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UKRAINE

Germany’s Bundestag approves €100 billion fund to beef up defences

The German parliament voted on Friday for a constitutional amendment to create a € 100 billion fund beefing up its military defences in the face of an emboldened Russia.

Germany's Bundestag approves €100 billion fund to beef up defences
German Chancellor Olaf Scholz addresses parliament on a budget debate during a session at the Bundestag (lower house of parliament) in Berlin on June 1, 2022. (Photo by Tobias SCHWARZ / AFP)

Deputies of the Bundestag lower house approved the measure 567 votes to 96 with 20 abstentions after the centre-left-led government and the conservative opposition reached a deal on Sunday.

The watershed move answers years of criticism from close allies that Berlin was failing to achieve NATO’s target of spending two percent of GDP on defence.

The Bundesrat upper house must still approve the measure.

“This is the moment in which Germany says we are there when Europe needs us,” Foreign Minister Annalena Baerbock of the Green party told MPs.

READ ALSO: ANALYSIS: Are Germans questioning Merkel’s legacy?

Three days after the Russian invasion of Ukraine in February, Chancellor Olaf Scholz pledged a special budget of 100 billion euros to rearm the German military and modernise its outdated equipment over the next few years.

But critics have since accused Scholz of timidity in his support for Kyiv and failing to take enough concrete action in terms of arms deliveries.

The agreement will allow Berlin to achieve NATO’s target of spending 2.0 percent of GDP on defence “on average over several years”.

Russia blasted the move on Friday, accusing Germany of “remilitarising” and using language that summoned up its Nazi past.

“We take that as another confirmation that Berlin is on the path to a new re-militarisation,” said Russian foreign ministry spokeswoman Maria Zakharova.

“We know only too well how that can end.”

It appeared to be a reference to Nazi Germany’s re-armament programme in the 1930s under Adolf Hitler that plunged the world into war.

‘Largest army in Europe’

The bulk of the German investment — € 40.9 billion — will go toward the air force with the acquisition of 35 US-made F-35 fighter jets, 15
Eurofighter jets and 60 Chinook transport helicopters.

READ ALSO: Germany to deliver air defence system to Ukraine, says Scholz

Nearly € 20 billion will be earmarked for the navy, mainly for new corvettes, frigates and a 212-model submarine. More than € 16 billion will beef up the army’s holdings with Marder transport tanks and Fuchs armoured troop carriers.

Scholz said this week that the agreement would “considerably strengthen” the security of Germany and its NATO allies.

“Germany will soon have the largest conventional army in Europe within NATO,” he told local media.

The exceptional fund will be financed by additional debt.

For that, it was necessary to circumvent the “debt brake” rule enshrined in the constitution, which caps government borrowing. This was why the government needed the support of the conservative opposition to muster the two-thirds majority in parliament needed to pass the constitutional amendment.

READ ALSO: Putin can’t dictate peace in war he ‘won’t win’ says Germany’s Scholz

Since the end of the Cold War, Germany has significantly reduced the military from around 500,000 in 1990 to just 200,000 today.

Fewer than 30 percent of German naval ships were “fully operational” according to a report published December on the state of the military.

Many of the country’s fighter aircraft are unfit to fly.

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MONEY

‘€10-€15 more for groceries’: How price hikes are hitting consumers in Germany

Russia's war in Ukraine is driving up energy and food prices. While the German government mulls new measures to protect consumers, buyers are increasingly feeling the price hikes, reports Cecilia Filas.

'€10-€15 more for groceries': How price hikes are hitting consumers in Germany

Consumer prices are rising in Germany – and people are noticing it in their wallets. In May, inflation rose by nearly 8 percent year-on-year, the highest level since the country’s reunification in 1990. First, it was the pandemic and the resulting disruption of global supply chains that pushed up prices, now, it is Russia’s invasion of Ukraine that is driving energy and food prices to record high levels. 

Olaf Scholz’s coalition government launched a €30 billion plan to help German consumers, especially the most vulnerable. The measures included the €9 monthly ticket over summer; fuel tax cuts; energy subsidies; and a one-off €300 payout for all taxpayers, plus a €100 ‘Kinderbonus’ for children.

But while the measures provided temporary relief – in June inflation fell to 7.6 percent – experts fear another surge is around the corner. The numbers could get significantly worse in the coming months when some of the measures end and Germany will face the winter with a reduced amount of Russian gas – or none at all. 

READ ALSO: Who gets Germany’s €300 payout – and when?

Thinking carefully about bigger purchases

People living in Germany are feeling the pinch.

At the supermarket, a shopping bill that used to be between €70-€80 is “now €10 or €15 extra,” says Nicolás, an Argentine expat in his 30s who lives in Berlin.

Unlike in Argentina, where consumers are used to offers and different forms of financing to cover themselves against inflation, Nicolás says he has no strategy and has not reduced his consumption because of the rising prices, although it is impacting him. “You don’t need to pay in instalments (for items), but you do feel the difference. You save less,” he says.

Federico, another Argentina native who has been living in Germany for more than 10 years, agrees.

“It’s not that you have problems making ends meet, but that you save a little less,” he says. “Or if you have to make a big purchase, you might think about it a little bit more.”

He says everyday food products in Berlin have also noticeably gone up. 

“The most classic thing – to buy a kebab which is something everyone eats – you can see how much it has increased,” he adds.

“There is a lot of advertising on TV and radio showing you ways to save, and years ago there was no advertising or products with so many promos. Now, this has become more visible, as there is a much greater variety of bargains and people tend to go after that a little bit more than they used to.”

Fruit and veg being sold at a market in Oldenburg.

Fruit and veg being sold at a market in Oldenburg. Photo: picture alliance/dpa | Hauke-Christian Dittrich

‘Price shocks’

Chancellor Scholz has promised more measures in the coming months to cushion the burden, especially on lower-income families. The Chancellor plans to meet with employers, trade unions and the Bundesbank team in September.

Bundesbank President, Joachim Nagel, said recently that there is a risk of inflation remaining high in the medium term, and the German central bank is forecasting an average rate above 7 percent for 2022.

“For this year, we think that we can really manage the inflation headwinds we see on the energy side but also on the salary side,” Bettina Orlopp, CFO of Commerzbank told Bloomberg TV.  “Next years – 2023, 2024 – the story will be different, becoming more difficult”, she said.

But is Germany really experiencing an inflationary process? Dr. Silke Tober of the Hans Boeckler Foundation’s Macroeconomic Policy Institute (IMK) doesn’t think so.

“The inflation we are experiencing in Germany at the moment, and in the euro area as a whole, is not inflation in the real sense. What we have are price shocks”, she tells The Local. “What really makes an inflationary process is that wages and prices rise, and then you get persistent inflation.

“We are not at that stage. What we are really seeing instead is that the energy price hikes and the increase in food prices are pushing up prices.”

READ ALSO: When will Germany’s rising cost of living slow down?

Tober adds that there are assistance measures which make a difference.

“The government has put in place several transfer payments to households, especially low-income households, and other measures that reduce the burden of inflation,” Tober says.

She expects price rises to come down “substantially” next year, provided the war in Ukraine does not escalate.

However, Tober says: “If we have a gas embargo and no more gas from Russia, we will have another jump in energy prices, and then inflation will stay high next year as well. And then we have the problem that there may be second-round effects, meaning wage increases might be excessive and then will have persistent inflation.”

The expert from IMK says that rising prices are especially affecting lower-income households, who must “cut back on other expenses to pay for food and energy” because they tend to have fewer savings to fall back on.  

“Households with higher incomes tend to have wealth and a high savings rate, so they cope with it by reducing their savings rate or maybe even reducing their savings,” Tober says.

“But low-income households usually, in Germany at least, they don’t have a positive savings rate – that means they’ve already spent all of their money or most of it – and have very little wealth, so what they have to do is actually reduce consumption to deal with the current [price] shocks.”

READ ALSO: What is Germany’s new gas ‘tax’ and who will pay it?

Money lies on a radiator.

Money lies on a radiator. People with gas heating will face much higher costs. Photo: picture alliance/dpa | Patrick Pleul

Ongoing concerns about price hikes

Indeed, June retail sales plunged 8.8 percent year-on-year, the biggest drop since 1994, according to Destatis. Non-essential items such as furniture, household appliances, clothing and shoes were the hardest hit.

On the other hand, to avoid passing on cost increases to customers and remain competitive, several companies are maintaining prices (or raising them at a very low rate) but reducing the content of their products, warned Verbrauchenzentrale Hamburg, a consumer advice centre. These are hidden price increases, generally referred to as ‘shrinkflation’.

With an interest rate of just 0.5 percent, credit or financing purchases in instalments might seem an attractive option to protect from inflation.  However, Verbrauchenzentrale Nordrhein Westfalen, the consumer protection association in the state of North Rhine-Westphalia, says that there hasn’t been, at the moment at least, “increasing demand in our debt counselling service as a result of the current inflation, although we notice ongoing concerns about the price increases”.

“Normally excessive debts and consumer insolvency are not seen immediately but with a time gap -they follow a crisis,” the agency told The Local. “Therefore, it is just possible that in the end, we will see more consumer insolvencies due to these general price increases.”

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