Germany's position as Europe's leading economic and political power put Chancellor Merkel in an awkward position vis-a-vis how to address Vladimir Putin's extra-territorial activities. With high implied stakes for the post-Cold War order, Germany must carefully balance its self-interest with its obligations to NATO and its neighbors. This makes Germany particularly vulnerable to a backlash, both from Europe -- if it fails to do the 'right' thing -- and Russia, so the Chancellor must proceed with caution.
A majority of Germans remain unconvinced that increased military spending is the answer, with a Reuter's poll from June finding that 74 percent of Germans were strongly opposed to the prospect of having a permanent German presence in the Baltics. It was therefore no surprise that the German government balked at NATO Commander Rasmussen's proposal for members to pledge 2 percent of their GDP to future defense spending. Defense Minister von der Leyen publically stated she believed the 2 percent target was 'arbitrary'.
At present, Germany falls well short of Rasmussen's benchmark, spending only 1.3 percent of its GDP on defense. Given the ongoing NATO orientation toward enhanced economic sanctions against Russia, it is becoming increasingly clear that this is Germany's weapon of choice. A meaningful expanded commitment to conventional armaments remains unlikely in the near term, since Germany is already the second largest overall contributor to NATO (after to the US), and the largest European contributor.
Merkel's public relations "saving grace" is the dated NATO-Russia "Founding Act on Mutual Relations, Cooperation and Security", which, when put into place in 1997 was intended to smooth over Russian concerns about NATO expansion. In the face of the Ukraine Crisis, Germany has conveniently used the Act -- which holds that NATO members must not place "substantial" NATO capabilities in Eastern Europe -- to justify its hesitancy to ramp up its defense spending.
While NATO continues to promote its agenda for a larger presence in the Baltics, Poland asserts that regardless of Germany's decision to uphold the treaty, Russia's invasion of Georgia, and its annexation of Crimea, have effectively scrapped the agreement. Openly parsing the wording of the Founding Act, Rasmussen has stated that while there would be no "permanent stationing" in the Baltics there will be "continuous presence and activity in the air, on land and at sea in the eastern part of the Alliance, on a rotational basis". The semantic difference between "permanent" and "continuous" is just enough to allow NATO to bolster its forces while allowing Germany to avoid a politically damaging "permanent" commitment.
Despite increasing aggression by Russia and pressure from NATO, Merkel remains steadfast in her commitment, having asserted last month that there would be no permanent stationing of combat troops in the Baltics "for the moment", so as not to overstep the Act. Using the words "for the moment" serves the dual purpose of heeding public opinion while leaving the door open to change her stance should circumstances warrant it.
Germany and Canada -- two of the most vocal nations opposed to NATO's budgetary expansion -- were also the most visible in the Baltic Air Policing Mission, taking the helm of Baltic sorties on September 1st. Germany is chief among NATO nations adhering to NATO's austerity-driven "smart defense" policy, intended to pool resources and coordinate activities in order to do more with less. The expanded Policing Mission offered cost-conscious nations the optics of deterrence without the hefty price. While Germany may not be ready to commit to a Cold War-sized military budget, its participation in the BAPM indicates the limits to its tolerance of further incursions into Ukraine.
Germany intends to do its part to guarantee a broader peace through limited "smart" defense measures. Later this month, it will participate in the "Rapid Trident 2014" military exercises in Ukraine, the first significant foreign presence in the country since the outbreak of tensions with Russia. Can Germany sustain its approach of diplomatic restraint and limited "smart defense" for the foreseeable future?
When in 2006 NATO asked for a similar 2 percent commitment from its 28 members, Germany and 24 other members promptly ignored it. There appears to be an unwritten German budgetary rule, which limits the scope of its military commitments. Since the 1990's, Germany has never committed more than 1.5 percent of its GDP to defense spending. Even in the wake of 9/11 and the increased use of NATO resources for broader anti-terror operations, its military expenditures have consistently remained at 1.5 percent of its GDP.
But that was before the failure of President Obama's attempt to reset relations with Russia, Mr. Putin's brazen attempt to reassert Russian influence in the former Soviet Union, and the Ukraine crisis, which has delivered the potential implications of a NATO military budget shortfall to Germany's doorstep. As Europe's economy continues to flounder and Mr. Putin's antics continue to rattle Europe, the Chancellor should find it difficult to limit future defense spending to 1.5 percent of GDP in the medium-to-long term. That 2 percent threshold is likely to seem more achievable given the potential ramifications of not doing so.
*Daniel Wagner is CEO of Country Risk Solutions, Senior Advisor with Gnarus Advisors, and author of Managing Country Risk. Allison Sorkin is a research analyst with CRS based in New York.