The German defence ministry has decided to terminate the F126 frigate programme, a €12.8bn project to build six large multi-role warships for the German Navy, according to ministry sources cited by multiple German media outlets. The cancellation, which has not yet been officially announced, immediately wiped nearly a fifth off the share price of Rheinmetall, the Düsseldorf-based arms manufacturer that had been poised to take over the troubled contract from the Dutch lead contractor Damen Naval. The Stoxx Europe 600 defence and aerospace sub-index fell 1.15%, with Italy’s Leonardo losing 4.9% and Sweden’s Saab 2.8%, while shares in ThyssenKrupp Marine Systems (TKMS), the German shipbuilder set to supply an alternative vessel, rose as much as 14.8%.

Defence ministry officials in Berlin attribute the decision to persistent technical, organisational and financial difficulties that have beset the programme since its launch in 2020. The F126, designed as a 166-metre, 10,000-tonne multi-purpose frigate capable of long-duration deployments, was to be the largest German warship built since the Second World War. Instead, the ministry now plans to procure eight smaller MEKO A-200 frigates from TKMS, a move described by one ministry source as “faster, cheaper and better suited to the current needs of the navy and NATO”. The Green party defence spokesman Robin Wagner welcomed the decision as “long overdue”, calling the F126 “a bottomless pit for taxpayers”, while the ministry itself has acknowledged that roughly €2.3bn already spent on the project will be lost.

The F126 collapse follows the recent failure of the Franco-German-Spanish FCAS next-generation combat aircraft project, meaning German public budgets have absorbed around €4bn in sunk costs from cancelled major defence programmes within a single month. The Bundesrechnungshof, Germany’s federal audit office, and economists such as Lars Feld have warned that the constitutional exemption of defence spending from the debt brake, introduced to accelerate rearmament after Russia’s full-scale invasion of Ukraine, is encouraging uneconomic procurement decisions. The FAZ newspaper, in an editorial, described the sequence of failed projects as “luxurious failure”, noting that the ministry can simply reorder a different ship type at one-and-a-half times the original price thanks to effectively unlimited borrowing capacity.

The market impact was cushioned in part by a third consecutive daily decline in oil prices, as provisional US-Iran peace arrangements eased supply concerns in the Strait of Hormuz, pushing Brent crude below $76 a barrel. This helped the CAC 40 in Paris and the FTSE 100 in London close modestly higher, while Frankfurt’s DAX fell 0.71%, weighed down by the defence rout. The German Ifo business climate index edged up to 85.6 points in June, a second consecutive rise that ING analysts said signalled a gradual return of optimism among German companies, though they cautioned that GDP could contract again in the second quarter. The defence ministry is expected to formalise the F126 cancellation and present the expanded MEKO A-200 order to the Bundestag budget committee in the coming weeks.