Germany’s Pearl Harbor Moment: The War’s Weightiest Consequence

German Chancellor Olaf Scholz on Sunday (Feb 27) opened his extraordinary speech to the German Bundestag with this sentence: 

  • “The 24th of February, 2022, marked a change in the history of our continent.”

Who does not hear the echo of Franklin Roosevelt’s famous first sentence, in his speech to Congress after the attack on Pearl Harbor: “Yesterday, December 7, 1941— a date which will live in infamy…”

Following Scholz’s Sunday speech (and we’ll get to the substance in a minute), Friedrich Merz, the German opposition leader, head of the CDU/CSU alliance, also spoke, in support of the government almost unconditionally. Merz began with the same grave sense of marking the moment:  

  • “This 24th September, 2022, is going to be a day which we will remember and we’re going to say about this day in the future that I remember where I was when I got the news of the war in Ukraine.”

Yes, you read that right. In his intensity, Merz misspoke – he actually said “September” instead of “February.” Did the obvious rhyme with Roosevelt’s “December” prompt this slip? A few sentences later he used the word“infamie” – infamy – to describe Russian actions against the Ukraine. 

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This is a vital moment in world history and there’s something petty about dwelling on mere finance. The psychological impact of Putin’s invasion was indeed felt in Western financial markets, which roiled down, then up – and it was felt throughout the commentariat, which had vastly misjudged the situation (and I include myself in that indictment). Mainly, it produced consternation and uncertainty. It confounded most of our experts, and left normally glib media pundits groping for What-To-Say. 

  • “We Have Never Been Here Before …Our world is not going to be the same again because this war has no historical parallel.” – Thomas Friedman, New York Times 
  • “We are not repeating history. This war is uncharted territory.” – Peggy Noonan, The Wall Street Journal  
  • “The dogmas of the quiet past are inadequate… We must think anew, and act anew.” – The Washington Post (quoting Abraham Lincoln from 1862)

In days to come, the markets will perform their function of “price discovery” – translating the new situation into the prospect for various sectors of the economy – energy, finance, semiconductors… But this weekend, as events have unfolded unpredictably, overthrowing many of last week’s confident expectations, the prevailing psychological regime in the U.S. is one of shock, pendency and doubt.  

Germany At The Center 

The impact of Russia’s aggression in the Ukraine on German public and political opinion has been all the opposite: it is clarifying. Scholz spoke to that clarity. 

I have admired Scholz for some time. He is an exponent of a more robust European federalism and the extension of the European Union’s constitution to embrace a common fiscal and financial policy, to grant the EU the full power to tax, spend, and borrow at the federal level – the thing most lacking in the original EU framework. The exigencies of the Covid crisis in 2020 prompted, at long last, a reckoning on this point, and by supporting this expanded federalism, which Germany had long resisted, Scholz — then the German finance minister – provided the decisive impetus to this initiative. He coined a wonderful phrase – “the Hamiltonian Moment” – to describe that historic policy shift, alluding to the similar measures instituted by Alexander Hamilton in the early days of the American republic. Scholz understood and accepted that the EU needed the same powers. I see him as a next-generation visionary for advancing Project Europe.

Now, however, a new “moment” has arrived – let’s call it Germany’s Pearl Harbor Moment. The policies and controversies of decades have been swept aside overnight. This is the lead story here: the enormous German psychological revolution, and the accompanying revolution in military and economic policy. That is what Scholz’s Bundestag speech was about.

Here are the major initiatives that Scholz laid out:

  • He declared an end to Germany’s self-imposed ban on shipping arms to conflict zones. This ban had been in force for decades, and would have seemed immutable before February 24. In January, almost perversely, Germany had even blocked Estonia from providing some of its own weapons to the Ukraine, because the weapons were of German-origin – “Germany has not supported the export of lethal weapons,” as Olaf Scholz himself had explained. That was then. Now, on Sunday, to concretize his message, Scholz promised to ship 1000 anti-tank weapons and 500 Stinger antiaircraft missiles to the Ukraine ASAP.
  • He suspended the Nordstream 2 gas pipeline project from Russia – a step that the Americans had sought for years, unsuccessfully, to persuade the German government to accept.
  • He pledged to immediately and permanently boost German defense spending above the 2% of GDP threshold, a long-ignored NATO goal.
  • He announced the creation of an immediate “special reserve” of €100 billion for strengthening the German Armed Forces.
  • He described a broad weapons acquisition program, to deploy new “drones, jets, carriers…” 
  • He pledged to create a strategic natural gas reserve – analogous to the U.S. strategic petroleum reserve – and to build two new LNG terminals in Germany, as part of a thorough revision of the country’s energy policy, and specifically the elimination of “energy dependency” on Russia, with of course major economic implications
  • He supported measures taken with other Western powers to “paralyze” Russia’s central bank, by halting its ability to use its foreign reserves, which “could effectively freeze a large part of Russia’s reserves abroad” 
  • Not least – he called for imposition of the Mother-of-all-Sanctions – the “financial nuclear weapon” – cutting Russia off from the SWIFT network.

The SWIFT move is in some ways the most surprising. SWIFT is the international payments messaging network that is said to be the backbone of the global financial system. It is essential to almost all cross-border economic transactions around the world. As recently as last Friday, the “informed view” in most quarters was that a SWIFT cut-off would not be invoked, that it would be blocked by the Europeans, especially the Germans. There was said to be much concern about the “sizable lending exposure in Russia” of some European banks. (Banks in Italy (e.g., Unicredit), France (SocGen) and Austria are the most vulnerable with over $60 billion in loans out to Russian entities — which could be stranded in the event of a cut-off.)  

But now Scholz and the German government have announced their support for an amputation. The impact is said to be devastating:

  • “Depending on how many banks the European Union and the United States plan to target through SWIFT, it could hobble the Russian economy’s ability to do business beyond its borders. When Western nations threatened to use this sanction against Russia in 2014, after it annexed Crimea, the country’s former finance minister Alexei Kudrin said it could reduce the country’s gross domestic product by 5 percent within a year.”  

The Bundestag responded to Scholz’s stunningly decisive program with thunderous applause and several standing ovations. His speech was emotional, inspiring, moving, and will be remembered as historic. Like FDR. (Well worth watching, here.)

Friedrich Merz in his remarks adopted an even more aggressive tone, supporting Scholz down the line, but with relish. He sparred contemptuously from the podium with the few recalcitrant members on the far right and the far left. He told them all “the world before the attack is not the same as the world after it… this heralds a new age.” He pointed out some highly inconvenient truths (worth quoting at length):

  • “The real challenge goes much deeper. We are seeing the ruins of German and European foreign and defense policies of the last decades and some of the seeming certainties of the last years have to be relegated to the past. Finally. We are not surrounded only by friends. We are also being threatened directly by an aggressive state….” 
  • “Germany needs to be ready to define its interests. Germany needs above all to be prepared to assert these interests. This includes the capability to defend the territory and population against any kind of intimidation, and the German armed forces – if we ask them today – they’re not able to do that.” 

[Merz is interrupted here by some shouting and a general uproar breaks out in the chamber.] 

  • “We are all responsible for the federal armed forces being in the condition that we find them in today….” 
  • “[Addressing Chancellor Scholz] To do away with this weakness in our country, and to provide the necessary tools, is something that you understand to be the historic task of your chancellorship.” [A 2-minute standing ovation followed.]

The German Pearl Harbor

Pearl Harbor ended, in one day, a century of isolationism in the United States (only briefly suspended in World War I and reasserted with the rejection of the League of Nations). It propelled America into the global role it has continued to play in the 80 years since. It was not the physical damage of the Japanese attack that was most important; it was the sudden transformation in public opinion, the completely altered American mindset. It set in motion previously unimaginable shifts in our economy. (For just one example — within weeks of the attack, Ford Motor Company halted all civilian automobile production for the next 4 years, and set to producing airplanes and other war materiel. Dozens of companies followed suit.)  

Germany has just experienced something similar, a sudden and decisive change in mindset and policy. Watch the Bundestag video and you will see a new spirit. After decades of accommodative and ineffectual quasi-pacifism, something much more vigorous has stirred in Berlin. It can’t be reassuring to Moscow. 

The measures announced by Scholz will have profound political and economic consequences. They represent the end of Ostpolitik (which sought to cultivate rapprochement with the historical antagonist). And it is probably also the end of Angela Merkel’s Wandel durch Handel, or “Change through Trade,” at least as far as Russia is concerned. 

In the coming weeks, analysts everywhere will work towards figuring out the specifics of the economic shift. Energy up, defense up, inflation up, interest rates not up…? Those are the sequels. Scholz’s policy announcements are the driving force.  

One has to wonder. Biden’s ineffectual blustering (as Putin probably saw it) was one thing. Half-hearted financial measures (as he may have assumed) – so what?  

But – German rearmament? Quite another matter. Perhaps one consequence of the Ukraine invasion that the Moscow spider failed to account for?

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