructure, bridges, cybersecurity systems, energy networks, and digital infrastructure that serve both military and civilian purposes.

Europe’s sovereignty shift: A new geopolitical architecture is emerging

At the European level, there is a growing consensus that the existing security architecture is no longer adequate. In the European Parliament, there is broad agreement that an “arc of instability” has formed around Europe, in which competition and protectionism have replaced cooperation and free trade. The EU High Representative, Kaja Kallas, is working on a new security strategy that covers all dimensions of European security – from hard security and defense to economic security and preparedness. This development is historic. Europe is realizing that its economic strength cannot be defended in the long term without a corresponding capacity for effective security policy.

By 2035, direct defense investments by European NATO states will total almost €2.2 trillion – this is the only way to achieve equipment targets and compensate for the potential loss of American systems. This enormous investment sum also represents the largest economic stimulus program ever adopted by Europe. The growth effects extend far beyond the defense industry: these annual investments generate approximately €40 billion in gross value added within the European defense sector, and an additional €109 billion is triggered along the supply chain and in other sectors.

The geopolitical risk test: What’s at stake

The urgency of this transformation is underscored by the current geopolitical risk profile. Three risks stand out in particular, as Stefan Mair of the German Institute for International and Security Affairs (SWP) analyzes: a defeat of Ukraine in the war with Russia, a withdrawal of American security guarantees, and an escalation of the strategic rivalry between the US and China. All three scenarios would have immediate and serious economic consequences for Germany and Europe.

The Bundesbank confirms this assessment in its own research: Rising geopolitical risks in trading partner countries increase the cost and dampen imports and disrupt supply chains. They also promote the fragmentation of global trade, with risks related to China being particularly significant. Germany, as one of the world’s leading export economies, is especially affected by this fragmentation. A weakening of the globalized trading system will hit no economy harder than those that rely on open markets and stable supply chains.

From defense readiness to economic resilience

The crucial economic policy conclusion, therefore, is not that military spending is desirable per se. It is more subtle and long-term: A country that can credibly deter foreign powers protects not only its territorial integrity but also its economic interests. It secures trade routes, protects critical infrastructure, maintains access to resource markets, and prevents economic blackmail by authoritarian actors. Europe has consumed the dividends of peace in recent decades—low defense spending, global trade integration, and cheap energy from Russia. These dividends have been exhausted.

The EU budget for 2026 reflects this new reality: Planned spending on security and defense is increasing by almost €200 million to just over €2.8 billion, and around €230 million more is earmarked for migration and border management. These sums may sound modest, but they signal a fundamental reprioritization. As the largest net contributor to the Union, Germany provides almost a quarter of EU funds – and at the same time benefits more from the single market than any other European economy.

The key principle for economic policy in the coming decade is therefore this: Investments in security policy are not mere consumption, but infrastructure for economic success. Anyone who considers roads, railways, and bridges economically relevant must do the same for cybersecurity, defense capabilities, and strategic reserves. The separation of these spheres was a historical luxury that Germany and Europe afforded themselves in the post-Cold War era. In the world of 2026, this luxury has become unaffordable.

Opportunities and risks of the new arms dynamics

It would be incomplete to describe the economic dimension of security policy solely as an opportunity. The risks are real. Massive increases in defense spending can create displacement effects: if public funds flow into armaments, they may be lacking for education, research, climate protection, and social infrastructure. While the fiscal multiplier of defense spending is positive, it is generally lower than that of investments in education or infrastructure. And an overheated arms industry can draw skilled workers away from other productive sectors.

Added to this is the danger of strategic path dependency: economies that increasingly focus their innovation on military applications risk losing their civilian competitiveness. The US serves as a cautionary example here – it possesses overwhelming military strength but is showing increasing weaknesses in civilian industry. Europe and Germany must therefore seriously pursue the dual-use approach: technology investments must be designed to drive both military and civilian innovation. This will ensure that the defense dividend flows back into the broader economy.

The realization that security policy is always also economic policy is not an invitation to the militarization of the economy. Rather, it is a call for sobriety: sobriety towards the naiveté of decades of peace dividends, sobriety towards the temptation of pursuing armaments as an end in themselves, and sobriety towards the complexity of a world in which economic strength and military credibility are mutually dependent. Those who understand this interplay act wisely – those who ignore it will sooner or later pay a heavy price.