The financial windfall from oil and gas exports may boost regional officials’ ambitious economic diversification plans but doesn’t make them foolproof.
German Chancellor Olaf Scholz addressed a special session of the Bundestag (Germany’s lower house of Parliament) on February 27. In what could be considered a historic speech in response to Russian President Vladimir Putin’s actions in Ukraine, he committed the country to a 100 billion euro (about $113 billion) special fund to modernize the military, boost defense spending to 2% of gross domestic product to meet its NATO commitment, and quickly build two liquefied natural gas terminals. The chancellor also made a commitment to send arms to Ukraine, an active war zone, contrary to previous German policy. Germany’s foreign minister, Annalena Baerbock, said during the same event that, “If our world is different, then our politics must be different as well.”
However, there are still a couple of outstanding questions that could have an impact on German foreign policy reorientation. First is whether Russia will cut Nord Stream gas supplies, which were supposed to maintain stable relations with the Kremlin in the post-Cold War order but, along with Russian international oil sales, helped it amass gold and foreign exchange reserves of $635 billion. These funds are likely to be used to help Russia withstand pressure from significant and growing economic sanctions. Although Germany has suspended Nord Stream 2, whose operator has filed for bankruptcy, it still needs Russian gas in the short term, because gas is not as fungible as oil. The most likely scenario involves a reduction from the Nord Stream pipeline, along with maximizing growth in wind energy and switching to domestic heat pumps balanced with hydrogen to address seasonality.
Second is whether Germany will release itself from a debt break (the rule, introduced in 2009 and enshrined in the German Constitution, to limit government borrowing to 0.35% of GDP). This probably won’t be addressed until 2023 since the rule was already suspended until then due to the economic impact of the coronavirus pandemic. Removing the debt rule could enhance the German budget and expenditure and increase influence in chosen policy areas, while baking in future economic vulnerabilities last made apparent during the debt crisis in 2009. If these additional revisions are implemented, they will represent the wholesale rollback of decades-old center-left Social Democratic Party policy.
The U-turn on military funding alone is truly remarkable from a traffic light coalition of Social Democrat Party (Red), Free Democratic Party (Yellow), and Alliance 90/Greens. It is a significant departure from Germany’s mainly economic and embedded role in the European Union, and it will give Germany a greater voice on a wider range of issues in international affairs. With higher military spending, Germany could lead by example and encourage other allies in the EU and NATO to adopt a similar policy.
Germany’s Policy in the Gulf
In the Middle East, Germany has been able to leverage its close relations with Iran, originally developed when it was a great power during the 19th century, and with Israel, developed as part of its reconciliation policy since the end of World War II. Bilateral relations with Iran were especially useful in sustaining the E3 (Germany, France, and the United Kingdom) dialogue with Iran for the negotiation of the Joint Comprehensive Plan of Action nuclear deal and in the E4 framework with Italy alongside Iran concerning Yemen.
Germany’s economic relations with the Gulf Cooperation Council states have been dominated by EU-GCC Free Trade Agreement negotiations, which were launched in 1990, supported by developments such as the European single market in 1992 and the launch of an EU Common Foreign and Security Policy in 1993. However, negotiations only really developed after the creation of the GCC Customs Union in 2003. Talks ended in 2008 without resolution mainly due to a disagreement over export duties. A Joint Action Program, which was expected to expand cooperation in 14 key strategic areas, including economic issues, energy, and nuclear safety, was launched from 2010-13 but was not renewed. In 2017, a more formal EU-GCC dialogue on trade and investment was launched. The EU is the Gulf region’s second-largest trading partner after China, with trade in goods amounting to 97.1 billion euros (about $108 billion) in 2020.
Germany’s largest trading partner in the Gulf region is the United Arab Emirates followed by Saudi Arabia. Both these Gulf states have implemented “vision” strategies for economic diversification, which could provide opportunities for cooperation in areas such as health care, education, infrastructure, and renewable energy. Although German investment has been lacking in the region, the German government and utilities have been ramping up cooperation with Saudi Arabia, the UAE, and Oman on green hydrogen projects since 2021. Even though oil and gas companies have better access to gigawatt-scale hydrogen projects, there are many other states moving into this area. Qatar offers potential as a long-term gas supplier, although the U.K. has also adopted this strategy as a response to natural gas shortages in Europe. With Qatar recently designated a major non-NATO ally, closer German-Qatari cooperation has some logic to it. Another logical step would be for Germany to build energy relations with Iran, which shares the South Pars/North Dome gas-condensate field with Qatar. This would be contingent on the United States and Iran returning to the JCPOA but is not without geopolitical exposure and risk, including close relations between Russia and Iran.
German-UAE trade amounted to a modest 7.5 billion euros in 2020 (about $8.3 billion), which was above French-UAE trade (without arms sales) around the same time. But France, like the United States, the U.K., and increasingly Russia and China, maintains a more strategic dimension through arms transfers, which supercharge its total trade with the UAE. (2019 French arms sales to the UAE were valued at 8.3 billion euros, and France sold 80 Rafale fighter jets to the UAE in 2021 in a record-breaking 14 billion euro deal.) A principled German arms export approach stands in contrast with many other states that attach less conditionality to their foreign relations or none at all. Surprisingly, President Emmanuel Macron called then-Chancellor Angela Merkel’s position on arms exports after the killing of Saudi journalist Jamal Khashoggi as “pure demagoguery” and has sought to gain competitive advantage by being one of the first Western leaders to visit the kingdom in its wake. France also invests in more cultural cooperation, incorporating outposts such as a Sorbonne University campus and a Louvre-branded museum, as well as a permanent military base in Abu Dhabi. This forms part of the UAE’s hedging strategy: a national security or alignment strategy featuring protection-oriented ties with friendly powers.
At the political level, after former German Foreign Minister Sigmar Gabriel made a remark about Saudi adventurism in the Middle East (i.e., in Lebanon vis-à-vis the detention of former Lebanese Prime Minister Saad Hariri and its actions in Yemen), the kingdom withdrew its ambassador to Germany and denied accreditation to Germany’s ambassador. German exports to the kingdom subsequently dropped 5% in the first half of 2018 before the fallout from the comment was contained later that year. Should Germany choose to build its relations in the GCC through modifications to its arms export policy, it would no doubt be welcomed by these states interested in diversifying their defense arrangements and pursuing more joint ventures. Nevertheless, Germany may continue to encounter previously unanticipated political issues that impact its relations with one or more GCC countries. The ongoing close relations between the UAE and Russia stand in stark contrast to those between NATO states and Russia. It’s also hard to see German-Saudi military cooperation should Russia-Saudi joint military cooperation remain in place. Other opportunities or obstacles for cooperation could materialize as the GCC states attempt to balance, to various degrees, between the United States, Russia, and China.
The U.S. Role in Germany’s Gulf Policy
The United States has been decisive over several decades in shaping German relations in the Gulf. Former U.S. Secretary of State James Baker requested German talks to support Saudi Arabia during the Gulf War, which then-Chancellor Helmut Kohl agreed to. While Germany declined to join the U.S.-led coalition in Iraq, then-Chancellor Gerhard Schroder toured the Gulf in 2003 and decided to work with the UAE in training the Iraqi police and military, done in part to maintain cordial relations with Washington. Germany has supported the U.S.-led Combined Joint Task Force – Operation Inherent Resolve against the Islamic State in Iraq and the Levant in a noncombat role and has been active in the diplomacy-focused Global Coalition against ISIL. The United States will, no doubt, welcome the metamorphosis of a key European ally in combatting regional threats and strengthening the NATO alliance.
A New Competitive Edge?
Germany has lacked traction with the GCC states at the economic, political, and strategic levels. Distractions such as the 2009 debt crisis, 2015 migrant crisis, coronavirus pandemic, and a new coalition in the German government, formed after the December 2021 federal elections, have all diverted German attention from the Gulf. The Ukraine crisis has come to dominate and unite decision making in Berlin but still within a European security rubric. German military influence is bound to grow in the EU/NATO multilateral framework, and while its policies in the Gulf will continue to be shaped by its energy policy, U.S. policy, and other geostrategic considerations, these factors combined with more investment may eventually give Germany a more competitive edge over EU competitor countries in its relations with select Gulf countries.
is a non-resident fellow at the Arab Gulf States Institute in Washington and a fellow with the Sectarianism, Proxies and De-sectarianisation Project at Lancaster University.
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