Germany’s Military Modernization Is Shaping the Future of Europe’s Security and Defense Industry

Risk Outlook: August 18, 2026

Aug 18, 2026

Welcome to the Stepwise Risk Outlook, which highlights and contextualizes over-the-horizon developments in key regions of the world and industries of the global market. Today’s featured deep dive by Ian Cameron examines Germany's military modernization.

Germany’s Military Modernization Is Shaping the Future of Europe’s Security and Defense Industry

By Ian Cameron

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Germany is currently undertaking an extensive and long-term defense modernization program that has the potential to position Germany as Europe’s dominant military and security player. Berlin is investing money across a range of different capability areas, developing its defense industrial base and defense technology sector, and planning to become Europe’s largest military power by 2039. Defense expenditures have surged this decade and will continue to do so, although over time the focal points of Berlin’s defense investment will change.

Berlin’s new orientation in defense and security policy will play a fundamental role in shaping European security in the coming years. While Germany is well positioned to live up to its NATO commitments, its modernization drive also comes with downside political risks: increased tensions with neighbors like France and Poland, concerns about German industrial dominance in Europe, and greater potential for policy friction with Washington. Meanwhile, its approach to defense partnerships and international procurement is also in flux.  German defense investment will play out in line with Europe’s growing focus on reducing external dependencies and boosting its own economic and industrial system. On the upside, Germany’s spiking need for defense and technology products will create sustained demand across many sectors, and Berlin remains open to defense industrial partnerships and foreign procurement, especially for needs that do not yet have a strong European alternative.

In today’s full analysis:

Germany’s Defense Modernization: Europe’s Strongest Army
Disrupting Europe’s Defense Equilibrium
Risks and Opportunities

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Europe

Ukraine calls upon the EU to sanction Russia’s nuclear sector after safety complaints at Egypt’s El Dabaa nuclear plant, which uses the same VVER-1200 technology as Hungary’s anticipated Paks 2 reactor. The Egyptian Nuclear Power Plants Authority, in an internal letter dated June 4, described some reactors as defective and a safety culture of “deliberate negligence” on the part of the project official. The Authority assessed that the first unit could be delayed by 18 months. After the documents were made public, Ukrainian Foreign Minister Andrii Sybiha stated that Rosatom, Russia’s nuclear champion, is an “instrument” of Moscow’s geopolitical ambitions for nuclear dominance rather than just a reliable private company.

The EU has long hesitated to sanction Russia’s nuclear sector. Reducing dependence on Russian nuclear exports is more logistically difficult than oil and gas, whose markets are more diversified. Many of the nuclear reactors in Europe are built with Russian technology and must use Russian uranium as the sole input source. Moreover, taking one reactor offline is more disruptive than one oil or gas power plant; in Hungary’s case, the Paks nuclear reactor can produce up to half of the country’s electricity at full capacity. For these reasons, the EU failed to include a phaseout of Russia’s nuclear exports as part of its otherwise ambitious REPowerEU regulation.

Read More: Politico, Mezha, The Kyiv Independent

Middle East

The US pulled its last aircraft carrier from Asia to refocus on Iran. The USS George Washington is departing the Pacific and is expected to replace the USS Abraham Lincoln in the Middle East amid growing mental health concerns following a long deployment.

Some analysts see the shift as the death of America’s long-touted pivot to Asia. The “pivot to Asia” is Obama-era language, but successive administrations have professed to be shifting focus to the economically crucial Asia-Pacific region and shifting security burdens to partners in the Middle East. The redeployment adds to a sense in Asia that the US is distracted and overwhelmed by the war in Iran, drawing focus from its promises to Asian allies and signaling a lack of commitment. The shift comes as China has stepped up its exercises in the Pacific recently, and may seek to bolster the narrative that the US is not committed to or powerful in the region amid the Iran war.

Read More: PBS, Associated Press, Semafor

Asia-Pacific

Indian officials on Monday announced they arrested over 200 suspected terror operatives across 14 states in a crackdown on a network allegedly backed by Pakistan’s intelligence agency, Inter-Services Intelligence (ISI). The operation targeting the Shahzad Bhatti Network (SBN) uncovered IEDs, grenades bearing Pakistan Ordnance Factory markings, pistols, ammunition and CCTV cameras allegedly used for surveillance. Indian authorities said the network was preparing “subversive” attacks around India’s Independence Day. New Delhi alleges SBN is a criminal-terror syndicate backed by ISI and run by Pakistan-based gangster Shahzad Bhatti, whose profile has grown this year as authorities uncovered Bhatti-linked recruitment and terror modules, as well as connections to the newly surfaced Tehreek-e-Taliban Hindustan (TTH).

The arrests come amid a sharp deterioration in India-Pakistan relations following the April 2025 Pahalgam terrorist attack and India’s subsequent Operation Sindoor. New Delhi has long accused Pakistan and ISI of supporting militant attacks in India, including by providing or facilitating weapons, training, and logistical support to groups such as Lashkar-e-Taiba (LeT) and Jaish-e-Mohammed (JeM). Islamabad similarly accuses New Delhi of supporting militant activity inside Pakistan and denies India’s allegations. Indian authorities allege Pakistan-based actors are using social media to recruit Indian nationals for propaganda, reconnaissance, weapons trafficking and attacks, potentially allowing Pakistani handlers to expand their reach inside India while maintaining distance from operations. India’s zero-tolerance policy toward terrorism and stronger willingness to respond militarily raise the risk that future attacks could trigger renewed conflict between the neighbors.

Americas

Andrés Manuel López Beltrán, the son of Mexico’s former president, has said that the US has canceled his visa. The latest point of tension between the US and Mexico involves the son of Andrés Manuel López Obrador, the founder of the leftist Morena party and political mentor of current President Claudia Sheinbaum. López Beltrán, a prominent figure in Mexican politics, has been accused by his political opponents of corruption. The Trump administration has been more frequently using visa cancellations to pursue diplomatic goals in Latin America. In 2025, the US revoked the visa of former Colombian President Gustavo Petro, Colombia’s first left-wing president. More recently, the US revoked the visa of Brazil’s ambassador to the US over Brazil’s delayed approval of the Trump administration’s nominee for US ambassador to Brazil.

Amid the ongoing political tensions, Washington and Mexico City have continued to negotiate over security and trade. Over the weekend, US officials celebrated US-Mexico security cooperation with the announcement of a drone purchase agreement, which will allow Mexico to procure US drones. Sheinbaum has also allowed the planned attendance of her Security Secretary Omar García Harfuch at the DEA conference in Argentina to go forward. The US and Mexico are also continuing to negotiate on trade after the deadline to automatically renew USMCA passed without an agreement, with further negotiations expected in September.

Read More: New York Times [paywall], El Pais [paywall], Reuters [paywall]

Africa

Zambia’s incumbent President Hakainde Hichilema won reelection amid reports of a crackdown on opposition candidates. The presidential election began on August 13, with Brian Mundubile emerging as Hichilema’s most prominent challenger. Mundubile has criticized the ruling party over the country’s continued high cost of living. Vote counting was temporarily suspended over the weekend, reportedly due to violence against poll workers in several districts. On Sunday, however, several of Mundubile’s associates were arrested, with the Zambian government alleging that they were plotting an insurrection. Mundubile is currently in hiding.

Hichilema has pledged to deliver further economic growth following policy successes during his first term that contributed to Zambia’s debt recovery. His largely successful post-COVID debt restructuring, combined with the prospect of stronger growth in the mineral-rich nation, has helped attract foreign investment. However, signs of democratic backsliding could increase the risk of future political instability, making Zambia’s economic outlook more uncertain.

Read More: BBC, Reuters [paywall], Reuters [paywall], The Conversation

Geoeconomics

China’s latest GDP and July activity figures continue to show a staggering, unbalanced economy. GDP expanded 4.3% year over year in the second quarter, down from 5% in the first and the slowest pace in more than three years, leaving first-half growth at 4.7%. Momentum weakened further in July: industrial output grew 4.5%, compared with 5.3% in June, while retail sales increased just 0.6% and the services production index rose 4.3%. Exports remained the principal counterweight, rising 17.8% in yuan terms, while high-tech manufacturing output increased 13.8% over the first seven months. The economy is still producing competitively for global markets but generating insufficient demand at home.

A 6.7% decline in fixed-asset investment during the first seven months is the most worrying sign for the CCP. Property investment fell 19.2%, while infrastructure and manufacturing investment declined 3.6% and 1.7%, respectively. Private investment contracted 9.4%, even as investment in favored high-tech industries grew 5%. Housing demand remains weak: new-home sales by floor area fell 11.8%, prices declined 3.2% from a year earlier, and only 17 of 70 surveyed cities recorded monthly price gains in July. Falling property values weaken household confidence and consumption, while declining sales reduce developers’ ability to complete projects. Lower land-sale revenue also constrains local governments that previously financed infrastructure through the property boom. As households stop channeling savings into housing, China is left with excess domestic savings and production capacity that flows into exports, deepening trade surpluses and friction with major trading partners.

Read More: National Bureau of Statistics, Reuters [paywall], Financial Times [paywall], PIIE

Disruptive Technology

ICYMI: Anthropic will not release its so-called “Model 2,” an internal model more powerful than Mythos, for the foreseeable future. According to Anthropic, Model 2 performs better than Mythos 5 on some tasks, but is not a huge shift in capability. Nonetheless, in their latest safety disclosure, Anthropic acknowledged that there is increased uncertainty about the capability of powerful AI models to become misaligned with their assigned tasks in a way that increases the risk of harm. However, Anthropic believes the risk remains low, and its current safeguards and oversight mechanisms should prevent most misalignment. The hesitation to put the release of “Model 2” on a clear timeline could reflect increased deference to AI safety oversight or the review mechanism through the Department of Commerce.

Read More: Anthropic [pdf], Axios

Energy

London is assessing how to move forward on the future of oil and gas in the North Sea. The energy secretary for Andy Burnham’s new government is to approve continued development of the Rosebank oilfield and the Jackdaw gas project in the North Sea. Burnham is trying to walk a line on how to approach Britain’s oil and gas industry. He intends to hold to Labour’s 2024 commitment to no longer issue oil and gas licenses for new fields in the North Sea. However, both projects already have licenses, and Burnham has adopted a more positive approach to the traditional energy industry in the UK.

Oil and gas production has become a major issue in the UK. Concerns around energy security and economic growth have turned the future of the country’s oil and gas industry into a significant political flashpoint. However, there has also been pushback from climate groups and from those who claim the projects do not meaningfully contribute to UK energy due to a lack of domestic refining capacity.

Burnham’s approach is a departure from Kier Starmer’s government. Starmer had argued that he did not have legal authority to handle issues regarding North Sea oil and gas. He instead left the question to his energy secretary, Ed Miliband, who was reportedly strongly opposed to oil and gas production in the North Sea.

Read More: Financial Times [paywall], The Guardian, Oilprice.com

Transnational Crime and Corruption

FBI data shows violent crime in the US dropping almost 10 percent from 2024 to 2025. The decline is most pronounced in urban areas, where cities with between 500,000 and 1 million people saw an over 15% decline in violent crime. The declines were the largest since data collection began in 1936.

The decline follows both short-term and long-term trends. Crime spiked in 2020 and 2021 amid the COVID-19 pandemic and nationwide protests but began declining every year since 2022. Wide varieties of crime peaked in the early 1990s after rates nearly quadrupled between 1960 and 1991. Since 1993, violent crime rates have fallen by over 75%.

Read More: Federal Bureau of Investigation, New York Times [paywall]

Defense

German drone company Helsing is looking to break into the Japanese market. Helsing is moving to finish a deal with Japan’s army to sell it unmanned systems, specifically Helsing’s HX-2 strike drone. The agreement is being facilitated by the Japanese firm Rakuten. Field testing of the drones will take place until the end of September. The Munich-based company, which started in AI before expanding to work on unmanned strike drones, also works with Ukraine and other European governments.

Both Germany and Japan are expanding and modernizing their militaries and defense industries. Berlin has surged its defense spending in recent years, and German companies have landed major export agreements such as a recent deal with Canada to provide submarines. Helsing has also partnered with Kyiv to provide drones for Ukraine, and it is one of Europe’s largest unicorns. Tokyo has also expanded defense spending and loosened regulations governing arms exports, which has in turn attracted interest from global defense firms.

Berlin and Japan are developing their defense relationship. German chancellor Friedrich Merz is scheduled to make his first visit to Japan in October to discuss defense technology and Indo-Pacific security with Japanese Prime Minister Sanae Takaichi.

Read More: Nikkei Asia [paywall], Reuters [paywall]