How Will Germany’s Defense Spending be Affected by the COVID-19 Pandemic?

The outbreak of the worldwide novel coronavirus (COVID-19) pandemic is placing the global economy in a near-total freeze as governments are forced to undertake shelter-in-place and quarantine orders in order to mitigate the spread of disease.

As of April 7, the number of confirmed COVID-19 cases in Germany had reached over 107,000 and the Health Ministry is testing 300,000+ people per week, which means the total will continue to rise, even if on a downward trajectory. Despite this, measures are already being planned by the government to gradually reopen the nation once the lockdown ends (currently set for April 19), but dates and targets may shift along with facts on the ground.

For an export-oriented economy such as Germany’s, the knock-on effect of the necessary measures being undertaken is an increasingly likely slide into deep recession.

Germany’s economy was already slowing down by the end of 2019, but first quarter figures through the end of March (when the pandemic had already taken firm hold in Europe) show the start of what some economists predict will be an acute downturn.

Over the first quarter of the year, Germany’s economy contracted by 1.9 percent, with a severe contraction of up to 10 percent forecast  for the second quarter through June. If accurate, the latter figure would be twice as bad as the first quarter performance for 2009, when the global financial crisis was in full force.

Researchers from Germany’s five leading economic institutes are expecting the national economy to shrink by 4.2 percent for the year. Disruptions in the supply chains for German engineering companies continue to rise. How this continues to play out remains to be seen, but in the near term it is difficult to see how placing much of the populace and economy in lockdown will not result in some pain, however limited or severe.

In an effort to combat the short-term hit to the national economy and population, the German government is preparing to roll out a EUR750 billion ($815 billion) stimulus package aimed at supporting non-financial companies and private households. To do this, Berlin has suspended its constitutional balanced budget rule – the Schuldenbremse, or debt brake – that restricts the federal government from running a structural deficit of more than 0.35 percent of GDP.

Also some good news: Germany’s leading lenders – Deutsche Bank AG and Commerzbank AG – are well capitalized and carry limited risk exposure on their books. And the same researchers predicting a deep recession for the year also foresee a strong bounce-back in 2021 once the pandemic passes, with growth of up to 5.8 percent (qualified, of course, by caution of any second wave of infections  that would force the government to re-impose control measures and work stoppages).

Amidst the COVID-19 outbreak and the German government’s response to closing down most of the country’s economy, questions related to ensuing effects on Germany’s defense establishment remain open-ended.

Will the government opt to cut funding from future spending projections in order to ease near- and medium-term deficit pressures? If so, what major defense programs will be impacted? What about efforts aimed at rebuilding the Bundeswehr’s (German military’s) eroded force structure on the personnel side? How will Germany’s crucial defense industry fare if defense budget cuts result in a downturn in orders?

These are logical concerns at a time when Germany and fellow dual EU-NATO allies are emphasizing economic and social relief across the continent in response to the COVID-19 pandemic. The answers are elusive, but if the past is prologue, defense will be one of the first government areas wrung for savings.

The last such sharp economic downturn in Europe resulted in a wave of defense budgetary cuts, force downsizings and deferred capabilities improvements. The net result was a smaller, less-capable military component nation-by-nation across the EU-NATO spectrum.

Germany was certainly no exception in this regard, and the negative effects linger to this day. Smaller than ever, ill-equipped to conduct out‑of-area missions, and starved of basic necessities – ammunition, night vision goggles, functioning assault rifles – with which to perform its natural territorial defense role, the Bundeswehr is still trying to regain its footing following the major force restructuring in 2010.

Already under fire from the current U.S. administration for not pulling its share of the weight in NATO, another sharp reduction in military investment and Bundeswehr capability and capacity would bode ill for trans-Atlantic relations regardless of resident in the Oval Office. It would also slow attempts within the EU to generate a greater level of strategic autonomy, as well as hurt lower-tier companies within the defense industrial chain while driving up costs at the top end among consortiums and major defense primes.

In recent years, Germany’s Chancellor Angela Merkel has sought to persuade the larger German public of the need to strengthen the nation’s military muscle in order to act in concert with European partners and underwrite EU security.  Together she and successive defense ministers (former defense minister Ursula von der Leyen, now the president of the EU executive branch, the European Commission; and current minister Annegret Kramp-Karrenbauer) have appealed for higher defense budgets.

While recent topline defense earmarks have significantly improved – real-term year-on-year growth to the German defense budget reached over 10 percent in 2019 – the concern now is whether steady growth will be brought to an abrupt (and perhaps sustained) halt.

Always at the bottom tier of government priorities, Germany’s Federal Ministry of Defense will be lucky to come out of this 2020-2021 period with flat-lined funding. Longer term deficit reduction efforts are sure to inhibit an earlier-stated government goal of having the defense budget rise to 1.5 percent of GDP by 2025, rather than meeting the NATO Alliance minimum standard level of 2 percent of GDP.  Kramp-Karrenbauer proposed late last year that Germany reach the 2 percent standard by 2031, a goal that now has to be viewed as a moving target fading farther over the horizon.

For Germany, with its entrenched skepticism of anything perceived as militaristic, long-term commitments toward defense are subject to scrutiny. The Social Democrats, who form half of the current coalition government under Angela Merkel, were already pushing back against calls for large infusions of top-up funding for defense before the COVID-19 outbreak.

Flat defense spending growth merely for the short term might be the most positive outcome. Sharper cutbacks, however, would hinder major projects at a time when the Bundeswehr’s military readiness remains an ongoing problem (see here).

A one or two-year halt in defense budget increases would unquestionably present short-term sacrifices but still enable the Defense Ministry further time to absorb funding that grew by an average of 7 percent per year from 2017 through 2019. Stabilized defense budget levels would also continue to allow the department to recruit and train proper procurement staff, as well as steadily rebuild a broken defense equipment supply chain. While never a preferable option, recapitalization projects may be scaled down or spread out over longer delivery timelines in order to keep industry workflow humming while managing any production hiccups currently being experienced.

Like many European NATO countries since the end of the Cold War, there is almost never a lag period between economic slowdown and defense budget reductions. This time is unlikely to be different. While a constant funding level for defense would still bring challenges, right now it may be the best result Germany’s defense establishment could ask for.

Image – Nicolas Raymond

About Daniel Darling

Dan Darling is a senior analyst covering both the Europe and Asia-Pacific regions for Forecast International's International Military Markets group.

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