Why does Germany subsidize the Dolphin-class submarines sold to Israel?

Question

Wikipedia article says -

On 6 July 2006, the Government of Germany decided to finance an advance to start the construction, about €170 million, planned for delivery in 2012.[31] The two submarines cost, overall, around €1.3 billion, of up to one-third was subsidized by Germany.[25] In 2010, both Israel and Germany denied having talks regarding the potential purchase of a sixth submarine.[32] Yet in 2011, Israel ordered a sixth Dolphin-class submarine, for which it was reported to pay the unsubsidized cost of US$1 billion.[33] However, in July 2011, during a meeting between German Defense Minister Thomas de Maizière and Israeli Prime Minister Binyamin Netanyahu, and Defense Minister Ehud Barak, an agreement was reached to subsidize €135 million of the US$500–700 million cost of the sixth submarine.

Why does Germany subsidize the Dolphin-class submarines sold to Israel?

Answer 1

One reason is the German historical responsibility towards Jews, which plays important role in German-Israeli relations.

Another reason (as already pointed in the other answers) is that in this way Germany is essentially subsidizing its own industry from the government budget - it is a kind of inexplicit economic stimulus. Note that this is not unlike the American financial aid to Israel, which is generally supposed to be used for buying American-made weapons.

In other words, it is good for German public relations and good for German economy.

Update
I was asked in the comments to expand about German historical responsibility towards Jewish people and how this affects the relationships with Israel.

The planned genocide of Jewish people committed by Nazi Germany was an unprecedented crime - not only in terms of numbers, but also because it was widely publicized, affecting German international standing as a country and as a nation. Moreover, the gravity of these events is widely recognized by Germans themselves. This resulted in German efforts to rehabilitate their nation, which have been moving along several tracks:

• Reparations to survivors and their families, as well as restoration of property and citizenship rights (e.g., children and grandchildren of holocaust survivors or those who were forced to flee Germany in Nazi era have right to German citizenship.)
• Fostering relationships between two peoples - e.g., via academic exchanges and joint research projects.
• Commitment to survival and economic well-being of Jewish people. In this respect Israel plays a special role, not only as a home to many holocaust survivors, but also as the state whose mission is protecting Jewish people and anyone affected by antisemitism. Supplying military systems to Israel, as well as the extended economic cooperation serve these goals.

These realities have been recognized and restated by many German governments, and notably by those led by Angela Merkel, who visited Israel on many occasions, among other things addressing the Knesset and leading joint German-Israeli cabinet meetings.

Update 13/07/2022
As an example one could cite the message by Steffen Siebert, the newly appointed German ambassador to Israel:

In the two-minute video, Seibert spoke in Hebrew and English. He said that Germany and Israel today shared a special friendship after the “monstrous crimes of the Shoah”. “We have learned the lessons of our history,” Seibert asserted. “One of the most important lessons is to stand by the State of Israel and be committed to its security.”

Answer 2

Germany defines itself as an ally of Israel. This support is not unconditional or unlimited, but it goes beyond many other EU members.

The reasons for this are manifold. They include genuine revulsion and remorse about the genocide by German Nazis, a wish to be seen as repentant to (re)gain international acceptance, membership in the Western political grouping, and opposition to some Arab and Iranian regimes.

Answer 3

According a to a leaked US diplomatic cable (also discussed in Der Spiegel) the Israeli side apparently requested that kind of subsidy/payment from Germany (on submarines specifically) as closure on the agreed-upon but unpaid portion of the German reparations for the Holocaust under a 1953 bilateral agreement. The unpaid portion was apparently due by East Germany, but became a liability of Germany after reunification. The cable doesn't record what the German position/response might have been.

Answer 4

Additionally to any moral obligation of Germany towards Israel to financially support them, one should not forget that there was also considerable self-interest involved.

This submarine production order kept jobs and know-how in a critical industry in Germany. Part of the subsidies will have returned in form of increased taxes paid and the manufacturer (HDW, Kiel) did change ownership several times in these years, so more orders may have been very welcome. A higher volume of submarine production surely creates synergies and also improves availability and quality of submarines produced for the German military.

In that way one can see it as subsidization of the Israel military by German taxpayers but with a side effect of the Israel taxpayers subsidizing the German weapons industry too.