Stand in front of a “Leopard” main battle tank as the German Defense Minister (not in the picture) visits the Bundeswehr's digitalization unit for land-based operations in Muenster, northwest Germany, on July 11, 2022. (Photo by Axel Heimken / AFP) (Photo by AXEL HEIMKEN/AFP via Getty Images)AFP via Getty Images
Germany will finally reach its military spending target. However, this comes amid a brutal recession that isn't expected to end anytime soon.
In short, this means the country will be strapped for cash, experts say.
Chancellor Olaf Scholz says he will receive defense spending that is at least as high as the commitments from NATO membership: at least 2% of GDP.
That seems reasonable, but the country did not do that last year or the year before, even though Ukraine, the European Union's neighbor, has been defending itself for two years.
That in itself is bad. But the truth is that Germany has not met its defense spending target since 1990, according to data from the website TradingEconomics. The country almost reached the target in 1991, when the cost was 1.99783% of GDP. Since then, the government has fallen well short of that target every year.
According to a recent report from the RAND think tank, achieving the goal will be difficult. The situation is explained as follows:
- “These are bold statements and Germany has clearly made significant progress in supporting Ukraine.” But whether it can afford real transformation is another question. “While money and weapons have finally flowed into Ukraine, replenishing an exhausted Bundeswehr has proven more difficult.”
The Bundeswehr is the name for all of Germany's armed forces.
Scholz has apparently promised 100 billion euros in additional funding. However, according to the RAND report, the country would need three times this amount, says the Bundeswehr chief.
And according to the RAND paper, the likelihood of either happening is fading quickly; and stated as follows:
- “Spending commitments are already being withdrawn: The federal government initially promised to set up a new special fund in the budget for the purchase of weapons for Ukraine, but in view of the recent crisis, these weapons must now be made available through the “100 billion fund for the modernization of the Bundeswehr”. My focus.
These military budget problems are putting Germany in a difficult political position. First, it is the largest and richest economy in Europe. But at the same time, it is a long-standing bet on buying cheap natural gas from Russia, triggered in the wake of Russia's invasion of Ukraine.
Since then, the German economy has sputtered like a car constantly stalling as higher energy costs slow Germany's huge industrial base. Last year, the first quarter saw 0.1% growth, which was the highest performance of the year. That was followed by six months of no growth, and the most recent quarter saw a decline of 0.3%, according to TradingEconomics.
Worse, TradingEconomics predicts even more malaise this year. Growth of just 0.1% is expected by the third quarter of this year.
In short, this means the government will have to make difficult budgetary decisions.
Then there is the political kick in the head that will likely come from the European Central Bank, the euro zone's version of the Fed. According to a recent report from British consultancy Capital Economics, the country is likely to delay any interest rate cuts until it is absolutely 100% certain that the inflation monster has been tamed. The situation is explained as follows:
- “The recent increase in price pressure surveys and the strong German wage data released this week suggest that there is still not enough evidence to convince the ECB that underlying inflation pressures are easing quickly enough.” This will make policymakers wary of cutting rates too early.”
However, there is a catch. If these borrowing costs do not fall, Germany and the rest of the Eurozone economies will likely suffer from stagflation – economic stagnation and inflation.
The question for the world is: How will crushing inflation help Germany strengthen its military to defend Europe from the looming threat of Russia?
Olaf Scholz poses for photos after recording a televised address to the nation following the Russian military invasion of Ukraine on February 24, 2022 in Berlin. Russia launched a large-scale attack on Ukraine, with explosions reported in several cities and well outside the restive eastern areas controlled by Russian-backed rebels. (Photo by Hannibal Hanschke – Pool/Getty Images)Getty ImagesFollow me up Twitter or LinkedIn. Checkout my website or some of my other work here.
Simon Constable | Author | broadcaster | Journalist | Commentator | Speaker. Author of the Wall Street Journal's Financial Flashback column. Fellow at the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise. Former General Motors Treasurer's Office employee. MA (Hons) University of St Andrews, Scotland. Co-author of the award-winning book The WSJ Guide to the 50 Economic Indicators that Really Matter. He has written for Middle East Eye, TheStreet.com, The South China Morning Post, Barron's, Time Magazine, MarketWatch and CityWire.
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