Budget Constraints Impact European Defense Stocks Amid German Military Aid Controversy

European defense stocks dropped after reports suggested Germany's finance ministry would not approve additional Ukraine military aid due to budget constraints. Rheinmetall and other defense manufacturers saw noticeable declines. The German government reaffirmed its support for Ukraine and plans to use frozen Russian assets for future aid.

European defense stocks faced a downturn on Monday following reports of Germany's finance ministry halting new military aid applications for Ukraine due to budgetary limits. Shares in Rheinmetall dropped 2%, making it the significant loser in the German DAX index, while Hensoldt and Renk saw even steeper falls.

Despite the unsettling news, a German government spokesperson reiterated at a Monday press conference their commitment to support Ukraine for 'as long as necessary.' However, the spokesperson acknowledged constraints, emphasizing that future financial aid could draw from frozen Russian assets.

The fiscal challenges were likely a central topic in the prolonged budget negotiations among Germany's ruling coalition, which had to balance climate, social, and infrastructure funding with constitutional debt limits. The coalition recently agreed on a draft budget of 481 billion euros but must reduce its deficit target further.

(With inputs from agencies.)