Germany’s GDP Costs Could Increase by up to 20 Times if Russia Wins

It is cost-effective for Germany to maintain and “even significantly increase” support for Ukraine, because the cost of Russian victory in the war could cost it as much as 20 times its current spending on aid in future years. 

Germany’s average annual military support for Ukraine is estimated to be 0.1% of GDP, but it could increase to as much as 2% of GDP annually, if Russia succeeds in its war in Ukraine, the Kiel Institute for the World Economy’s new paper estimated. 

These losses include a list of measures Germany will need to face: 

• An increase in its contributions to NATO and the security of

the Baltic states substantially beyond current levels.

• A probable influx of additional refugees in need of financial support.
• The costs of trade disruption and the partial loss of investments in Ukraine.

The report’s authors Johannes Binder and Moritz Schularick point out that there have been voices advocating a decrease in Ukraine’s military support and readdress it toward domestic uses, but the cost of supporting Ukraine “has been tiny from a macroeconomic point of view”.

Russian victory could spike losses if predictions of further aggression against Europe are borne out. “In addition, there will be indirect costs resulting from the loss of Western deterrence, making future conflicts around the world more likely and leading to substantial costs in terms of lost trade and growth,” the authors wrote. 

Ineffective German domestic policies eat almost the same revenues as aid to Ukraine 

Germany has provided Kyiv with a total of around €10.6 billion ($11.56 billion) in military aid since 2022. Even when including bilateral humanitarian and financial aid to Ukraine, Germany’s cumulative contributions remain modest in relation to its economic output at 0.14% of GDP. During the 1991 First Gulf War Germany allocated 0.6% of GDP - six times as much as it does to Ukraine. 

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Germany’s contribution as a percentage of GDP ranks it only 16th among its European neighbors. Several European countries, including Denmark (0,65%), Estonia (0,57%) and Latvia (0,43%) have devoted substantially larger shares of their economic output to military support for Ukraine, the researchers stated. 

Binder and Schularick point out that even redirecting this resource inside the country will not mean it will bring much public benefit. Germany has ineffective policies that also eat its tax revenues in volumes very alike to what the country spends to help Ukraine. 

“The energy tax credit for diesel fuel (“Dieselprivileg”) reduces tax revenues by an estimated €9.6 billion ($10.47 billion) each year. Ongoing subsidies for internal combustion company cars at €13.7 billion ($14.94 billion) each year exceed the cumulative German military aid to Ukraine since the Russian invasion,” they wrote. 

Risks for Germany if Russia wins

If Russia’s military wins and Russia dictates the terms of a settlement, Binder and Schularick presume it will occupy additional territories and install a puppet government in Kyiv, “dashing hopes for EU accession and westward orientation”. 

But this will also not mean the end of safety in Europe as it rises risks  in vulnerable regions like the Suwałki Gap, the land corridor between Kaliningrad and Belarus. 

“If exploited by Russia, [the land corridor] could isolate the Baltic states (Estonia, Latvia, and Lithuania) from the rest of Europe. To prevent this, NATO and the European Union would need to significantly bolster their conventional military capabilities,” report writes. 

From 1.9 million to 3.8 million Ukrainians could migrate to Germany in case Russia wins, analysts counted. This could also lead to a €7 billion ($7.63 billion) reduction in German exports. “Similarly, a significant part of German direct investment in Ukraine of around €2 billion ($2.2 billion) would likely have to be written off,” authors stated. 

Proving that the war in Ukraine is too costly for the Kremlin is the way to make Russia stop the invasion.