Military investment fund

5 things to know about Germany’s historic military investment fund

After weeks of negotiations, German politicians finally reached a deal on a massive €100B military modernization fund.

BY HANS VON DER BURCHARD

Germany has spent months touting its epochal shift toward a more muscular military policy. Now the country finally has a spending plan to make it happen.

Three months after Chancellor Olaf Scholz first announced Germany’s so-called Zeitenwende, or historic turning point, political leaders late on Sunday approved the main pillar of the new policy — a massive €100 billion military modernization fund.

The monetary injection — which falls outside Germany’s normal budget — is intended to give the chronically underfinanced German military a swift equipment upgrade, helping chart a course for Berlin to play a more prominent role within the NATO military alliance and EU military missions.

“Germany will now provide a significantly higher contribution to the security in Europe … that also corresponds to its size,” Scholz said Monday, arriving at an EU leaders’ summit in Brussels.

Germany, the EU’s largest economy and most populous country, has faced withering criticism since Russia invaded Ukraine for dragging its feet on sending certain weapons to help Kyiv. Berlin has countered that its armed forces, the Bundeswehr, lack critical military equipment and cannot spare more heavy weaponry such as tanks or howitzers, of which it plans to send a few to Ukraine.

While the latest plan will help address those shortcomings, it is designed to work over the course of several years and can’t change the situation immediately. And some hawkish voices within Germany argue the country must go even further.

Here are five things to know about Germany’s freshly agreed military investment fund, the so-called Sondervermögen.

1. Germany will now (mostly) meet NATO’s spending targets

The €100 billion injection will raise Germany’s annual military spending from roughly €50 billion to an average of €70 billion over the course of five years. That would put Germany in line with the NATO goal to spend 2 percent of economic output on defense — a commitment Berlin has so far blatantly violated.

However, the deal reached on Sunday night falls short of enshrining the 2 percent target in the German constitution. Instead, it says the benchmark should be reached “on a multi-year average,” meaning Germany might spend more than 2 percent in some years due to major military investments, but less in others.

Critics like Rüdiger Wolf, a former state secretary in the German defense ministry, say that’s not enough.

During a German parliament hearing last month, Wolf argued the €100 billion fund should be used solely to tackle modernization needs and equipment gaps — and that Germany should hit its 2 percent goal through an additional increase of the regular annual defense budget from €50 billion to €70 billion.

This approach, he argued, is the only way “to provide the permanently needed financial resources” for the Bundeswehr to fulfill its tasks within NATO “in width and depth.”

2. Some budget fudges were required

But boosting the country’s regular defense budget is a sensitive subject in Germany, which has long adhered to strict debt rules.

In Germany’s current governing coalition, Finance Minister Christian Lindner — a member of the fiscally conservative Free Democrats (FDP) — wants the country to reinstitute its “debt brake,” constitutionally enshrined fiscal restraint rules that have been suspended for two years due to the coronavirus pandemic.

That’s the main reason the €100 billion was set up as a special fund — it avoids having the mega investments count as part of the country’s regular budget and exempts it from the debt brake.

In order to do that, the special fund has to be enshrined in the German constitution, a move that requires a two-thirds majority in the German parliament. That meant Scholz’s governing coalition had to reach an agreement on the money with the center-right opposition, which took weeks of negotiations.

Since the special fund runs out after five years, the idea is that by then the regular defense budget will have to be increased to at least €70 billion so that Germany continues to meet the 2 percent NATO spending goal even without the special monetary injection. However, it’s still unclear how such budget increases can be arranged with Lindner’s disciplined fiscal plans and the debt brake.

Yet considering that Germany will hold another general election in a bit more than three years, it might well be that by the time the special fund runs out there will be a new government that would have to worry about such questions — and, ultimately, it could always decide to set up yet another special military fund.

Other EU countries, which have less favorable borrowing conditions on the financial markets and more debt than Germany, can only dream of such luxury. Many countries want the EU to exempt military upgrades from the EU’s own strict fiscal rules — a demand the German government, and Lindner in particular, reject.

3. New jets, ships and tanks are on the way

Although Germany’s official list of military investments is secret, there is one huge project the government has made public: The purchase of U.S. F-35 stealth fighter jets, which are supposed to replace decades-old Tornado fighter jets. Notably, these high-tech jets should, if worst comes to worst, be able to carry U.S. nuclear weapons, a renewed worry as Vladimir Putin saber-rattles about Russia’s nuclear arsenal.

The German government also said it wants to improve the general equipment of its troops, which have long suffered from a laundry list of shortcomings — missing night goggles or rifles, insufficient protective vests, defective training facilities.

“I have to tell you that there are appalling deficiencies in the area of equipment and combat readiness,” said Eva Högl, who serves as both an ombudsman and military personnel advocate as the German armed forces parliamentary commissioner.

Högl, speaking during a discussion in April, cited one example: The German navy’s elite diving force in Eckernförde has “not had a functioning swimming hall for over 10 years.”

Sunday’s deal specifies that the new money must be used for Bundeswehr investments, raising hopes among German defense companies like Rheinmetall that they will get fresh orders for new tanks and ammunition. Meanwhile, northern German shipyards are hoping to build five new corvettes, more frigates and several combat boats, as public broadcaster NDR reported. Some 60 percent of German army helicopters currently can’t fly, meaning that there’s an urgent need for investment there as well.

One challenge, however, will be ensuring the investments are done in a timely manner. Germany’s military procurement office has a reputation for being slow and bureaucratic. Högl warned that these problems were “getting more and more, and not less.”

4. Ukraine won’t immediately benefit, though

Given that the €100 billion will be spent over five years, Germany is unlikely to soon have more tanks and artillery to donate to Ukraine.

However, the two tanks Ukraine has requested for months from Germany — the Leopard main battle tank and the Marder infantry fighting vehicle — wouldn’t come from the country’s army stocks but from its defense companies. These firms say they have decommissioned models of those tanks to sell.

Scholz has so far refused to grant the companies an export authorization for these tanks, citing concerns the move could escalate the war and potentially make Germany a target.

5. Germany’s critics will still want to see action

Scholz’s government has been hammered internationally in recent months for being too hesitant to provide Ukraine with military support. While Scholz’s pledges to make Germany a more prominent European military power are being welcomed in many EU capitals, especially in the east, many nations are waiting to see if those words are followed by deeds.

On that front, Scholz’s track record so far is quite thin.

The chancellor will have another opportunity to lay out his plans for the special fund, and military support for Ukraine more broadly, during a speech in Parliament on Wednesday morning. The special fund is set to be adopted by Parliament as early as this Friday.