Germany’s triple shift: A major change for Europe

17 March 2022

The conflict in Ukraine has triggered a threefold shift in Germany: military, energy and fiscal. This dramatic political reversal will have major implications for Europe. 24 February 2022, the day Russian troops enter Ukraine, will mark an epochal change for Germany.
Until now, and since the end of the Second World War, the country had anchored itself to a triple pivot: a weak military pivot under the American umbrella, a powerful economic pivot based on its fabric of medium- and large-sized companies, geared towards exports and developing close links with Central Europe in industrial matters and with Russia for energy, and a prudent fiscal pivot focused on balancing public finances.
The sudden eruption of war a few hundred kilometres to the east of its eastern borders generated a spectacular threefold shift across the Rhine.

Firstly, a military shift. Long neglected, the Bundeswehr is regularly the subject of damning reports on the very low availability of its equipment. For example, a report from 2020 pointed out that only eight Tiger attack helicopters out of fifty-three were in flying condition and twelve NH90 transport helicopters out of ninety-nine.
Those days are over: the Bundeswehr will be strengthened and modernised. A budget of one hundred billion euros is planned immediately and the government has committed itself to devote 2% of the country’s GDP annually to its defence. In addition, the country is no longer forbidden to export arms to conflict zones, reversing a precept that dates back more than seventy years.
Then, an energy turn. Since the signing of the NordStream 1 gas pipeline project in 1997, which was commissioned in 2012, Germany has always had a close partnership with Russia for its energy supplies. This tropism was reinforced after the Fukushima accident and the commitment to abandon nuclear power, concomitant with the signing of the new Nordstream 2 pipeline project with Russia, potentially doubling the country’s Russian gas delivery capacity. In 2021, the country imported 55% of its gas needs from Russia.
February 24 was an electroshock. After hesitating, Olaf Scholz postponed ‘sine die’ the commissioning of NordStream 2. He also announced that he was considering postponing the closure of its last three nuclear reactors and the construction of two new terminals to import liquefied natural gas. A complete strategic update. Only a real revival of nuclear power seems to be excluded at this stage.
Finally, a fiscal turnaround. The election last autumn of a coalition that allowed the very rigorous FPD president Christian Lindner to take up the post of finance minister suggested a return to the strictest budgetary orthodoxy after the pandemic. His first statements were indeed along these lines. On 14 February, in an interview with the Handelsblatt, he again declared that it was important to ‘find a binding way to reduce debt ratios in Europe’.
Here too, a profound change seems to have taken place. A few days after the start of the Russian military operations, the German Chancellor made it clear that additional spending on security and energy supply could be set aside from budgetary commitments. And on 1 March, Vladis Dombrovskis, EU Commissioner for the Budget, suggested that the suspension of EU rules on both deficits and debts until December 2022 could be extended by a year. Even on inflation, abhorred by all, Christian Lindner acknowledged in the Bundestag on 28 February: “this may be the price we have to pay to confront Mr Putin”.
This German triple shift represents a major evolution for Europe. The military shift may allow the Old Continent to think of itself and to evolve at last as a fully-fledged power, and no longer only as an economic and legal entity. The energy turn is likely to create the industrial impetus necessary to achieve energy independence, which is essential to be fully sovereign in a world of tensions.
Finally, the fiscal turn, by freeing itself from the debt brake and tacitly allowing the ECB to temporarily tolerate more inflation, could generate a surplus of activity that will be very useful in mitigating the recessionary effects of the Ukrainian conflict.
For there is no point in denying it: the Euro-pean Economic Momentum, which is currently very dynamic, at 67 for the Eurozone according to our MMS Montpensier indicator, can only suffer from the surge in commodity prices and above all from the uncertainties and fears generated by “the return of tragedy”.

Eurozone economic momentum expected to weaken in the coming weeks


What is at stake today is the unity of Europe, around a Germany that has decided to finally assume its role as a strategic locomotive, and a France that is courageously turning towards the indispensable economic reforms.
economic reforms, which is at stake today. The European Central Bank, as of this week, will have a decisive role in supporting the European economy and of course the markets.