Guten Morgen!

Lots going on this week, many stories to report. We had a state election this past weekend, whose implications Dr. Steven E. Sokol dives into in the Guest House’s View. In our main articles, we take a look at how Germany’s aerial defenses are poised against possible Russian missiles and how realistic the EU’s semiconductor strategy is. Finally, Anna’s WOOM analyzes why the Free Democratic Party might be losing its raison d’être. Happy reading and have a great start into one of the first Spring weekends!

Anna                                Christian

German Air and Missile Defense or Why We’re Potentially in Trouble

Since Russia started its invasion of Ukraine, also Germany and its neighboring states are of course asking themselves one big question: Would we be prepared should Russia expand its attacks on the rest of Europe? The answer is most likely: no, not really. This becomes especially clear if we have a look at the German air and missile defense system which experts did in the last weeks. We had a look at some privileged information from the German Ministry of Defense.

Since the end of the Cold War, Europe experienced an era of disarmament. This becomes especially visible in the German air and missile defense system. Currently, we have mainly the so-called “PATRIOT” system at our disposal, an originally American technology. It can protect German cities or German military forces in deployment abroad against selective missile strikes. However, Germany doesn’t have an multi-city defense system at its disposal. Just as an example, to protect Berlin alone, all PATRIOT units would have to be relocated there and even then, it’s not certain the whole city would be protected. Shit.

The most prominent idea experts came up with was the establishment or even acquisition of a system similar to Israel’s Iron Dome. The system could be ready by 2025 and costs in the ballpark of €2 billion. That’s the good news. The bad news is that Germany is much bigger than Israel and the system wouldn’t bring the full protection you might hope for. Especially against Russia’s go-to missile types (like the hypersonic ones). The German Ministry of Defense assesses the costs for setting up a functioning air and missile defense system to be somewhere between €6 and €18 billion. These budgetary needs will definitely be part of the discussion around the new €100 billion special asset for the German military.

Putting All the Chips on Digital Sovereignty

Back in February, the European Commission unveiled a set of measures to secure the supply of semiconductor technologies and applications and “ensure technological leadership.” It’s called the European Chips Act. In a [Kraut]shell, the EU will pour tens of billions of euros into R&D for semiconductor tools in Europe, as well as a mechanism to monitor and anticipate potential supply shortages.

This week, Margrethe Vestager, Commission Executive Vice President, Commissioner for Competition, and responsible for guiding Europe’s digital future was in the hot seat at the European Parliament for what is called a “structured dialogue.” At these meetings, Members of the European Parliament grill proposed legislation, which gives the Commission (and us) some initial ideas on which topics will be controversial going forward.

Let’s just say Vestager was hit with a wave of reality. One member of the ECR group said no major producer would manufacture in the EU without additional tax benefits. A member of the S&D group pointed out that a cutting-edge production facility for this technology costs 20 billion euros alone, almost 50% of the planned 43 billion euros to be allocated by the EU. Meanwhile, China plans for 150 billion dollars in investment by 2026. A member of the Greens put a damper on the ambition to gain 20 percent of future global market share in semiconductor production and lamented the adverse environmental impacts of the semiconductor industry. Furthermore, the Renew group questioned how the Commission would be able to pull together the necessary funds, given the implementation and coordination problems in existing funding initiatives like Horizon Europe. And, finally, the multi-billion-dollar question: are there even enough European companies active in the chips sector to make this work? Well, it seems Ms. Vestager and her team have their work cut out for them…

Healthcare Experts, Listen up!

Having deep connections in Berlin and Brussels political circles does have it perks, particularly when it comes to informational advantages. This week, we managed to get an early look at the German Federal Ministry of Health’s (BMG) work program for 2022 and of course we had to share the most interesting projects with the Krautshell audience.

Unsurprisingly, the BMG has been primarily occupied with fighting the Coronavirus, which was stepped up even further after the government named outspoken (and by now internet meme sensation) virologist Dr. Karl Lauterbach (SPD) as Federal Minister of Health. Now, Lauterbach’s Ministry must get to work implementing plans set out in the coalition treaty. Focus number one: getting finances in order.

Specifically, Germany’s health insurance system faces an enormous deficit. The plans indicate a reduction on sales tax on pharmaceuticals, a lowering of the sales threshold needed for orphan drugs to be reimbursed, and an additional five billion euros in annual financial injections by the government. Specifically, these first two measures are an attempt to increase sales volume of medicines. Moreover, under the category of “lessons learned from the pandemic,” the BMG wants to drive forward more decentralized stockpiles of medicines and medical products for better preparedness. To stock up these reserves, the government needs trustworthy partners to supply them. Finally, within the G7 Presidency, priorities include pandemic eradication, combatting antibiotic resistance, and reducing the impact of climate change on public health. We hope there was something in there that could inform your work, and if you want any more details, feel free to ping us!

(and take a look below to find out what these results mean)

Source: Landeswahlleiterin Saarland

by Dr. Steven E. Sokol, President, American Council on Germany

Voters go to the polls. Again…

Last Sunday voters in Saarland – the small western German state on the border of France and Luxembourg – took to the polls in the first litmus test for Social Democratic Chancellor Olaf Scholz and the new Ampel government in Berlin. This was also the first bellwether for the Christian Democrats under the leadership of Friedrich Merz. (Remember, the CDU saw a historic drop in last September’s federal election from 32.9 percent in 2017 to 24.1 percent in 2021 – after winning 41.5 percent of the vote in 2013.) Sunday’s election will be followed by state elections in Schleswig-Holstein and North-Rhine Westphalia in May and Lower Saxony in October. While the Social Democrats (SPD) are looking to consolidate their power at the state level (and in the upper house, Bundesrat), the conservative Christian Democrats (CDU) will be trying to win back support after major losses at the federal level.

Saarland. Got it. And what’s the background?

With a population of less than one million, Saarland is Germany’s smallest state (apart from the city-state of Bremen), but it has produced some politicians who achieved name-recognition at the national level including former party chair and Defense Minister Annegret Kramp-Karrenbauer and Economics Minister Peter Altmaier (both CDU), as well as Foreign Minister Heiko Maas (SPD).

Saarland has traditionally been led by the CDU. Except for the period between 1985 and 1999 – when the center-left Social Democrats held the majority of seats in the Landtag – the center-right Christian Democrats have governed alone or in a coalition continuously since 1957. But, support for CDU Minister President Tobias Hans has been dropping since November

On Sunday, in the Saarland the Social Democrats won 43.5 percent of the vote and the Christian Democrats won 28.5 percent of the votes. This means that the SPD’s lead candidate, Anke Rehlinger, will oust Minister President Hans, who had previously led a Grand Coalition with the SPD as a junior partner. The strong result will allow her to rule Saarland without any coalition partner.

What about the other parties?

Significantly, the Greens and the liberal Free Democratic Party (FDP), which are coalition partners in Scholz’s government at federal level — missed the five percent hurdle needed for entry to the Saarland state parliament. After the CDU, the Left Party suffered the greatest losses going from 12.3 percent to 2.3 percent. In addition to the SPD and CDU, the only other party represented in the state parliament is the far-right Alternative for Germany (AfD) with 5.7 percent.

Reading the Post-Election Tea Leaves

The election results in Saarland carry important symbolism. Some see it as confirmation of the rebirth of a robust Social Democratic Party. Others think that the poor showing for the CDU could zap momentum and lead to a “domino effect” for the party in the upcoming state elections. The Greens were 23 votes short of passing the five percent threshold. Never strong in Saarland, internal strife among the Greens at the state level undoubtedly contributed to this result. The liberal Free Democrats seem to be sputtering as Finance Minister Christian Lindner walks a fine line between fulfilling his party’s campaign promises and meeting the requirements of his new post.

Symbolism aside, let’s not make too much of these results. Saarland is a small – and this was the first of three regional contests this spring that will serve as interim report cards for Scholz, his government, and the main opposition Christian Democrats. (When the most populous state North-Rhine Westphalia goes to the polls in late May, it could be far more consequential.) And – more importantly – there’s a lot going on right now.

The Guest House’s View

Putin’s war is dominating the headlines and upsetting the sense of peace and stability in Europe and around the world. It is contributing to spiraling energy prices, food shortages, and mass migration – and Germany is key in addressing these new challenges. But, it is a tricky path forward for Berlin.

Germany has received nearly 300,000 refugees from Ukraine – and the unofficial numbers are likely much higher than that. It is working hard to accommodate and integrate them – and there has been an outpouring of public support.

The conflict in Ukraine has called into question some of the tenets of the new government’s “value-oriented foreign policy.” Vice Chancellor and Minister of Economics and Energy Policy Robert Habeck recently traveled to the United Arab Emirates and Qatar to shore up energy supplies while Germany fast-tracks investment in renewables. Some say Germany is switching its dependence from a war-monger in Moscow to autocrats in the Middle East.

But, since his big speech before the Bundestag in late February announcing a major policy shift in foreign, security, and energy policy, Chancellor Olaf Scholz has not been as present as one might expect. Will Germans and others start asking “Wo ist Scholz?” again? To be successful, leadership requires sustained attention and action and Scholz will need to ensure that his Zeitenwende speech doesn’t just become a bunch of words with no meaning.

With more state elections on the horizon – and questions about the Zusammenhalt (cohesion) of the coalition – Scholz has to convince the electorate that while it might be bumpy, Germany’s new direction is here to stay.

• Brussels is Back: This week, I (Mats) was finally able to enter the European Parliament again with my external accreditation and boy can I tell you it was a great feeling. The occasion was a seminar with leading economists on Russian oil imports. It was incredibly informative, and there’s no better feeling than being able to get right back into the hustle and bustle of the Brussels bubble.

• The Not-So-Quick Relief: Last week, we reported that the Federal Government agreed on a quick relief package because of the rising energy prices. This week, there is still no draft legislation. Turns out the quick relief is not so quick. There are some organizational issues but also some fights between the governing parties. Main pain points: the €9 public transport ticket and the reduced tax on fuel. German consumers will have to wait for a relief on their wallet probably until the 1^st of June.
• Come Visit Germany: After Mats was able to go to the EU Parliament again, also the German Bundestag is finally opening its doors for bigger visiting groups. From the 9^th of May onwards, visiting groups can watch plenary debates from the stands again. In case you are planning a Berlin visit and want to ensure you have the best company to visit a plenary session, we are happy to show you around. Ping us!

The Voters(‘) Notice.

You just read it in the Guest House’s View: The FDP did not make it into Saarland’s parliament. Nevertheless, FDP Chairman Christian Lindner is trying to sell the gain of 1.5% in comparison to the last elections as a success. What’s more, he refuses to see any connection to his policy-making on Federal Level and suggests the party’s main issues are of not that big a concern in Saarland. I am not so sure about that.

Especially when looking at the latest polls for the upcoming elections in the states of North Rhine-Westphalia (-4,6%) and Schleswig-Holstein (-2,5%) as well as the federal level, where, according to current numbers, the FDP would score 1.5% less than in the federal elections last year.

Maybe, just maybe, it does have something to do with the federal level and the policies Christian Lindner is signing on in his capacity as Federal Minister of Finance after all. The Liberals (in Germany) are known as the party of a lean state, of regulatory policy* (a.k.a. Ordnungspolitik), of low taxes and economical freedom. All things they were elected for in 2021, and what they claim to be their responsibility as part of the government coalition.

The reality however, is quite different: Not-retrieved credit authorizations installed for the Corona crisis being devoted to climate change measures. Additional funds for helping companies affected by the Ukraine war and relief for the consumers because of raising energy prices. And huge additional spending for the envisioned defense budget.

They are all important causes, for sure. But there are always reasons, and important reasons, to increase spending. I still would expect the Minister of Finance, and a liberal one for that matter, to not only consider the reasons for spending, but also the reasons for saving. Or, at least try to balance necessary expenditures with cuts in other areas and stick to the principles of regulatory policy. Just as the party promised in their election campaign. And then, maybe, just maybe, the polls might look different.

*After much searching we figured out there’s not a direct translation for Ordnungspolitik, but in this sense we define regulatory policy as: encompassing the rules, institutions and actions that enable the economy to be organized according to the principles of the market and competition. In this context, the main objective is to ensure competition and guarantee the freedom of individuals to pursue their economic activities.