Early in the Ukraine War with Russia, Poland sent 200 T-72 battle tanks to Ukraine. Most other NATO members joined in, sending tanks, missiles, guns, supplies and technology. Germany sent nothing and have continued to avoid helping Ukraine as much as possible while the war dragged on for a year. Germany seems to have hoped for a quick Russian victory leading to a quick return to the pre-war, state of affairs. That’s not likely. Even early on, the war looked like a slow, long slog. Reluctantly, this month, Germany promised to send 18 Leopard tanks to Ukraine, requesting as replacements, mothballed tanks from Switzerland.

Germany is currently the 4th largest economy in the world, just behind Japan, and ahead of India (for now). They also have the 3rd oldest population. Their place as the leading economic and political power in Europe rests on a close relationship with Russia that is fading, bringing Russian goods west and manufacturing with them. Before the war, Germany imported most of its oil and 65% of its natural gas from Russia. Much of the gas came via two direct pipelines, Nord Stream, that bypassed the rest of Europe. Well into the war, while the rest of Europe disengaged, Germany is still buying from Russia and funneling it west: steel, aluminum, titanium, ammonia and platinum. Germany is still buying some Russian natural gas by way of Poland. The German economy is based on turning these materials into cars, high tech machines, and chemicals for export to the US, the EU, and China. Despite the very old population, Germany counts on cheap labor from low wage EU nations. These transient, long term. workers do not get citizenship or retirement benefits. The current war has presented Germany with more potential workers, Ukrainian refugees, but far fewer Russian supplies. The German economy is shrinking, and so far, the Ukrainian refugees have been mostly left unemployed.

German industrial production is down by about 4% this year leaving its GPD at about $4T/year, about where it was in 2018. The US economy and the rest of Europe has grown. For an explanation, consider Germany’s ex-chancellor, Gerhard Schroeder, shown at left with Putin. Schroder remains a leader in the ruling SDP party, the party of Ms Merkel and of the current chancellor. He is also the chairman of the board for Nord Stream AG and of Rosneft, (Russian aerospace). He also sits on the board for Gasprom (Russia’s energy conglomerate), Rothschild, a prominent International bank, and is chairman of the board of the Hannover 96 football club. He is symbolic of Germany’s attachment to Putin and Russia. But the rest of the EU, along with the rest of the developed world, has come to hate Putin and Russia (they’re not too fond of Rothchild either). Europe is unlikely to tolerate Germany’s Russian imports, including titanium (65% of Airbus titanium comes from Russia) or natural gas. Germany has asked for a titanium exception (and been denied). What’s more, three of the four Nord Stream pipelines have been blown up (by whom?) leaving Germany to buy natural gas from its NATO allies: Norway, Britain, France Holland, and the US. Gas purchases are expensive for Germany while helping its NATO neighbors — Germany has asked to be subsidized for energy too (unlikely, imho). It has also restarted old coal-burning power plants, an insult to the EU given how hard Germany pushed them on climate change.

Germany is now near recession. Much of Europe is close, but Germany is worse-off since they are buying from the rest.

Much of the EU can sell gas and food to Germany, and Russia can export to China, India, and Iran. German inflation averaged 8.5% last year (9.2% in January). That is not hyperinflation, but a shock for a country that’s averaged 1% inflation over the last 25 years. US inflation, by comparison was 7.5% last year — due to excess spending by the Democrats (imho), the so- called “inflation reduction act,” but at least the US economy grew, along with the US population. It seems to me that, without Russian supplies, Germany will continue to slip versus the world and versus the EU.

The German population is dying too. They too among the highest percent population over 65, see map. The death rate has spiked 25% over the last 6 months, too. Europe and much of the EU saw similar spikes earlier in the pandemic, partially from COVID, the rest is alcoholism, drugs, the vaccine, pollution, or a psycho-somatic response to isolation and the war. Sweden has largely avoided these problems so far.

Germany has been propping up its inefficient industries with low cost loans. The idea, presumably, is that things will go back to normal soon, and the companies will make good. So far, the war goes on, and the loans discourage competition and modernization. It becomes ever more likely that these inefficient German companies will default. If so, they could take down their lenders as happened in Japan in the 90s, and as happened to Lehman Bros. in the US. The same seems likely for China.

It becomes ever more likely that these inefficient German companies will default.

Even if the war ended tomorrow, it’s not clear that Germany could go back to its pre-war status. The blown Nord Stream pipelines will need a year or more to repair. And may never restart, as sanctions might remain long after the fighting ends, as with Cuba or North Korea. Russia seems to have recognized this possibility, and has begun sending titanium, gas, and oil elsewhere, mostly to Iran, India, and China. Iran has become a major customer of Russian aluminum, and food, and is a major supplier of drones and consumer goods to Russia. In the last two years, the Iranian GDP has doubled to about $2T/year. It is now nearly half the size of Germany’s GDP and growing while Germany shrinks.

Russia’s trade with India and China has grown too. They are working to improve the Trans-Iranian railroad that would allow easy shipments from Russia to India and China via the port of Tehran. The first direct shipment of this sort was completed in July 2022– Caspian Sea containers to an Iranian train to ship to India and China. If the war goes on, Iran, India, and China will benefit at the expense of Germany, it seems. India, in particular. India’s economy is already approaching the size of Germany’s, and will probably pass it with the help of Russia’s energy and raw materials. Meanwhile, Germany is left with an aging population and aging industries; with few suppliers, and no obvious competitive advantages. Europe is almost as badly positioned, but they can still sell to Germany. As for Ukraine, it seems to be doing well, despite the war — or because of it. They still grow and export food and energy, and they are holding their own in the war, for now. There is destruction in the east, but Ukraine might come out stronger, as happened with South Korea and Vietnam. Russia too seems to have found new customers and might come out OK. It is hard to see how Germany comes out well. This, at least, is how I see things today.

Robert Buxbaum, March 8, 2023.