Early in the Ukraine War with Russia, Poland sent 200 T-72 battle tanks to Ukraine. Most other NATO members joined in, sending tanks, missiles, guns, supplies and technology. Germany sent nothing and have continued to avoid helping Ukraine as much as possible while the war dragged on for a year. Germany seems to have hoped for a quick Russian victory leading to a quick return to the pre-war state of affairs. That’s not likely. Even early on, the war looked like a slow, long slog. Reluctantly, this month, Germany promised to send 18 Leopard tanks to Ukraine, requesting, as replacements, mothballed tanks from Switzerland.
Germany is currently the 4th largest economy in the world, just behind Japan, and ahead of India (for now). They also have the 3rd oldest population. Their place as the leading economic and political power in Europe rests on a close relationship with Russia that is fading. They import Russian raw materials and use them to manufacture products for export.
Before the war, Germany imported most of its oil and 65% of its natural gas from Russia. Much of the gas came via two Nord Stream direct pipelines, that bypassed the rest of Europe. Well into the war, while the rest of Europe disengaged, Germany is still buying its supplies from Russia and funneling it west: steel, aluminum, titanium, ammonia and platinum. Some Russian natural gas too, by way of Poland. The German economy is based on turning these materials into cars, high tech machines, and chemicals for export to the US, the EU, and China. Because of their old population and generous benefits, Germany manufactures using cheap labor from low wage, EU nations and abroad. These transient workers do not get citizenship or retirement benefits, enriching Germany at the expense of their neighbors. The current war presents Germany with more potential workers, Ukrainian refugees, but far fewer Russian supplies. As a result, the German economy is shrinking, and so far the Ukrainian refugees are mostly left unemployed. German industrial production is down by about 4% this year leaving its GPD at about $4T/year, about where it was in 2018. The US economy and the rest of Europe has grown.
Emblematic of Germany’s peculiar ties with Russia is Germany’s ex-chancellor, Gerhard Schroeder, shown at left with Putin. Schroder remains a leader in the ruling German SDP party, the party of Ms Merkel and of the current chancellor, and also the chairman of the board for Nord Stream AG and of Rosneft, (Russian aerospace). He also sits on the board for Gasprom (Russia’s energy conglomerate). He’s also on the board of Rothschild, a prominent International bank, and is chairman of the board of the Hannover 96 football club.
These attachments are not problematic, as the rest of the EU, along with the rest of the developed world, has come to hate Putin and Russia; they’re not too fond of Rothchild either. Europe is unlikely to tolerate Germany’s Russian imports, including titanium (65% of Airbus titanium comes from Russia) or natural gas. Germany has asked for a titanium exception, and been denied. What’s more, three of the four Nord Stream pipelines have been blown up (by whom?) forcing Germany to buy natural gas from its NATO allies: Norway, Britain, France Holland, and the US. Gas purchases are expensive for Germany but helps its NATO neighbors. Germany has asked to be subsidized for this (unlikely, imho). It has also restarted old coal-burning power plants, an insult to the EU given how hard Germany pushed them on climate change. Russia is barely harmed since it can export to the other BRICS nations: China, India, Iran, Brazil.
Germany is now near recession. Much of Europe is close, but Germany is worse-off since they are buying from the rest.
German inflation averaged 8.5% last year (9.2% in January). That is not hyperinflation, but a shock for a country that’s averaged 1% inflation over the last 25 years. US inflation, by comparison was 7.5% last year — due to excess spending by the Democrats (imho) via the so- called “inflation reduction act,” — but at least the US economy grew, along with the US population. The German population shrank. It seems to me that, without Russian supplies, Germany will continue to slip versus the world and versus the EU.
The German population is among the oldest in the world, with among the highest percent over 65, see map. The death rate has spiked 25% over the last 6 months, in part because of COVID, but also because of alcoholism, drugs, pollution, vaccines, or depression. The rest of the EU saw similar spikes, but earlier in the pandemic. Sweden has largely avoided these problems – they treated COVID differently.
Germany has been propping up its inefficient industries with low cost loans. The hope is that things will go back to normal soon with Russia, and that the companies will make good. Until then, the loans discourage competition and modernization, and it becomes ever more likely that these inefficient German companies will default. If the do, they could take down their lenders. This happened in Japan in the 90s, and with Lehman Bros. in the US. Default seems likely for many Chinese companies too.
It becomes ever more likely that these inefficient German companies will default.
Even if the war ended tomorrow, it’s not clear that Germany could go back to its pre-war status. The blown Nord Stream pipelines will need a year or more to repair. And may never restart, as sanctions might remain long after the fighting ends, as with Cuba or North Korea. Russia seems to have recognized this, and is selling more titanium, gas, oil, aluminum, and food to Iran, India, and China. Iran, in return, has become a major supplier of drones and consumer goods to Russia. In the last two years, the Iranian GDP has doubled to about $2T/year, nearly half the size of Germany’s. Iran is growing while Germany shrinks.
Russia’s trade with India and China has grown, via their “dark fleet,” and the Trans-Iranian railroad that would allow easy shipments from Russia to India and China via the port of Tehran. The first direct shipment of this sort was completed in July 2022– Caspian Sea containers to an Iranian train to ship to India and China. If the war goes on, Iran, India, and China will benefit at the expense of Germany, it seems. India, in particular. India’s economy is already approaching the size of Germany’s, and will probably pass it with the help of Russia’s energy and raw materials. Meanwhile, Germany is left with an aging population and aging industries; with few suppliers, and no obvious competitive advantages. The rest of Europe is almost as badly positioned, but they have better demographics, and can still sell to Germany. As for Ukraine, it seems to be doing well, despite the war — or because of it. They still grow and export food and energy. They are holding their own in the war, for now despite destruction in the east. Ukraine get money and technical aide, and might come out stronger from the war, as happened with South Korea and Vietnam. It is hard to see how Germany comes out well. This, at least, is how I see things today.
Robert Buxbaum, March 8, 2023.