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War in Ukraine impacted Germany’s budget

Sep 11, 2023 | Studies & Reports

European Centre for Counterterrorism and Intelligence Studies, Germany & Netherlands – ECCI.

How war in Ukraine impacted Germany’s budget

DW – Things are not going well in Germany — at least, that was the impression conveyed by this week’s budget debates in the Bundestag. The parliamentary debates throughout this week featured repeated talk of extraordinary times and extraordinary political conditions.There have never been so many major crises of this kind at once, older parliamentarians said. The coronavirus pandemic, which demanded so much of the state, the economy and the people, was immediately followed by Russia’s war on Ukraine, whose consequences now influence virtually all government departments.

A faint war fatigue is spreading among the Germans. When, at the end of August 2023, the ARD Deutschlandtrend pollsters asked what Germany’s most urgent problems were, only 9% mentioned the war in Ukraine. In April, the figure was still 25%.For the government, the war is now primarily a geopolitical and geo-economic reality whose consequences have to be dealt with. “Many of the problems we have at the moment are still causally related to the turmoil from Putin’s horrible war of aggression on Ukraine,” Economy Minister Robert Habeck said in the Bundestag recently.

Like all the other government ministers, Habeck had to tell parliament what he wants to spend money on in 2024. The template for the federal budget was delivered by Finance Minister Christian Lindner, who is determined to make massive savings and take on as little new debt as possible. Virtually every department has had to save money, a total of €30 billion ($32 billion) compared to the current year. Only the defense budget is to be excluded, and there are to be no cuts in further support for Ukraine.

€22 billion since the war began

Helping Ukraine is “in our own national political interest,” Lindner told the Bundestag during his speech. Ukrainians, he said, were fighting for “the order of peace and freedom in Europe as a whole.” In fact, he added, further support for Ukraine has already been locked into budget planning for the next few years: “Let no one be deceived. Germany will have staying power on this fateful issue,” the minister promised.

As of July 2023, support payments amounting to around €22 billion flowed from Germany to Ukraine since the start of the war. Added to this is the cost of hosting more than one million Ukrainian war refugees in Germany, borne primarily by the states and local authorities. The OECD puts the cost of this per capita per year at around €11,300.Defense is also a priority. When, at the start of the war, Chancellor Olaf Scholz spoke of a “turning point” both in history and German defense policy, he announced a €100-billion special fund for the military and promised that 2% of GDP would be invested in defense — in line with the NATO target.

But this special fund will be depleted by 2027, as the chancellor knows. “It is already clear today that we will have to directly finance an additional €25 billion, perhaps almost €30 billion, for the Bundeswehr from the federal budget from 2028 at the very latest,” Scholz told the Bundestag.But there are more financial gaps. For each of the years 2025 to 2027, there is talk that an extra €5 billion will have to be raised in the overall budget. And from 2028, Germany will have to begin repaying the additional debts it incurred during the coronavirus years — an estimated €12 billion per year.

Not only that, but from 2031, Germany is planning to start repaying loans from the Energy Economic Stabilization Fund.Lindner has called this an iceberg toward which the republic is heading. “We have the responsibility not to wait until the iceberg from the horizon has come right under our noses,” he said. “We must change our budgetary course now.”

A suffering economy

Germany’s total state budget for 2024 is around €445 billion, but even this must first be generated. Will the taxes keep flowing? The country is continuing tolose economic power. Germany is a highly industrialized country that still has an energy-intensive industry, Habeck said in the budget debate: “If about half of the energy from Russia goes away, then you get high energy prices. And if half the energy is gone and has to be procured at higher prices, then of course that pushes inflation up.” Higher interest rates are also putting a strain on the budget. The federal government is budgeting €37 billion to service its current loans next year, ten times more than in 2021. Economic aid, inflation compensation, energy subsidies — the state significantly increased its mountain of debt during the crisis years.

If it were up to the Greens and large parts of Scholz’s Social Democrats (SPD), however, new debts would be incurred in 2024. The environmentalist party only grudgingly accepted the austerity dictates of their coalition partner, Lindner’s Free Democrats (FDP). Green Foreign Minister Annalena Baerbock said in the budget debate in the Bundestag that the austerity constraints were “painful” in view of “the situation in which a war is raging in Europe.”Despite Scholz’s historic turning point, and Baerbock’s wish to do more for Ukraine, the current Bundestag does not have the necessary two-thirds parliamentary majority to adjust the debt limit enshrined in the Basic Law. “We cannot wish away the debt brake,” Baerbock admitted.

Almost all parties in the Bundestag want to continue supporting Ukraine, except for the socialist Left Party and the far-right Alternative for Germany (AfD). In the budget debate, their deputies once again called for a halt to arms deliveries to Ukraine.The AfD even went one step further: Instead of sending money abroad, most if not all of the federal budget should be spent inside Germany. For that reason, AfD deputies used their time at the podium to once again call for the complete abolition of German development cooperation.


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