Germany’s Economic Struggles: As Germany heads to the polls on Sunday, the country’s struggling economy is at the forefront of voter concerns. Economic recovery is now a pressing issue, but challenges are mounting, especially with the possibility of Donald Trump’s return to the White House and his proposed tariffs on imported goods. These factors make it even harder for the next government to address Germany’s economic woes.
Economic Stagnation and the Threat of Far-Right Rise
Germany, the world’s third-largest economy, has faced a slowdown in growth since the pandemic. After contracting in 2023 and 2022, it marked the first back-to-back annual contractions since the early 2000s. The International Monetary Fund (IMF) forecasts a modest growth of just 0.3% for 2024, underscoring the difficulty of recovery.
Economists warn that this economic stagnation could have severe political consequences. Carsten Brzeski, a senior economist at ING, suggests that failure to stimulate economic growth could pave the way for the far-right Alternative for Germany (AfD) party to gain power. If voters lose faith in the current leadership’s ability to turn the economy around, AfD could seize the opportunity.
Germany’s Economic Boom Is a Thing of the Past
Germany’s export-driven economy was once thriving. From 2005 to 2019, the country enjoyed significant economic growth fueled by cheap Russian natural gas, a booming Chinese market, and global free trade. However, the landscape has dramatically shifted.
As global dynamics evolve, the potential return of Donald Trump to the White House presents a new challenge for German exporters. Trump’s approach to trade could lead to new tariffs, particularly targeting Germany’s key exports like automobiles and industrial products.
Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, warns that a world where free trade is no longer the norm poses a serious problem for Germany. The country’s reliance on open markets is critical, and any shift away from this model could severely hurt its economy.
A Stagnating, Aging Economy – Germany’s Economic Struggles
The call for economic reform is urgent. Voters prioritize the economy, and its revival is essential for Germany’s current and future generations. The country’s growing number of retirees makes reform even more urgent. Germany faces a demographic challenge with an aging population, and the need for economic revitalization is becoming more critical by the day.
Kirkegaard emphasizes the importance of reforming Germany’s economy, warning that without change, the country’s economy will stagnate. An “unreformed” economy would be one that is “sclerotic” and unable to keep up with global challenges.
The Decline of Exports and the Rise of Competition
Exports have been the backbone of Germany’s economic success for decades. In 2023, exports of goods and services accounted for over 43% of Germany’s GDP, the highest share among major economies, according to the World Bank. Key exports like motor vehicles, machinery, and chemical products have historically performed well.
However, this success is now in jeopardy. China, once a major market for German-made cars, has slowed down economically, and local manufacturers like BYD and Xpeng are rising fast. German automakers such as Volkswagen, BMW, and Audi have built their reputations on internal combustion engines, but they have been slow to adopt electric vehicle (EV) technology. Meanwhile, competitors in China and the U.S., like Tesla, have quickly scaled up EV production.
Germany’s auto industry now faces fierce competition. The reluctance to prioritize EVs has put German manufacturers at a disadvantage, threatening one of the country’s most important sectors.
High Energy Costs and Deindustrialization – Germany’s Economic Struggles
In addition to global competition, high energy costs are further harming German industries. Since Russia’s invasion of Ukraine in 2022, Germany has had to replace Russian gas with imports from more distant suppliers, driving up prices. Many companies have been forced to reduce production or even shut down altogether.
Lars Kroemer, chief economist at Gesamtmetall, a trade association of metal and electrical engineering employers, warns that the country is in the midst of deindustrialization. He points to high energy prices, steep taxes, and excessive regulations as factors that have hindered Germany’s industrial competitiveness.
Germany’s strict “debt brake,” which limits borrowing, has also prevented much-needed investment in infrastructure and digital public services. This is a problem, especially as the country lags behind in digitalization.
Achim Wambach, president of the Leibniz Centre for European Economic Research (ZEW), highlights that Germany’s bureaucratic burden is heavier than in other countries, making it harder for businesses to thrive in the modern economy.
Trump’s Tariff Threat: A Major Blow to German Exports
For months, former President Donald Trump has threatened to impose new tariffs on imported goods. These tariffs could exacerbate the challenges facing Germany’s economy. Trump’s administration already imposed a 25% duty on steel and aluminum, which will take effect in March. Just last week, he ordered a review of reciprocal tariffs, meaning the U.S. could match tariffs from other countries on American products. On Tuesday, he proposed a 25% duty on imported automobiles, semiconductor chips, and pharmaceuticals, which could start as early as April.
If Trump moves forward with these tariffs, it would be a significant blow to German exporters, particularly the auto industry. The U.S. is Germany’s largest single market, accounting for 10% of German exports. The proposed tariffs would make it harder for German products to compete in the U.S. market.
Wambach notes that every additional tariff imposed on automakers would be detrimental to the industry, which employs millions of people in Germany. This would not only hurt the auto sector but could have ripple effects across the broader economy.
The Global Economy Is a Network
Michael Böhmer, chief economist at Prognos, a Swiss research firm, explains that the global economy functions as a network. If tariffs are imposed in one area, the entire system feels the impact. Mexico, Canada, and China could reroute goods meant for the U.S. to other markets, creating new competition for German products.
This interconnectedness means that even if Trump does not directly target German products, his tariffs on other countries could still harm Germany’s economy.
A Call for Reform and Transition to New Technologies
Experts agree that Germany must overhaul its economic model to stay competitive. According to Böhmer, Germany cannot rely solely on legacy industries like automotive, machinery, and steel. The country must transition to cutting-edge technologies such as artificial intelligence to secure its position as the world’s third-largest economy.
“If Germany fails to transition to a future-oriented economy in the next decade, it will no longer be the third-biggest economy,” Böhmer warned.
Conclusion: Germany’s Future at a Crossroads
Germany faces a crossroads. Economic stagnation, high energy costs, and looming trade barriers from Trump’s tariffs pose significant challenges. The country must act quickly to reform its economy and embrace new technologies. Failure to do so could lead to a weaker economy, more competition, and political instability.
For more information on Germany’s economic challenges and the global impact of trade tensions, visit New York Mirror.
