London
UJ
—
As German voters head to the polls on Sunday, the issues surrounding the struggling economy and the commitments to address it will be at the forefront. However, the impending import tariffs proposed by Donald Trump will complicate the new government’s efforts significantly.
The stakes for failure are high.
If the leading parties that are likely to form a new governing coalition fail to revitalize economic growth, “they know who will win the next elections, and that would be the far-right AfD,” warned Carsten Brzeski, a senior economist at pan-European bank ING, reflecting widespread concerns regarding the Alternative for Germany party.
The German economy, which is the third largest in the world, has seen minimal growth since the pandemic, contracting both in 2023 and the previous year, marking the first consecutive annual declines since the early 2000s. International Monetary Fund forecasts suggest a modest growth of only 0.3% for this year.
This situation hasn’t always been the case.
From around 2005 to 2019, the export-driven economy was prospering, bolstered by affordable natural gas from Russia, high demand from China, and a relatively seamless global trading system.
However, the global landscape has transformed significantly since, with Trump’s potential return to the White House posing new challenges for Germany’s vital export sector.
“A reality where free trade is no longer the prevailing economic philosophy poses significant challenges for Germany,” stated Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, a think tank based in Washington, DC.
Economic reforms aimed at stimulating growth are not only what voters desire — as surveys indicate the economy ranks among their top two concerns — but are also crucial for the future prosperity of Germany, especially for its growing population of retirees.
“A German economy that is not reformed is one that is stagnating, aging, and calcified,” Kirkegaard remarked during his conversation with UJ.
Historically, exports have been a key engine for Germany’s growth. In 2023, exports of goods and services accounted for over 43% of the country’s gross domestic product — the highest ratio among major economies, as per World Bank data.
Last year, motor vehicles and their parts, machinery, and chemical products were among Germany’s leading exports, according to its statistics office.
Dependence on foreign demand was profitable when China’s substantial economy was booming and consumers preferred to purchase cars from renowned foreign manufacturers like Volkswagen over domestic newcomers.
However, China’s economy has decelerated in recent years, while local carmakers, including electric vehicle companies BYD and Xpeng, have started to capture market share from Western competitors both domestically and internationally, as the so-called EV “revolution” accelerates.
Partly, the German automotive sector has become “a victim of its own achievements,” Kirkegaard explained. Brands like BMW, Mercedes, and Audi, which gained success from traditional gasoline-powered internal combustion engines, were understandably hesitant to jeopardize their own success by investing heavily in electric vehicles.
Meanwhile, Chinese EV manufacturers, along with Tesla (TSLA), “have proven far more adept at… scaling up to produce millions of cars,” he added.
At the same time, Germany’s energy-intensive industrial sectors are facing higher costs for their primary energy source, natural gas, compared to prior to the onset of the Ukraine conflict in 2022, leading Europe to shift its gas imports from Russia to other suppliers. Consequently, many German firms have reduced output and some have even shut down.
“We are experiencing a phase of deindustrialization,” commented Lars Kroemer, chief economist at Gesamtmetall, an association representing employers in the metal and electrical engineering sectors.
This trend is concerning for an economy reliant on “highly specialized industrial firms producing specialized goods,” as noted by a German government source.
In addition to escalating energy prices, high taxes and excessive regulations have also taken a toll on the nation’s industries, according to Kroemer.
Overall, strict constraints on government borrowing in Germany, referred to as “the debt brake,” have stifled essential investments, including in areas like infrastructure and digital public services.
“We have yet to digitize. Our bureaucratic load is heavier than that of other nations,” stated Achim Wambach, president of the Leibniz Centre for European Economic Research, or ZEW.
For several months, Trump has been threatening to impose higher tariffs on imports entering the United States. Since January, he has shown a willingness to enforce these threats, declaring, for instance, a 25% tariff on steel and aluminum imports, effective in March.
Last week, Trump initiated an investigation to determine whether the US should establish reciprocal tariffs on foreign goods, suggesting that the US might match the tariffs other countries impose on American products. On Tuesday, he signaled his intention to introduce a 25% tariff on imported automobiles, semiconductor chips, and pharmaceuticals as soon as April.
Should foreign suppliers pass these new tariffs onto their American customers, their products could become less competitive compared to goods made in the US.
This situation would particularly disadvantage German exporters, as the US is their largest market, accounting for 10% of total German exports, according to government data.
The repercussions would be felt most acutely by specific exporters, including several struggling German automakers, warned Wambach.
“Any additional pressure on the automotive sector is detrimental for the industry,” he disclosed to UJ.
An estimated 1.2 million jobs across various industries in Germany are reliant, either directly or indirectly, on exports to the US, according to Prognos, a Swiss research firm. This figure translates to 2.6% of all employment in the nation, based on the latest governmental statistics.
The overall impact on the German economy from Trump’s newly proposed tariffs will, to some degree, be contingent on their eventual rates.
Germany’s central bank has examined a scenario where Trump implements universal tariffs of 10%, along with 60% duties on imports from China, a notion he has alluded to during his campaign.
The analysis concluded that the German economy would “suffer significantly,” with substantial negative implications for growth, stated Joachim Nagel, president of the central bank, during a recent speech.
Even if direct tariffs on its products are avoided, Germany could still endure repercussions stemming from tariffs levied on other nations.
Since his inauguration, Trump has also initiated a 25% duty on all imports from Mexico and most products from Canada, along with an additional 10% tariff targeting Chinese goods. Nonetheless, some German automakers, like Volkswagen, export vehicles to the US through their factories located in Mexico.
“The global economy functions as an interconnected network, meaning that a tariff or barrier in one area will impact the entire world economy,” said Michael Böhmer, chief economist at Prognos.
He highlighted that Mexico, Canada, and China might redirect their exports originally intended for the US to alternative markets to circumvent Trump’s tariffs, consequently putting those goods in direct competition with German products in those regions.
Enhancing Germany’s growth over the coming years will require significantly more than simply devising responses to Trump’s tariffs. In fact, a complete overhaul of the country’s business model may be warranted, according to some experts.
Böhmer concurs. He argues that if Germany fails to transition over the next decade from “outdated” sectors such as car manufacturing, heavy machinery, and steel to a “future-oriented economy” focused on cutting-edge technologies like artificial intelligence, it may well lose its status as the world’s third-largest economy.
