The Economy of War: Recession, inflation pushes Germany to inch closer to Russia

Virendra Pandit 

New Delhi: It is too early to predict disunity in the US-led North Atlantic Treaty Organization (NATO). However, the massive costs of the 15 months of the ongoing Russian invasion of Ukraine have set disquiet in Europe about the politico-economic uncertainties staring at them.

Some countries, like Poland, flooded with Ukrainian refugees, are rethinking and recalibrating their soured relations with Russia, as they try to look less sympathetic to war-torn Ukraine. The NATO countries’ economies, which depended heavily on Russian oil and gas, for nearly half their needs, have suffered grievously because of the war.

Now, Europe’s largest economy, Germany, where a recession has set in amid high inflation, is also trying to inch closer to Russia, the media reported on Friday.

German Chancellor Olaf Scholz, in an interview, said he was still “actively supporting Ukraine,” but, “at the same time wanted to prevent a direct conflict between NATO and Russia.”

With this objective, he said he planned to speak to Russian President Vladimir Putin “in due course,” holding out the prospect of resuming contact after a near-total breakdown in relations since the Russian invasion of Ukraine started on February 24, 2022.

“My last telephone call was some time ago,” Scholz told the Koelner Stadt-Anzeiger newspaper on Friday. “But I plan to speak to Putin again in due course.”

The two leaders had last spoken by telephone for an hour in December 2022 when the German leader urged Putin to withdraw Moscow’s troops from Ukraine. The Russian President accused the West of pursuing “destructive” policies, like expanding NATO nations’ territory right up to the Russian borders.

Since then, tensions have only escalated between Moscow and Berlin, particularly over the decision by Scholz’s government in January 2023 to allow German-made heavy battle tanks to be sent to Ukraine.

Asked about NATO’s reaction to his plans, Scholz said he does not “act alone, but in close coordination with our friends and allies.”

About the prospect of halting the conflict through negotiations, the German Chancellor said that Putin must understand that the war could not be ended by making “some kind of cold peace.”

“For instance, by turning the current front line into the new ‘border’ between Russia and Ukraine.”

“Rather it is about a fair peace, and the prerequisite for that is the withdrawal of Russian troops,” he added.

The invasion, and Moscow’s move to slash gas supplies to Europe, hit Germany particularly hard as the country had come to rely on inexpensive Russian energy to power its economy.

The conflict prompted Germany to drop a traditional pacifist stance, with Berlin sending a barrage of weaponry to help Kyiv in its fight against Moscow.

But a year on, the situation has changed.

Since early 2023, the German economy entered a recession after household spending in Europe’s economic engine finally succumbed to the pressure of high inflation.

Its GDP fell by 0.3 percent. German GDP data showed “surprisingly negative signals,” Finance Minister Christian Lindner said on Thursday. Comparing Germany with other highly developed economies, the economy was losing potential for growth.

The International Monetary Fund (IMF) predicted a recession in 2023 only in Germany and Britain among European countries.

Germany’s Economy Minister Robert Habeck said his nation’s previous high dependency on Russia for energy supply led to the recession but the growth forecasts were much bleaker.

“We’re fighting our way out of this crisis,” Habeck said at an event in Berlin on Thursday.

“Under the weight of immense inflation, the German consumer has fallen to his knees, dragging the entire economy down with him,” said Andreas Scheuerle, an analyst at DekaBank.

Household consumption was down 1.2 percent quarter on quarter after price, seasonal and calendar adjustments. Government spending also decreased significantly, by 4.9 percent, in the quarter.

“The massive rise in energy prices took its toll in the winter half-year,” Commerzbank Chief Economist Joerg Kraemer said.

A drop in purchasing power, thinned-out industrial order books, aggressive monetary policy tightening, and the expected slowdown of the US economy all argue in favor of weak economic activity.

The German Bundesbank, however, expects the economy to grow modestly in the second quarter of 2023 as a rebound in the industry more than offsets stagnating household consumption and a slump in construction, according to a monthly economy report published on Wednesday.