Last week, the Knesset Finance Committee approved a transfer of NIS 11.35 billion to the defense budget (as a permit to commit) for the purchase of three submarines from German conglomerate ThyssenKrupp. Financing for the submarines was meant to have been included in the defense budget and earmarked in advance. In the past few months, however, the Germans doubled the submarines' price.
According to a report in "The Marker", the Israeli government was surprised at ThyssenKrupp's demand for a further €1.3 billion (about NIS 4.6 billion) for the deal that was agreed in principle four years ago.
An even greater surprise was that the German government was not prepared to increase its subsidy for the submarines to match the higher price, and if the final bill for three submarines is €3 billion (NIS 10.7 billion), Berlin will pay "only" 20% of the cost, instead of 33% as it has in previous deals.
The Ministry of Defense approached the Ministry of Finance for approval of the extra budget required for the procurement. It can be imagined that the request to receive billions more shekels just after the defense budget had been approved made Ministry of Finance officials pretty queasy. But after the ministerial procurement committee, of which Minister of Finance Avigdor Liberman is a member, approved the purchase of the submarines despite the price hike, the officials came into line with the policy.
Israel will pay the €2.5 billion to the German shipyard in instalments over more than a decade. The cost will be divided half-half between the Ministry of Defense budget and the Ministry of Finance.
Where will the money come from?
The Ministry of Defense will now have to find the money, NIS 2.3 billion more than before. The extra will probably come from cuts in long-term projects. For its part, the Ministry of Finance will need to be prepared for requests from the IDF to make up the difference in the coming years. In other words, in future discussions on the defense budget, the Ministry of Finance will have to decide whether to add NIS 2 billion to it in order to restore the projects cut in order to finance the submarines, in which case it will actually bear the entire price increase. The submarines are due for delivery around 2030, and will replace older vessels.
Although the price tag for the submarines is now NIS 8.9 billion, the two ministries have allocated NIS 11.3 billion to the deal, to cover VAT and exchange rate differences.
A new wind blowing from Berlin?
It may be that the revised price for the submarines is only the beginning of a change in relations between Germany and Israel. If Jerusalem was indeed surprised by the Germans' refusal to continue subsidizing Israel's submarine purchases to the tune of 33%, this is a change that calls into question the strength of Germany's promise to ensure Israel's security as part of the raison d'être of the Federal Republic. It's a change that perhaps also reflects the policy of the new German federal government formed in Berlin last month, which takes a more critical approach to arms exports in general, and to arms exports to Israel in particular, and which is devoting more of its budget to climate and environmental matters. It's a change that signals that Angela Merkel could indeed come to be seen, as she has already been dubbed, as "the last pro-Israel German chancellor."
The signing of the submarines deal was part of Merkel's legacy. In the fall of 2017, about a year into the submarines graft affair, and before the investigation had arrived at clear conclusions, the Germans rushed to sign an MOU at the Israeli embassy in Berlin on the future sale of three submarines to the State of Israel. These would be submarines seven to nine in Israel's fleet. The sums mentioned as the price of the deal ranged between €1.5 billion and €2 billion. The German government reportedly undertook to finance a third of the cost, as it had in similar deals in the past.
Since then, a great deal of water has flowed in the Spree. Merkel exited the political stage, and was replaced last month by Social Democrat Chancellor Olaf Scholz, who heads a coalition with the Greens and the liberal Free Democratic Party. The cost of building the submarines has risen, and Germany's submarine business is not in the same financial plight as it was in the past. Israel's requirements - as reflected in the sixth submarine now under construction at Kiel, which will be the largest submarine produced by Germany since the Second World War - have apparently also been upgraded.
All these factors could explain why ThyssenKrupp, which acts in complete coordination with the German government, felt no compunction in raising the price for the three new submarines to €3 billion. That at least is what the Israeli government thought, as it approved the deal, due to be signed with ThyssenKrupp this week. The fact that the German government is stopping at providing €600 million towards the cost reflects erosion in the level of Germany's commitment to help Israel, and could be part of a new approach by the current government. Germany's foreign minister, Greens leader Annalena Baerbock, has said in the past that she opposes selling submarines to "warzones" like Israel. Since then, the party has changed its stance, and says it will examine each case on its merits. Nevertheless, together with finance minister Christian Lindner of the Free Democratic Party, the Greens are currently promoting a new law on arms exports that could limit sales to conflict zones. That prospect of the proposal becoming law may have been a spur to the signing of the deal by Israel this week.
Furthermore, the current German government has made clear that it needs every possible budget saving after Germany loosened the purse strings to an extraordinary extent to deal with the coronavirus pandemic. All the government's grandiose plans for combating climate change and for changing Germany's energy mix are meant to be financed from the regular budget. A saving of a few hundred million euros on aid to Israel is consistent with this approach. Together, these considerations could presage a change in the wind blowing from Berlin.
In the past, Merkel spoke of "ensuring Israel's security", but that commitment appears to be diminishing. Chancellor Helmut Kohl gave Israel the first two submarines for free after the First Gulf War, when it emerged that there had been German involvement in improving the precision of Saddam Hussein's missiles and in his chemical weapons. The third was subsidized to the tune of 50%. The next three submarines were 33% financed by the governments of Gerhard Schroeder and Merkel.
The current deal reflects further erosion of the Germans' willingness to bear the burden of financing the most expensive weapon in Israel's arsenal, and with erosion of the special relationship between the two countries.
Israel could theoretically decide not to buy the submarines from ThyssenKrupp at the current asking price, but the Israel Navy's fleet is based on the products of the German shipyard, which has now supplied five of the six submarines that Israel has already bought. When it comes to buying submarines seven, eight and nine, Israel is dependent on the shipyard, which is fully familiar with the Israel Navy's operational needs and is ready to introduce special adaptations into the submarines. So it has come about that, after heavily discounted deals in the past, every additional purchase by Israel's Ministry of Defense from Germany is more expensive than the last, and merits less of a subsidy from the German government.
Published by Globes, Israel business news - en.globes.co.il - on January 19, 2022.
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