Zeitenwende in doubt as Berlin accused of 'fiddling' defence spending figures ++ VW considering first-ever plant closure in Germany
Wednesday 4th September
Good morning. Today’s post covers reaction to VW’s bombshell announcement that it is considering plant closures in Germany, and a report from the SZ which reveals the creative accountancy Berlin is engaging in to give the impression of progress on defence spending.
Worries in Wolfsburg
One of the top stories across this morning’s papers is the news that Volkswagen, the world’s second-largest car manufacturer, is considering the closure of plants in Germany as part of plans to reduce company overheads by some €10 billion by 2026.
The aim of VW’s ‘Performance Programme’, the Frankfurter Allgemeine Zeitung reports, is to increase return on sales to 6.5%, though most recent figures only reached 2.3%. The company is also still around €5bn short of its savings target.
Closures of sites on German soil would be a first in the company’s 90-year history, and the mere mention of the move will further spike fears of a wave of deindustrialisation. CDU leader Friedrich Merz has said that he sees the announcement as a symbol of how badly the German economy is doing in international comparison: “Germany is no longer competitive enough”, he told a CDU event in Osnabrück, and suggested that the company “may have made a mistake in focusing on EVs”.
In an opinion piece, the business paper Handelsblatt’s auto industry reporter Lazar Backovic says that “such a big bang has not been heard in Wolfsburg since the aftermath of the diesel scam. This case is different. But the impact is comparable.”
VW’s diesel scandal, interestingly, has been making headlines today too, as the company’s former Chief Executive Martin Winterkorn has been giving evidence to a trial on the case which began this week.
“Both cases”, Handelsblatt’s correspondent writes, “are about the decline of the largest German company in the largest German industry. A company that people on the street assume will always be there. Volkswagen - too big to fail, they say. And yet the VW giant has been reeling for quite some time. All those involved in Wolfsburg have been aware of this for some time, and the really surprising thing about (the announcement of) 2 September 2024 is therefore not so much the fact that a German VW plant is being publicly questioned for the first time. It is the fact that this day has not come much earlier.”
Important to say that this all remains entirely hypothetical. The company would not say how many jobs may be at risk, and public opinion, resistance by trade unions such as IG Metall, as well as action by the state government of Lower Saxony, which holds 20% of the voting rights in VW, backed by the federal government, will probably weaken management’s ability to do anything really drastic. But such stories strengthen the dominant narrative about the German economy at the moment as the ‘sick man of Europe’, suffering from its overexposure to now seemingly untenable global supply and value chains.
Zeitenwende in doubt: is Berlin cooking the books to meet 2% target?
An ‘exclusive’ report placed front-and-centre on the Süddeutsche Zeitung’s website this morning looks into the German government’s figures for defence spending.
As direct government spending on aid to Ukraine is due to reduce rapidly (apparently to be replaced by the G7’s $50bn loan drawn from interest on frozen Russian assets) and the €100bn ‘special fund’ runs out, Germany’s commitment to meet NATO’s 2%-of-GDP defence spending target looks doubtful. This has led, the SZ claims, to some “interesting accounting tricks”.
“The defence expenditure reported for the NATO target is made up of three areas: the defence budget (section 14 of the budget), the special Bundeswehr fund, and defence-related expenditure in other areas of the federal budget. The composition of the first two blocks is publicly known, but the third block is being stonewalled - and obviously fiddled. When asked by the SZ, the Ministry of Defence emphasised that the amounts of this third block were determined by the departments concerned under their own responsibility and communicated to the Federal Ministry of Defence. These overviews are "classified", i.e. secret. Although there are clearly defined NATO criteria for what can be reported, there is certainly room for manoeuvre”
The report later outlines some of the frankly laughable examples of ‘creative accountancy’ apparently being included in the government’s defence spending figures:
For 2025, debt interest for federal bonds will therefore also be declared as defence expenditure, according to a government response. 2.05% of gross domestic product is to be spent on defence in 2025, of which 14.21 billion euros, almost 16 percent, is already accounted for by funds that are not spent directly on the Bundeswehr. In addition to aid for Ukraine, this block also includes items from the Federal Foreign Office and the Ministry of Development Aid. According to reports, consideration is now also being given to including motorway costs, for example when it comes to bridge renovations - these could play a role in troop deployments and the carrying capacity for tank transports.
The SZ quotes Ingo Gädechens, the CDU’s main Bundestag spokesman for Defence (who served in the Bundeswehr for over 30 years), who sums up the situation: because the government wants to reduce spending on Ukraine, “German motorways are now also supposed to be relevant to defence— although the government has no idea to what extent motorways are relevant to defence at all.”
This, he is quoted as saying, is an example of how Olaf Scholz does politics: "He promises something out of the blue and then government officials have to bend the figures so that the Chancellor's promises at least appear to be kept."
This is all pretty embarrassing, and one wonders what officials at NATO HQ in Brussels, and in national capitals (especially Paris, London and Washington) will make of this. Not to mention how this will be received in Moscow.