The German Revolution

Vladimir Putin speaks fluent German due to his past work for the KGB in Dresden. He bills himself as an expert on German culture. It is this same Putin who is now the cause of a true revolution in German politics. The day after the Russian invasion of Ukraine, all dogmas went overboard.

It began with the writing off of Nordstream 2, the gas pipeline from Russia directly to Germany. Before then, German politicians dismissed it as a private project, without a geopolitical dimension. When that dimension did come, Nordstream 2 was doomed. Then the new Chancellor Scholz set out to cut off Russian banks from the SWIFT system, and the already remarkable coalition of Greens, Socialists and Liberals signed a long list of sanctions against Russian institutions and individuals. The goal: complete economic, financial and political isolation of Russia under Putin.

It was a definitive departure from the Ostpolitik initiated by socialist Willy Brandt, in which the relationship with Moscow was actually strengthened. The biggest surprise was the German rearmament in combination with the fact that the country itself is sending weapons to Ukraine. This will probably be the biggest shock for Putin. It is only 800 kilometres from Dresden to Lemberg, today’s Lviv, and in Putin’s eyes, belligerent Germany is back on the world stage. The German army, barely able to defend its own territory, was given an additional 100 billion in one fell swoop to rearm the country. Gone is the debate about American nuclear warheads in Germany, there was even a mea culpa from the Greens and Socialists that they had seen it wrong all along. Germany is no longer the bridge between East and West. Dialogue is replaced by deterrence. National German interests again take precedence, and the only way to stop Putin is by force. The Prussians again have the upper hand in German politics.

This German revolution put the country more in line with other European countries. Because of its wartime past, Germany had always had a pacifist position of exception within Europe, especially when it came to military or foreign affairs. Partly because Germany could no longer boast of a great army, the country became Exportweltmeister. Tanks were replaced by BMWs. The country became a democracy without enemies. Many decades of demilitarization followed, conscription was abolished, in their pacifism, the postmodern Germans even felt superior again. The Nordstream 2 gas pipeline was intended to secure Russian gas for Germany, because of possible military risks in countries like Ukraine, Poland and the rest of Eastern Europe. It allowed the country to stop using nuclear power, further increasing its dependence on Russian gas. The years of anti-militarism, when German soldiers were spat on in the streets, were over. It did require a new war on the European continent for the Germans to change course. Putin succeeded in changing German history in one fell swoop, though he will not be happy with the outcome.

This German revolution has made it highly unlikely that Europe will reconcile with a new status quo in Ukraine. Whereas Russia got away relatively well in 2014 after occupying Crimea and the Donbas basin, the chances of a new German appeasement policy are slim. Partly due to social media pressure, there is no going back, not for Putin and not for the West either. Apart from a thermonuclear war with NATO, the most gloomy scenario regarding the Ukraine crisis was that Russia would turn off the gas tap. Russia has not yet done so, but now the West wants to boycott Russian gas. The consequences for the European economy are the same. A recession on the European continent thus seems inevitable. This is at least the conclusion of investors who are leaving the European financial markets en masse. This while at the beginning of this year the Eurozone still had good chances to grow stronger than the United States. This while the ECB under Lagarde had changed course only a few weeks ago by emphasizing that fighting inflation was more important than financial stability.

But much has changed in recent weeks. The central bank simply cannot print oil and gas. By tightening now, financial conditions in the eurozone deteriorate, increasing the risk of financial instability. Despite the rhetoric of the ECB, the central bank will ultimately give priority to financial stability. The German aversion to inflation can be linked to the German aversion to war. Even fundamental principles had to give way to the new German revolution, so long as inflation was fought. But now principles are allowed to cost money. If inflation goes up because it is required to get Russia under it, so be it. It is, of course, nonsensical that on the one hand, the ECB takes money off the table, while on the other hand national governments run around subsidizing energy. Such subsidies do not come cheap. After the corona crisis, debt as a percentage of GDP is above 115 per cent in France, above 130 per cent in Spain, 150 per cent in Italy and 200 per cent in Greece. This increases the likelihood of more European financing, of Europe subsidizing its citizens in the area of energy. Europe is already doing that in the defence field, all weapons to Ukraine are funded by the European Union. The next step is a European army, funded by European money. Germany is ready for it.

The external threat has increased unity in Europe. Further integration is required because in its current form there is a good chance that the European Union and the euro will not survive the next deep recession. Further, that political unity with its emphasis on principles combined with the boycott of Russia has a price. Not only in the form of a higher level of inflation, but also through large shifts in the trade balance. There has been a deficit for three months now, as energy prices have risen sharply (including before the invasion of Ukraine). But soon oil and gas can no longer be paid for in euros, but must be deposited in hard dollars. In the past, we got a large part of the euro back from the Russians, in consumption and in investments, but that too is falling away. The last time there was a trade deficit for several months was in 2011, indeed during the previous euro crisis. Add to that the fact that Middle Eastern petrodollars and Chinese billionaires may also start to avoid the eurozone, fearing similar sanctions that are now hitting Russians, and that there will even be central banks that will start to doubt the value of their euro reserves, and the European currency thus seems to be getting weaker rather than stronger.

Despite the war in Ukraine, stocks worldwide (including European stocks) are higher than at the time of the Russian invasion. Equities are also higher than in the last week of January. At that time, the focus was still on the interest rate hikes as a result of rising inflation. As great as the humanitarian drama in Ukraine is, on balance the financial markets appear to be experiencing a non-event, or at least an event where pluses and minuses can be cancelled out against each other. This is the case with most geopolitical events. But just as after the fall of the Wall or the attacks of September 11, 2001, it is not so much the short-term consequences as the long-term consequences that will have a major impact on financial markets. In this regard, it does not even matter now what scenario will unfold around Ukraine in the coming weeks or months. Russia will disappear behind a new Iron Curtain, various countries and regions will strive for a higher degree of self-sufficiency in energy, technology, defence, finance, essential commodities and food, and trends such as the energy transition, de-globalization, the regulation of tech and in sustainability will continue to accelerate.