Donald Trump’s electoral victory in the US is the culmination of the ‘perfect storm’ that has been hanging over the German economy since the pandemic. Although the trade policy of aggressive tariffs that the next tenant of the White House intends to apply is worrying in all corners of the world and, of course, in Europe, Germany is the great weak point. The traditional European export machine has already been suffering in recent times and Trump’s pretensions threaten with a blow that could be lethal in the midst of the economic morass (flat growth since the covid and continuous brushes with technical recession) and political (the weak government tripartite led by the Social Democrats has just been blown up) that is passing through the country, dubbed by the international financial press – just as it was 20 years ago – as the ‘sick man’ of Europe.
Everything seems to have conspired against the historic ‘economic locomotive’ of the Old Continent. The exit from the pandemic has come with the end of the cheap russian gas by the war a Ukraine (essential for the muscular Teutonic industrial arm), some interest rates much higher (after the inflationary wave) and a more pronounced change in dynamics since China (the Chinese ‘friend’ already buys less added value from Germany due to its weakness after the covid and because it produces it itself). Too much for Berlin, which was already experiencing structural headwinds and now sees its American ‘friend’ let go of its hand at the top of the cliff.
Although they are far from the 60% effect intended for China, the US tariffs proposed by Trump of 10% for Europe pose a clear threat. Especially for a Germany that has seen how the aforementioned American ‘friend’ has continued buying from it while Beijing, its trading partner par excellence in recent decades, moved away. A transcendental ‘lifesaver’ for an economy whose exports represent almost 50% of GDP.
The Exports to the US represent around 3.8% of German GDP and represent 10% of the country’s total exports. As the economist Stéphane Colliac confirmed this summer in a BNP Paribas report, the trend has gone further: “Exports to the US are already boosting German foreign trade, which has contributed to an important change: the return of the eurozone as the largest supplier to the US, ahead of China. For Germany, exports to the US represent a true growth engine: +5.6% year-on-year in the first four months of 2024 to the United States and +40.4% compared to the same period of 2019 (compared to +3.2% towards China compared to 2019)”.
Daniel Kral (Oxford Economics): “If the US becomes protectionist, Germany is finished”
Given these data, it is normal for Germany to hold its breath and analysts put themselves in the worst. Daniel Kral, an analyst at Oxford Economics, already warned this in a providential way a month ago, when there was still hope in a victory for the Democrats in the US. “China has moved up the value chain and is no longer driving Germany’s export-based growth. If the US becomes protectionist, Germany is lost,” the analyst published in a post of X in which he used the expression is cookedwhich can be translated into Spanish as ‘is lost’ or ‘finished’.
The electoral result – with Trump’s sweep in votes, in the Senate and in the House of Representatives – has confirmed the worst omens. “Looking ahead, the short and long-term prospects for the German economy have darkened. A second Trump term and the foreseeable new trade tensions will affect the German economy,” diagnoses Carsten Brzeski, chief economist at ING and regular ‘ doctor’ of the German economy. “Although Exports could increase in the short termas importers try to get ahead of tariffs, will probably fall if Trump follows through with his threat,” Franziska Palmas, of Capital Economics, poses without any hot topic.
The hole can be especially large for the ailing automobile sectoronce the ‘crown jewel’ of German industrialism. “It doesn’t take much imagination to imagine that US tariffs on European cars will plunge the German car industry into deeper problems,” Brzeski said. The national insignia, Volkswagenand other historic brands such as bmw either Mercedes-Benz They do not stop stringing together negative headlines in the press: successive cuts in profit estimates, constant shocks in Chinese demand, plant closures even on German soil, decline in sales due to the cheaper Chinese models… The commercial blow by Trump would be the ‘coup de grace’ and, in anticipation of this, investors already penalized brands like BMW on the stock market yesterday, which erased more than 7%.
The consequences would not take long to spread to the bulk of the economy. “He weakening of foreign demand and increased uncertainty at a time when profit margins are being reduced would hurt investment and cloud the outlook for employmentespecially if we take into account the considerable accumulation of labor after the pandemic,” warns the UniCredit Research team headed by Daniel Vernazza in a note for clients.
The negative effect It can even reach the pockets of the Germans. “Higher tariffs divert US demand from goods produced in the eurozone and Germany, reducing inflation in the eurozone. However, increasing US tariffs cause the dollar to appreciate, making imports from the eurozone more expensive. eurozone. In addition, retaliatory tariffs from the EU can be expected with a time lag from 2026, which will also increase consumer prices in Germany,” explains Jörg Krämer from Commerzbank.
In a report titled precisely ‘What Trump’s victory means for Germany’, Krämer exposes another negative consequence for Germany of Trump’s return, which is nothing more than a largest exodus of companies from Germany to the other side of the Atlanticintensifying a phenomenon that was already occurring: “(The president-elect) has announced his intention to reduce the corporate tax rate from the current 21% to 15%. After the experience of his first presidency, it is likely that he will largely apply measure this plan, which would put Germany even more on the defensive. The effective tax rate for companies (including the trade tax) is already significantly higher than in the US or other European competitors. “that Trump’s victory will intensify tax competition and support the tendency of German companies to increasingly relocate their production to the United States.”
Ukraine, NATO and national politics
Another negative point is found by Kramer in the geopolitics. Although it is a problem that affects Europe as a whole, Germany attracts a lot of attention in everything that surrounds Ukraine and the future of NATO: from the criticism of Chancellor Olaf Scholz for wavering in his support for Ukraine to the pressure from the Biden Administration on the European ‘locomotive’ to increase its defense spending to 2% of GDP. Trump’s return opens up numerous unknowns on this front, but the president’s ambivalent attitude towards NATO is a long-term risk that is often underestimated, Kramer highlights. “Trump is likely to also pressure European countries to spend more on defense, as he did in his first term,” says Vernazza, from UniCredit.
“It would not be a problem if there were no significant military threats in Europe. But Russia is aggressive and the defensive capabilities of European democracies are weak. Therefore, there is a certain risk that, after a possible victory over Ukraine in a few years , a heavily armed Russia turns against the Baltic countries, for example, without unlimited security guarantees from the United States within the framework of NATO, Investors could at some point start pricing in military conflicts in Europe with a low but not negligible probability. This would have a clearly negative impact on financial markets and economic development,” the German economist explains.
From ING, Brzeski warns that the uncertainty about US support for Ukraine will not only weigh on the investment and consumption prospectsbut it is also a major political issue in Germany, leading to the recent collapse of the German government and its economic implications with the potential scenario of new elections next Marchfrom which the only viable arithmetic option that can emerge right now is the ‘umpteenth’ grand coalition between the CDU and the social democrats.
“In the short term, this collapse is likely to weigh on sentiment and slow investment and consumption. From a more positive point of view, a new government could, and I emphasize that it could and will not, finally end the current paralysis of economic policy in Germany and provide the country with the long-awaited certainty and guidance in terms of economic policy on how to restore growth and competitiveness,” the economist is cautious, acknowledging that Germany’s growth prospects will depend largely on “the ability of a new government to strengthen the national economy in the midst of a possible trade war and even stricter industrial policies in the US.
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