Budget '25: the End of the Zeitenwende?
Monday 19th August
Reports over the weekend that Berlin will be ‘ending’ its current regime of financial and military support for Ukraine as part of a cost-saving drive have unleashed a wave of fury and concern against Germany’s governing ‘traffic light’ coalition. Media and politicians alike are describing the move, believed to be agreed by Chancellor Olaf Scholz (SPD) and pushed through on the initiative of Finance Minister Christian Lindner (FDP) in some cases in near-apocalyptic terms. Kyiv’s ambassador to Berlin has suggested these proposals would be “fatal” for Ukraine, while some are declaring the coalition dead. In today’s post I try to make some sense of what’s happened.
No more new money for Ukraine
The news, which has sparked a furious response in Berlin and internationally, was first reported by Peter Carstens and Konrad Schuller in yesterday’s Frankfurter Allgemeine Sonntagszeitung, the FAZ’s Sunday edition.
According to the FAS, Berlin now seems set on a major rollback of its financial and military support for Ukraine. Total aid is set to be halved by next year, before reducing to a tenth of the current amount in 2027. But the halt has reportedly already been implemented: only money which has already been allocated will be spent on aid. On 5th August Christian Lindner wrote a letter to Annelena Baerbock (Green) and Boris Pistorius (SPD), the Foreign and Defence Ministers who have chafed almost constantly against their FDP colleague’s austerity drives, informing the pair that
“"new measures" may only be taken if "funding is secured" in the budgets for this and the coming years. This is followed by the terse sentence: "Please ensure that the upper limits are adhered to."”
This has had an immediate impact on the situation on the ground in Ukraine. According to the SZ:
“One official reports that the delivery of another Iris-T air defence system worth 300 million has already been put on hold — another country wanted cancel their order of this system at short notice in favour of Ukraine. However, this would have been a new project for which no additional funds are currently available.”
The Finance Ministry has defended itself by saying that state funding would be replaced by the proposal (recently agreed by the G7) to appropriate the interest from seized Russian central bank assets, estimated at $50bn (€45bn) annually — which amounts to about half of the total international support given to Ukraine so far this year. But there are major doubts as to whether this is actually feasible due to legal obstacles, as well as its implications for further ‘weaponisation’ of the global financial system.
“A fatal signal"
The reaction has been nothing short of apoplectic in many outlets. Some are declaring the ‘traffic light’ government’s days numbered, as today’s top story in the SZ does (“the traffic lights are not on anymore”). See also this column by Gerald Braunberger on the front page of today’s FAZ (“The Ampel is at an end”.)
Kyiv’s ambassador to Berlin, Oleksii Makeiev, as not pulled his punches. In an interview with the broadcaster ARD’s Tagesschau, he said that
“Germany is our most important partner in Europe, and it would in these conditions of course be fatal (for Germany) to stop supporting Ukraine.” Sharing a snippet of the interview in a tweet, he added that “Saving on military aid for Ukraine means jeopardising Europe's security, which would be fatal and must be prevented. The means are there, it is a question of political will.”
There has been no shortage of sharp words for the government in the last 48 hours. Many share the sentiment, perhaps expressed best by former SPD foreign minister Michael Roth in today’s Tagesspiegel, that Ukraine is being sacrificed on the “altar of the debt brake”. As a result, the vitriol has been especially concentrated on the FDP Finance Minister, Christian Lindner. The most eye-catching example of this by far appeared yesterday in Wirtschaftswoche. Dieter Schnaas, one of the business magazine’s editors, has really gone for Lindner and other ‘light liberals’, who have “clung to the debt brake (and the key texts of ‘ordoliberalism’) like a priest at his Bible in the storm of rampant godlessness: in the name of Hayek, Eucken and St Erhard. Amen.”
“That's enough, Christian Lindner. You're not a Chancellor of the Exchequer, you're a huckster. Not a finance minister, but an economic junk peddler. You could also say: a brake on growth. An investment deterrent. A security risk. Your task as a liberal finance minister in a traffic light coalition is to stop the expansion of social democratic care programmes and curb the missionary zeal of green transformation enthusiasts - not to deny the Germans their future.”
He also quotes Moritz Schularick, President of the Kiel Institute for the Global Economy (IfW), who says that the debt brake is “becoming a risk to national security”.
But beyond the opening salvo of zingers and snappy quotes, Schnaas is interesting on what he thinks should come after what he sees as the last stand of the Ordoliberals.
“Nobody is aiming for Italian or French debt ratios. It's just a matter of clearing an investment backlog, building financial bridges towards a climate-neutral economy and calculating with greatly increased security costs - with money that we have thought we could save for far too long. […] Certainly, for heaven's sake, there is no need for an "entrepreneurial state" (à la Mariana Mazzucato)1, freed from all money worries (à la Stephanie Kelton), i.e. a kind of economic land of milk and honey for well-meaning control freaks that many greens and social democrats (and libertarian authoritarians in Silicon Valley) dream of.
“However, we need frameworks and limits, control and coordination in order to be able to manage the urgent transformation towards a climate-neutral economy, minimise our dependence on systemic competitors - and guarantee our own security. We are dealing with an urgent, precautionary design task - and not (more) market-based developments with administrative tasks that are as after-the-fact as possible.”
This is part of a wider trend towards a reformist, ‘securitising’ outlook on public debt and spending/investment I have noticed in Germany’s business-orientated outlets in recent months. Handelsblatt has definitely led the way on this— see this post from a while back on their editorial shift of late (especially compared to the FAZ, though it too seems to also be heading in this direction).
Some observers, such as the philosopher John Gray, have recently suggested that Germany is on course for a policy of ‘appeasement’ towards Russia. Given this latest sense of capitulation, that assessment may now seem persuasive. I am not so sure. I think, perhaps optimistically, Schnaas is right in saying that this may be a last gasp of the old Sparpolitik, and that Germany’s next government, likely led by the CDU, will produce a reformed version of Germany’s debt regime. The question is whether this will happen in time to save Ukraine from being kaputtgespart.
See also
Handelsblatt: chip factories become a job engine in "Silicon Saxony".
Report on the new facility being built by TSMC (the giatn Taiwanese chipmaker) in the eastern state of Saxony, due to deliver 6,000 jobs and support around 18,000 secondary jobs.
It’s interesting that Schnaas implicitly rejects Mazzucato, Director of the Institute for Innovation and Public Purpose at UCL, as she seems to have gained serious traction within the ‘right’ of the UK Labour party (e.g. the new Labour Growth Group in Parliament) and the broader UK centre-left.