July 04, 2018
Trump to confront Merkel head-on over Nato
Next week's Nato summit promises to be the high-noon showdown of the transatlantic community - possibly the beginning of the end of Nato. We are hearing more details of what Donald Trump wrote in his letters to various Nato leaders. The letter to Erna Solberg, Norway's prime minister, has been quoted in full. It is full of threats, even reminding Norway of its proximity to Russia.
But Norway is not the main issue here. It is Germany. This became clear in the letter he sent to Angela Merkel, extracts of which were published in the New York Times. It says:
"Continued German underspending on defence undermines the security of the alliance and provides validation for other allies that also do not plan to meet their military spending commitments, because others see you as a role model."
The German government is reacting the way it always reacted to these accusations. With a shrug, accompanied with an outright lie.
FAZ has the precise details of Germany's defence spending plan. The defence budget will end up falling from a proportion of 1.24% of GDP by the end of the coalition's four-year planning horizon. Yet, Olaf Scholz' budget proposal to the cabinet makes the following statement (our translation):
"In view of the Nato agreements, another decisive step will have been taken in the direct of the Nato target range."
This statement is a lie on so many levels. For starters, the commitment is not a range, but a number. Just like the ECB's inflation target is not a range either. And of course, there can be no question that Germany is on its way to meeting the target of 2% when the trend is going in the other direction. It is the policy of the German political parties, the SPD especially, that this target is not met. And Merkel is not fighting for this, but letting her finance and defence minister fight this out between them. It is the quintessential quality of her leadership not to solve problems.
We would add that Germany not meeting an agreed defence spending target is not only becoming an existential problem for Nato but also for the future development of a European defence and security pillar.
On a separate note, we see that Trump's threats on the commercial side are already having an effect. The FT reports this morning that the EU is considering a multilateral alliance with South Korea and Japan to agree lower car tariffs in order to forestall US car tariffs. We are not sure that such a deal can be transacted ahead of the Congressional elections as Trump clearly wants to those in place. Or whether they are politically feasible, since this is mainly a German problem, not a general EU-wide issue. We will monitor developments closely, but our working assumption for now remains that those car tariffs, 20 or 25%, will happen.