The Failure Of Germany’s Zeitenwende

Speaking of higher defense spending, let us turn to the country that is supposed to have had the biggest policy transformation after Russia's invasion of Ukraine. And one with a specific focus on military spending.

Germany is commendably trying to use Russia's war in Ukraine as the catalyst for a Zeitenwende or "turning point" in its strategic approach as a country.

Among other actions, the country has pledged to spend over €100 billion on defense which caused commentators the globe over - including humble newsletter writers - to hope that Germany might have finally figured out the cost of appeasing Vladimir Putin and relying so heavily

Let us get an update.


Since we last wrote about Ukraine and the hesitation of some European countries to deal with the war and threat from Russia seriously there has been some progress:

There are two big issues:

  1. Energy purchases that directly fund the Russian state and its aggression in Ukraine.

  2. And a hesitation over confronting Russia and supporting Ukraine with the necessary aid, especially militarily.

There has been some progress on both of these fronts, especially the first.

The positive:

In the last week of April, Germany dropped its opposition to an oil embargo. This paved the way for the announcement that Europe was going to seriously curtail Russian energy imports.

The European Commission has unveiled new sanctions on Russian energy, including a phase-out of crude oil imports within six months and refined products by the end of the year.

Great! An oil embargo. Eventually. Hopefully.

And this lackadaisical approach isn't the only problem on the energy front either:

There are actually two.....

  1. Russian oil is a problem for Europe but natural gas is its real dependency.

  2. Not buying Russian oil is a narrow positive (and a moral plus) but it may not actually change much for Russia itself.

The reason stems from the unique (and different) structure of the fossil fuels:

Oil is fungible. You can put it on a tanker and send it anywhere in the world with an oil refinery and, within reason, it can be refined and sold as a usable product.

Gas is also fungible but is the devil to transport. The easiest way to transport it is via pipeline but that requires a costly infrastructure project that is both vulnerable and fixed in place. Liquefied natural gas (LNG) can be transported far more flexibly but also requires major facilities to turn the gas into liquid form and also to then transport it safely.

Germany has no LNG facilities (though it is building some) and so it exclusively relies on pipelines for natural gas and those pipelines must obey the logic of geography and physics.

The end result is simple: every day Germany relies on Russian gas and pays for plenty of it and unpleasantly, with prices where they are, Russia is actually making more today from energy exports today than before the war broke out.

Putin's aggression is not just paying for itself, it is keeping his war machine in the fight.

That is beyond depressing.

And besides being a downer, it also highlights the scale of the task for Germany (and other nations) and reinforces that for all our effort on this front, not very much has been accomplished.

Ukraine may be holding its own on the battlefield but is the rest of Europe doing its part?

Let's examine that question in greater depth:

A few weeks ago we published a chart that explored how much aid was being delivered to Ukraine as a % of GDP.

We liked the image because it helped break things down and helped clarify the relative import of the numbers being casually thrown around every week.

It was useful to get a sense of what the contributions actually meant in terms of the contributing country's economy and also helped make more "real" the endless recantation of billions here, billions there.

It provided perspective and possibly an antidote to the idea that we were .

It is time for an update. Here is the % of GDP directly contributed to Ukraine through May 2022:

  • Poland 0.18%

  • Lithuania 0.06%

  • Slovakia 0.05%

  • Sweden 0.05%

  • U.S.A 0.04%

  • Czech Rep. 0.03%

  • Croatia 0.03%

  • UK 0.03%

  • France 0.02%

  • Italy 0.02%

  • Germany 0.01%

For a war that is spoken about in apocalyptic terms and has already witnessed numerous war crimes this is pretty underwhelming.

  • Nothing is more of a downer more than Europeans not really caring about Europeans.

And Germany - rich, large, powerful and sophisticated technically - is at the heart of the problem.

And the problem is not just the rhetoric, the reality is often equally disappointing. Germany keeps assuring the world that it will do more and send more but it often needs to be dragged kicking and screaming. There are countless examples here from the helmets as the first aid given, to the lack of heavy weapons but these days the problem is more about a lack of follow through.

We are not the only analysts to notice.

A bureaucratic state can come up with endless reasons NOT to do something if it wishes. Leadership involves finding a way to make it happen - if that is what it really wants.

The excuses might be even more shameful than the lack of action. If you are not going to help, at least be up front about it.

One leader of the German opposition put it well when he blamed the “wavering, procrastination and timidity” of the current government and especially the leadership of its Chancellor, Olaf Scholz.

The heavy weapons are a particularly striking and bitterly amusing microcosm of the overall German approach.

  • At first Germany wouldn't send them.

  • Before the war they also banned Estonia and other countries from sending Ukraine their own

  • Then it wouldn't send German heavy weapons but would replace central and Eastern European neighbors' weapons that were sent.

  • Then in early May, the government reversed course and said it would send heavy weapons, including tanks but they have yet to mysteriously show up. The German government claims unavoidable delays, during a war, in Europe.....

  • The latest seems to be that the tanks will be there in July but ammunition is low.

What are we doing here?

"The check is in the mail" is quite the excuse during the middle of a land war in Europe. Here are some "Guns but no ammo" might be the only thing that could top it. During a time where you have sagely promised to do whatever it takes.

This is a real, real problem. And not just for financial markets.

Vladimir Putin and Russia are hardly losing this conflict. They might even be winning. And let us not forget that Putin has made his aims perfectly clear:

"During the war with Sweden, Peter the Great didn't conquer anything, he took back what had always belonged to us, even though all of Europe recognised it as Sweden's. It seems now it's our turn to get our lands back [smiling]".

If Europe decides it doesn't have the stomach for real tradeoffs, real costs and real sacrifices let alone real deterrence then Europe and, by extension, the broader West is in real trouble.

It doesn't get more black and white than what is going in Ukraine. If countries in Europe can't see that then that is incredibly negative and not just financially.

We strongly believe in diversity of your portfolio here at Pebble. It is really the core belief but Europe risks becoming uninvestable if it can't understand the basics.

This bears watching very closely. A lot of the focus is understandably on the global problem of inflation but the war in Ukraine is deadly serious and, it may be slipping off the front pages but it certainly isn't losing either its relevance or its existential quality.

When will Germany wake up? And will it be too late....and not just too late for Ukraine?


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