Trump's War, Putin's Profit, and Germany's Opportunity

Donald Trump's escalation in Iran is bolstering Vladimir Putin's position and replenishing Russia's war coffers. Germany must now do everything possible to stimulate its domestic economy.

The financial markets consistently react critically to Trump's chaotic economic policies. Just as with his trade wars, markets showed skepticism, and a similar trend is now evident in the Iran conflict. Despite Trump's reassuring statements about the Iran war, oil prices quickly climbed to $95-100 per barrel, as markets did not believe his promises of a swift end.

The Iran war is escalating without a clear objective, plunging the global economy into chaos as Iran retaliates with counterattacks. This drives up prices, a particularly problematic development for Trump ahead of the midterm elections.

The situation demands a two-pronged response: one geopolitical, and one domestic and economic.

Washington temporarily lifted sanctions on Russian oil. With prices at $90-100, Vladimir Putin, whose economy was previously under significant pressure, can once again fill his war chest. Although Russia's economy had been weakened, Putin has regained strength through the oil crisis and is now sardonically offering oil to Europe, should they ask for it.

Europe finds itself in a dilemma: EU member states are divided on their Russia policy, with some countries like Hungary and Slovakia blocking sanctions. It will be challenging to justify continuing to shun Russian oil when it is once again legally traded globally, especially considering past imports routed through India.

While the US is embarking on an unpredictable military adventure in Iran and the world grapples with a dramatic energy price shock, Putin is refilling his war chest, and Ukraine becomes a pawn in the larger game. The market continues to disbelieve this policy, with oil prices rising above $100. This is the geopolitical answer to what will follow Trump's Iran war.

Germany's Challenges and Government Perspectives

The German federal government anticipates significant economic setbacks due to the ongoing conflict and high oil prices. Instead of an expected upturn, the focus will be on preventing a return to stagnation and combating rising inflation for 2026.

A certain resignation pervades Berlin among officials, who lament the exasperating situation. The ruling coalition had already outlined reforms for pension and health insurance, income tax relief, and a reduction in non-wage labor costs. Counter-financing measures, such as a VAT increase at the turn of the year or a raise in the top tax rate from 42% to 49%, combined with the abolition of the solidarity surcharge and broader tax system overhauls, were under discussion.

The proposed income tax reform could end a decades-long debate and provide relief for middle-income earners, making the reform worthwhile for this alone. However, it would also create larger holes in a federal budget already requiring significant savings. A VAT increase to reduce non-wage labor costs would also be sensible (to relieve businesses), but it is difficult to implement during periods of high inflation. Yet, it remains the only counter-financing option that could mobilize substantial funds. The only alternative might be for the coalition to accept a significantly higher new debt for such a reform package, an argument that could gain traction if the crisis worsens, though we are not yet at that point.

Regardless of the final shape of the reform package, the underlying approach to strengthen the domestic economies of Germany and Europe, and to make Germany a more attractive business location, is correct. It would signal that the world's third-largest economy is not merely managing its decline but is daring to undertake something new. It would also be a political signal that two embattled centrist parties are capable of overcoming old divisions and initiating major changes – something many in the country have awaited for years. In times of crisis, such changes do not become easier, but they become all the more urgent. It is quite possible that the escalation in the Gulf provides precisely the impetus for this.