On May 6, Friedrich Merz grew to become the following Chancellor of Germany. In what was meant to be a mere formality of the Bundestag (German Parliament) members electing him to be the following Chancellor, Mr. Merz couldn’t collect sufficient votes within the first spherical to be permitted by the MPs. This has by no means occurred with any earlier Chancellor in post-war Germany. Mr. Merz managed to get 325 votes within the second spherical (Chancellor candidates want not less than 316 votes) and was finally sworn in. The ruling coalition contains Mr. Merz’s conservative Christian Democrats (CDU/CSU) and the centre-left Social Democrats (SPD).
Even although migration was one of many key planks that Mr. Merz doubled down on through the election marketing campaign, the main target has as soon as once more shifted to the German economy.
Speaking on nationwide TV after turning into the Chancellor, Mr. Merz stated, “We are undergoing a profound structural change, but for me the overriding message is that Germany must remain a country of manufacturing industry. We will improve the framework conditions of our economy so that in the coming years we will remain, or again become, an efficient country at the top of the world’s industrialised nations.”
The German economy has proven unfavourable progress for 2 consecutive years. Things aren’t trying too promising for 2025 both, following U.S. President Donald Trump’s tariff bulletins.
Since Mr. Trump’s ‘Liberation Day’ announcement on April 2, imposing 20% tariffs on the EU (now at 10% because of the 90-day pause), financial tensions in Germany have been on the rise. Many financial institutes and think-tanks have run simulation research on the influence this might have on particular person EU member international locations. Germany, being the nation that exports essentially the most to the U.S. (within the EU bloc), faces a variety of challenges.
“The key message to Donald Trump is that Germany is back on track. Germany will fulfil its defence obligations, and it is willing to strengthen its competitiveness. Germany will be a very strong partner within the European Union,” Mr. Merz had stated quickly after his celebration gained the German elections in February. Mr. Merz additionally went on to say that President Trump’s insurance policies “increase the risk that the next financial crisis will come sooner than expected.”
Auto business most impacted
Despite the 90-day pause introduced by Mr. Trump, the 25% tariffs on vehicles and automotive elements are in place. Germany exported near 4,50,000 vehicles to the U.S. in 2024. It’s estimated that the brand new tariffs would add $6,000 on common to each imported automotive to the U.S.
“The tariffs place a significant burden on both companies and the automotive industry’s closely interwoven global supply chains, with negative consequences especially for consumers, also in the U.S.A.,” stated Hildegard Müller, President of the German Association of the Automotive Industry (VDA).
Sonali Chowdhry, a commerce economist on the German Institute for Economic Research (DIW), co-authored a coverage temporary trying on the influence of U.S. tariffs on the EU.
Quantitative mannequin evaluation carried out by DIW and Kiel Institute for the World Economy, notice that if there’s a protracted commerce battle between the EU and the U.S. (each areas imposing the identical tariffs on one another), then EU exports to the U.S. can be slashed by half. This might have an effect throughout industries within the EU, famous Ms. Chowdhry.
“Germany, in particular, could be looking at a real GDP contraction of 0.3%. It’s not only the actual tariff increases, but also the uncertainty created by the threats of tariffs that can depress economic activity as businesses and consumers defer investments and purchases,” stated Ms. Chowdhry.
Thomas Obst, senior economist on the German Economic Institute (IW), feels that the influence of the tariffs can be quick within the U.S., whereas it will construct up over time in Germany.
“We, at IW, did a few studies to estimate the impact of Trump’s tariffs on Germany. If the EU is to retaliate with a 20% counter-tariff on the U.S., it could lower the German GDP by up to 1.5% till 2028. In Germany, it would build up over the next four years because of the structure of the economy. We would see second-round effects,” stated Mr. Obst. Second-round results check with the oblique penalties (from the tariffs on this case) impacting wages, costs, and different financial variables.
‘De-escalate, not retaliate’
As Germany is a part of the EU, relating to issues round tariffs, it can not retaliate unilaterally. The EU has little incentive to retaliate, notes Ms. Chowdhry, as a lot of the EU’s imports from the U.S. are within the areas of oil and fuel, prescription drugs, chemical compounds and so on.
“Unless the EU is willing to bear higher energy costs and disrupt these supply chains, it makes more sense to de-escalate rather than retaliate. It is in the EU’s interest to seek an agreement with the U.S., while expanding trade with other partners,” stated Ms. Chowdhry.
Mr. Obst concurs. “The EU does not want to retaliate, but offer something on the table that could reduce the tariff impact. It would also signal that the EU is taking a stronger stand against China. The EU has a list of targets and services from the U.S. against which it can retaliate, but that’s not on the table,” stated Mr. Obst.
On May 1, European Trade Commissioner Maros Sefcovic agreed to extend imports from the U.S. by an extra $50 billion to scale back the commerce deficit, as that’s one thing that has been identified by Mr. Trump. Europe hopes to do this by buying extra LNG and agricultural merchandise like soybeans.
Additionally, on May 8, the European Commission stated that it will launch a dispute with the World Trade Organisation over the U.S.’ tariff coverage and duties on vehicles and automotive elements, that are as excessive as 25%. It’s additionally making ready an inventory of counter-tariffs on U.S. merchandise, amounting to 95 billion Euros, if commerce talks with the U.S. fail.
In its assertion, the EU Commission famous that U.S. tariffs “blatantly violate fundamental WTO rules.”
‘Deepening other partnerships’
“A more long-term strategy for the EU would be to deepen its trade relations with existing partners such as Canada, Mexico, Japan, South Korea, among others. Deepening trade with these partners and expanding free trade agreements (FTA) partners would neutralise the economic damages from U.S. tariffs,” stated Ms. Chowdhry, noting that this may enhance the resilience of EU industries from future shocks like local weather disruptions and geopolitical tensions.
India could possibly be a possible beneficiary if the EU decides to double down on increasing its FTAs.
“While a deep EU-India FTA would be difficult to realise soon, sectoral agreements (for instance, in the area of industrial goods) that focus on tariffs would be more feasible,” stated Ms. Chowdhry.
Mr. Obst famous that the EU-Mercosur FTA (a proposed commerce settlement between the EU and the Mercosur international locations (Argentina, Brazil, Paraguay, and Uruguay)) has the potential to kick-start a variety of constructive issues for Europe.
“With India, there is no FTA on the horizon. However, the first international trip by the newly formed EU Commission was to India, which says a lot. India is seen as a partner in the Asia region, a very attractive market, but it’s also very protectionist,” stated Mr. Obst.
Political challenges
Mr. Merz is perceived as a divisive determine, and this was on show when it emerged that members of his personal coalition voted towards him within the first spherical on May 6. If Mr. Merz hadn’t secured sufficient votes within the second or consecutive rounds, it might have created additional confusion as to who would lead the following German authorities. The inventory markets reacted negatively after the primary spherical of voting on May 6 as nicely. This shaky begin to the brand new authorities has raised doubts about whether or not this coalition might survive the 4 years and resolve Germany’s financial woes.
Mr. Obst expects stronger management from the coalition of the CDU/CSU and the SPD.
“They seem to understand the economic situation and are willing to do something about it, compared to the divisive coalition in the earlier government,” stated Mr. Obst.
However, the far-right Alternative for Germany (AfD) has a powerful participation within the Bundestag. It’s the most important Opposition celebration, and by way of new financial reforms, it might create disruptions.
Mr. Obst famous that company taxes in Germany (at 30%) are the best among the many EU and OECD international locations.
“In the coalition talks, it has been agreed to reduce that by up to 5%, but only after 2028. In the meantime, the coalition needs to do something to spur investments and incentivise companies to invest in Germany,” stated Mr/ Obst.
“The bureaucracy also needs to be brought down, not just in Germany but EU-wide. It needs a systematic and comprehensive reform agenda to have a lasting effect on the economy,” stated Mr. Obst.
Fears of Chinese dumping
While Mr. Trump introduced a 90-day pause on tariffs for many international locations, there was one nation that didn’t get that profit—China. On April 9, the tariffs directed at China stood at 145%, with China asserting counter-tariffs of 125% on U.S. imports.
It was solely on May 12 that the Trump authorities introduced a 90-day pause on tariffs in the direction of China, which now stand at 30%.
However, in lots of circles in Germany and Europe, there are fears that this can result in China dumping its extra manufacturing in Europe.
According to Ms. Chowdhry, China can reroute commerce flows to Europe. “The EU must be very careful in its response to this, as it cannot afford to be drawn into a global spiral of protectionism. The EU should continue to use more targeted instruments to address dumping issues and not take a heavy-handed approach,” she stated.
European Commission President Ursula von der Leyen has spoken to China’s Premier Li Qiang about establishing mechanisms to trace commerce diversions. As per an EU Commission launch, “President von der Leyen emphasised China’s critical role in addressing possible trade diversion caused by tariffs, especially in sectors already affected by global overcapacity.”
Mr. Obst feels the dumping will rely quite a bit on which sector is concerned.
“When it comes to standardised goods, it’s not a big deal as Germany or the EU do not directly compete with China on that front. One industry that is very concerned is the automotive industry. That is one of the reasons the EU introduced tariffs against EVs imported from China last year. China has heavily subsidised the EV industry and its supply chains, and the EU will have to act accordingly to protect its industries,” stated Mr. Obst, noting that Germany is worried with sectors producing items that add excessive worth to the economy.
According to a report by Bruegel, a Brussels-based suppose tank, essentially the most uncovered class is ‘electrical machinery, equipment and parts thereof’, for which Chinese exports to the U.S. have been round $124.8 billion in 2023.
“Smartphones and lithium-ion batteries account for 31% and 10% of this category, respectively. The EU produces virtually no smartphones but wants to increase its share of global battery manufacturing,” notes Bruegel.
“Trade uncertainty as a result of the U.S. tariffs is a pressing concern for an export-oriented nation like Germany, which is specialised in industries that have extensive global value chains. There are also a lot of domestic concerns and long-term issues, such as improving productivity and innovation, that need to be addressed. For the incoming government, this will be high on the policy agenda,” stated Ms. Chowdhry.
(Nimish Sawant is an impartial journalist primarily based in Berlin.)
Published – May 13, 2025 06:55 pm IST
