Germany Proves It’s Serious About Defense Spending
No mainstream politician seems to think cutting the military budget is the way out of a fiscal crunch.
A question for the ages will be whether German Chancellor Olaf Scholz truly understood what he was doing in February 2022 when, a few days after Russia invaded Ukraine, he announced that his country would transform its attitude toward defense. Yet here we are, more than two years later, with Mr. Scholz’s turning point gyrating in all sorts of interesting—and, mirabile dictu, positive—ways.
The latest example comes via yet another debate on defense spending. When Mr. Scholz proclaimed the turning point (the German word is Zeitenwende), the most important concrete action he proposed was the creation of a €100 billion special procurement fund for Germany’s military. This was the mechanism by which Germany finally would satisfy the North Atlantic Treaty Organization’s expectation that each member state devote at least 2% of gross domestic product to defense expenditure each year, and upgrade its military equipment to be an effective ally.
Money is how governments show they’re serious, and this special fund is demonstrating to German allies that Berlin is committing to its defense plans. Mr. Scholz secured a multiparty agreement for a constitutional amendment authorizing the off-balance-sheet fund, exempting this expenditure from Germany’s rules on government fiscal balance and thereby insulating it from guns-vs.-butter horse trading. A kaleidoscope of political alliances have seen off attempts by one party or another to fritter away the defense fund by devoting the money to climate-related, diplomatic or other ephemeral causes in the name of “national security.”
Inevitably there are a few caveats. Mr. Scholz’s administration has used the special fund in part to support military aid to Ukraine in that country’s struggle to fend off the Russian invasion that prompted the Zeitenwende. It’s a fair criticism that this cash was supposed to boost Germany’s military rather than someone else’s. But the Ukraine war constitutes the most urgent threat to European security in decades, so better that Germany contribute by any means necessary than not at all.
The bigger problem is that the special fund is running out. It was intended to last only a few years, a down payment on a permanently beefier German military. On its current trajectory, the fund likely will be exhausted in 2027, at which point the military, and military procurement, will require funding from the government’s on-balance-sheet budget.
A sign of Berlin’s newfound seriousness about defense is that politicians are fighting about this now rather than waiting until the special fund is actually gone. Germany’s political class has discovered, belatedly, that military procurement takes time. Berlin’s pre-2022 habit of trying to boost defense spending on an ad hoc basis with any cash left over at the end of the annual budget cycle precluded predictable longer-term investment. To avoid relapsing into those bad habits, politicians must think now about where the money will come from for future long-term investments.
Expect this process to be messy. Recent estimates of the size of the post-2027 budget gap range from a low of €20 billion to a high of, well, the sky’s the limit. It will depend partly on the size of the German economy, and also on whether Berlin chooses to treat NATO’s 2% target as a ceiling or a floor. Defense Minister Boris Pistorius suggests defense spending may need to rise to 3.5% of GDP.
These debates are happening while the government faces other enormous fiscal demands, not least from the net-zero energy transition the Greens in Mr. Scholz’s coalition insist on foisting on the country. The country’s highest constitutional court ruled last year that the astronomical subsidies necessary to fund this project must be paid for on-balance-sheet, a decision that already triggered one political crisis and is likely to trigger more.
Most military funding proposals so far are wholly inadequate to the scale of the challenge. Finance Minister Christian Lindner of the free-market Free Democratic Party last week suggested that some esoteric maneuvers concerning debt left over from pandemic spending programs might free up around €9 billion a year for defense, as long as social spending doesn’t increase. Mr. Scholz’s Social Democrats and the Greens—stuck in an unwieldy coalition with each other and Mr. Lindner’s party—predictably objected.
Mr. Pistorius, a Social Democrat, this week warned that rearranging fiscal deck chairs won’t be enough and Berlin should suspend or modify its constitutional debt limit for defense expenditures, an idea Mr. Lindner has criticized. Waiting in the wings are the center-right Christian Democrats, who may be running the government after next year’s election, and it’s hard to say what their plan would be.
Berlin has work to do. But German allies can take heart. Startlingly, no mainstream politician or party in Germany now seems to think that spending less on defense is the way to resolve this looming fiscal debate. That really is a turning point for Germany, and for Europe.