Germany’s Latest Challenge To Its Economy: Boosting Military Spending

Finally, Germany its going to hit its military spending target. But it’s doing so amid a brutal recession that isn’t expected to end any time soon.

In short, it means that the country will be cash strapped, experts say.

German Chancellor Olaf Scholz says he’ll get defense spending at least as high as the obligation it has from being a NATO member: At least 2% of GDP.

That seems reasonable but the country hasn’t done that last year or the year before, even though Ukraine, which neighbors the European Union has been defending itself for the past two years.

That’s bad on tis own. But the truth is Germany hasn’t hit its defense spending target since 1990, according to data collated by the TradingEconomics website. The country nearly hit the target in 1991 when the cost registered 1.99783% of GDP. Since then the government has fallen far short of that goal every year.

According to a recent report from the RAND think tank — hitting the goal will be tricky. It states the situation as follows:

  • “These are bold declarations, and clearly Germany has made significant progress supporting Ukraine. But whether it can afford to truly transform itself is another question. While money and arms have finally flowed to Ukraine, replenishing a depleted Bundeswehr has proved more challenging.”

The Bundeswehr is the name for all of Germany’s armed forces.

Scholz has apparently promised 100 billion euros ($108 billion) additional funding. However the Bundeswehr chief says the country needs three times that amount, according to the RAND report.

And according to the RAND paper, the likelihood of doing either is fast slipping away; and stated as follows:

  • Already spending pledges are being rolled back: the federal government initially promised to create a new special fund in the budget to buy weapons for Ukraine, but in light of the recent crisis these arms must now be provided through the €100bn fund intended to modernise the Bundeswehr.” My emphasis.

These budgetary problems for the military put Germany in a politically tight spot. First, it’s the largest and richest economy in Europe. But at the same time it’s long-time bet on buying cheap natural gas from Russia back fired on the back of Russia’s invasion of Ukraine.

Since then the German economy has spluttered like a car that’s continuously stalling as higher energy costs put the brakes on Germany’s vast industrial base. Last year the first quarter registered growth of 0.1%, and that was the highest performance for the year. That was followed by six months of zero growth and then the last quarter saw a contraction of 0.3%, according the TradingEconomics.

Worse still, TradingEconomics forecasts more malaise this year. Growth of a mere 0.1% is expected to arrive by the third quarter of this year.

In short, what this means is that the government is going to have to make tough budgetary decisions.

Then there is the political kick int he head that seems likely to come from he European Central Bank, the eurozone’s version of the Fed. It looks likely to postpone any interest rate cuts until it is absolutely 100% sure that the inflation beast has been tamed, according to a recent report from UK consulting company Capital Economics. It states the situation as follows:

  • “The recent increase in surveys of price pressures and the strong German wage figures released this week suggest there is still not enough evidence to convince the ECB that underlying inflationary pressures are easing fast enough. This will keep policymakers cautious about cutting rates too soon.”

However, there’s the rub. If those borrowing costs don’t go down, its likely Germany, and the rest of the eurozone economies will suffer stagflation — economic stagnation and inflation.

The question for the world is how will crushing inflation help Germany beef up its military to defend Europe from the looming threat of Russia?

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