Alternative for Germany: Kyiv's defeat would create a cascade of political and economic problems in the country and would cost the Germans more than increased aid to Ukraine

Since Trump's victory, the political crisis in Germany has further intensified the uncertainty over Ukraine's future and virtually paralysed Europe's ability to formulate an independent position on the issue.

Some members of the collapsed coalition claim that the final trigger for the crisis was the dispute over the amount of aid for Ukraine. Most likely, the former partners realise the need to maintain or even increase the allocation of aid when American support is in question. However, they are under intense pressure from voter fatigue when it comes to the topic of Ukraine.

According to recent polls, populist parties advocating for the swift end of the war through concessions to Putin – ‘Alternative for Germany’ and the Sarah Wagenknecht Bloc – would together receive more than a quarter of the votes if elections were held next weekend.

However, experts from the Kiel Institute for the World Economy argue that instead of saving money by cutting aid to Ukraine, which currently amounts to 0.1% of Germany's GDP, the country’s expenses will, on the contrary, rise. This is because Germany will bear the largest share of the costs from the likely defeat of Ukraine in such a scenario.

They estimate these costs at 1-2% of GDP annually for the next five years. First, Germany will have to significantly increase its military budget, as well as likely provide aid to the Baltic states. Second, the country will face a new and even more massive wave of refugees. Third, it will have to bear the losses associated with the rupture of trade ties and the loss of investments made in Ukraine. All these costs will, in turn, become an additional political challenge for the country and the entire EU.

Against the backdrop of the total uncertainty caused by Trump's victory in the US elections, the political crisis in Germany is virtually paralysing Europe's already weak ability to formulate an independent position on Ukraine in the new political realities. Coincidentally, the so-called 'traffic light coalition' (SPD + FDP + Greens), which had ruled Germany since the end of 2021, ceased to exist on the day the results of the US elections were announced.

Christian Lindner, the leader of the Free Democratic Party, who was ousted from the ‘traffic light coalition’, claims that the dispute over aid to Ukraine was the reason for his dismissal from the position of finance minister. According to Lindner, Chancellor Olaf Scholz demanded an additional €3 billion in aid to Ukraine if Trump won. Lindner refused and, instead of an amount that ‘would change nothing’, suggested approving the delivery of long-range Taurus missiles to Ukraine. This did not satisfy Scholz.

In reality, support for Ukraine is only one part of a conflict that has been developing for a long time. One way or another, members of the ‘traffic light coalition’, could not agree on the 2025 budget. Scholz advocated for weakening the so-called debt brake, which limits the budget deficit to 0.35% of GDP. Lindner, on the other hand, proposed a series of structural reforms and spending cuts, including social expenditures. The Social Democrats, to which Scholz belongs, and the Greens, the third party in the ‘traffic light coalition’, disagreed with reducing social spending. Without weakening the ‘debt brake’, it is unlikely that significant increases in aid to Ukraine would be possible. The continuation of current funding levels is also in question. Earlier, Germany announced it would cut direct aid in the coming year by half, expecting that these funds would be replaced by a loan (→ Re:Russia: The ‘Ukraine Plan’ and Scholz’s Plan).

Friedrich Merz, the leader of the Christian Democratic Union (CDU), who, according to polling data, is highly likely to become Germany's new chancellor, has not yet clearly articulated his position on aid to Ukraine. Previously, he had supported the delivery of Taurus missiles, but he refused Scholz's post-coalition proposal to push a number of laws through the Bundestag, including additional aid to Kyiv.

Experts at the German Foreign Policy Society (DGAP) suggest that additional aid may still be agreed upon. During the 21 days between the vote of confidence in Scholz (who is expected to lose) and the dissolution of the Bundestag, Merz and his party may approve the law without forming an alliance with the opponent, who is publicly accused of having ‘divided the country’ with his inability to negotiate. At the same time, politicians will take into account voter expectations. Stopping the war at any cost is one of the issues on which populist parties like the 'Alternative for Germany' and the Sarah Wagenknecht Block are gaining traction, particularly in the eastern regions. According to a Civey poll commissioned by the Berliner Morgenpost,in August, 46% of citizens believed that Germany should maintain a leading role in supporting Ukraine, while 43% opposed it. According to a poll by the INSA organisation, if elections were held this weekend, 32% of the vote would go to the Christian Democrats (+8 percentage points compared to the previous elections), 19% to the 'Alternative for Germany' (+8.6 percentage points), 16% to the Social Democrats (-8.3 percentage points), 11% to the Greens (-3.7 percentage points), and 7.5% to the Sarah Wagenknecht Block (a new party). Other parties, including the Free Democratic Party, which recently dropped out of the coalition, would not pass the 5% threshold.

Populist pressure is silencing even the proponents of increased aid to Ukraine. The paradox, however, is that Ukraine's defeat due to insufficient support will result in costs for Germany that, contrary to populist rhetoric, will far exceed the current expenses on aid to Ukraine, experts from the Kiel Institute for the World Economy (IfW Kiel) wrote in a special review.

According to the Ukraine Support Tracker project from the same Institute, by 31 August 2024, Germany had provided Ukraine with military aid totaling €10.63 billion, humanitarian aid of €3.05 billion, and financial aid of €1.41 billion, totaling €15.09 billion. The United States (€84.73 billion) and the European Union via the European Commission (€43.84 billion) have provided more. In terms of military aid, Germany ranks second after the United States, but with a large gap: €10.63 billion versus €56.8 billion. Germany's current spending on Ukraine, which amounts to 0.1% of GDP per year, is not excessive, the report's authors note: Germany ranks only 16th among European countries in this regard. For comparison, Denmark spends 0.65% of its GDP annually on aid to Kyiv, Estonia spends 0.57%, and Latvia spends 0.43%.

However, in the event of Kyiv’s defeat, Germany's expenses will increase over the next five years, averaging 1% of GDP per year in the baseline scenario, and up to 2% in the negative scenario, i.e., from €42 billion to €84 billion. These estimates are based on three key assumptions. First, Germany will have to significantly increase its military budget and likely provide aid to the Baltic states. Second, the country will face a rise in the number of refugees. Third, it will bear costs associated with the disruption of trade relations and the partial loss of investments in Ukraine.

Emboldened by military success, Russia will pose a direct threat to European security – especially in vulnerable regions like the Suwalki Corridor between Kaliningrad and Belarus, the report's authors explain. To reduce the risk of isolating Estonia, Latvia, and Lithuania from the rest of Europe, NATO and the EU will need to invest significant resources in tanks, air defense systems, naval equipment, drones, electronic warfare systems, cyber defense systems, and so on. Additional military expenditures for Germany will range from 0.5% of GDP (€21 billion) in the baseline scenario to 1% (€42 billion) in the negative scenario, according to IfW experts.

The authors of the report estimate that a new wave of emigration from Ukraine could involve between 9.4 million and 19.1 million people. If the distribution of refugees among countries remains the same, 20% of them could arrive in Germany, meaning between 1.9 million and 3.8 million Ukrainians. To date, the country has accepted about 1 million. Based on calculations by the Organisation for Economic Co-operation and Development (OECD), which estimated the cost per refugee at €12,800 per year, IfW experts determine the minimum cost of accepting a new wave of refugees to be €24 billion (0.57% of GDP) in the baseline scenario, and €49 billion (1.14%) in the negative scenario.

Over time, as the arrivals integrate, the costs decrease, although not quickly. Two and a half years after the start of the war, only about 18% of Ukrainian refugees of working age have found employment and are fully self-sufficient, including paying social contributions, according to the report’s authors. They estimate the integration potential to be 10% of the newly arrived refugees per year. At the same time, a mass influx of new refugees is likely to worsen this dynamic because language courses and administrative services will become overloaded.

If Russia wins and Ukraine falls under its sphere of influence, it will sharply reduce trade with the West, including with Germany. Additionally, Germany will have to write off investments. Based on data from the German Federal Bank, the report’s authors estimate the total losses from these two events at €4.4 billion in the first year after Russia’s victory (0.1% of GDP). Investments (€2 billion) will likely be lost. However, losses in foreign trade could be recovered within a year in an optimistic scenario.

In addition, the IfW experts warn of potential additional indirect costs. In particular, they consider a scenario where China, inspired by Russia's victory, invades Taiwan. If the West responds by imposing sanctions on China similar to those against Russia, essentially halting trade with China, Germany’s GDP could shrink by 5%, the authors calculate. If the invasion is successful and the West loses access to Taiwan's semiconductor production, the consequences could be even more devastating. The German economy will also be impacted by the very threat of escalation: even with a 10% increase in the risk of a Chinese invasion of Taiwan, Germany’s GDP could lose 0.5%, according to a model created by the IfW experts.