Increased tariffs from the U.S. pose a significant threat to Germany’s export-driven economy, raising concerns about inflation and economic growth. The Bundesbank warns that escalating trade tensions could lead to job losses, particularly in industrial sectors. While a weaker euro might improve competitiveness, it won’t fully counteract the negative effects. Additionally, potential increases in defense spending could create jobs, but the overall economic outlook remains bleak amid ongoing contraction and rising unemployment.
Impact of Higher Tariffs on Germany’s Economy
The potential imposition of increased tariffs by the United States poses a serious threat to Germany, particularly as an export-driven economy. Joachim Nagel, President of the Bundesbank, has expressed concerns regarding a possible uptick in inflation due to these tariff conflicts.
The Bundesbank has issued a warning about the detrimental effects that could arise should the trade tensions with the United States escalate. Nagel stated that a protectionist stance from the U.S. would specifically target Germany’s export economy, introducing significant risks to its economic growth. He emphasized, “Protectionism results in welfare losses across all nations involved. There are no true winners in this scenario.”
Forecasts and Labor Market Consequences
New tariffs could lead to adverse effects on the German labor market, which has already shown signs of decline at the year’s onset. The ongoing economic crisis has made the shortage of skilled workers less perceptible. Nagel referenced the Bundesbank’s modeling efforts, which predict that if the tariff threats made during Trump’s election campaign were enacted, Germany’s economic growth could fall by nearly 1.5 percentage points by 2027 compared to earlier forecasts.
While a weaker euro might enhance Germany’s competitiveness, it would not sufficiently offset the negative repercussions of these tariffs. “Inflation may also be triggered, although the degree of this risk remains uncertain,” Nagel noted, highlighting the speculative nature of this scenario.
President Trump has initiated a new wave of tariffs targeting all countries that impose tariffs on American goods. The Bundesbank’s analyses were based on Trump’s campaign assertions, which included potential tariff increases to 60 percent on imports from China and 10 percent on German products. They also took into account retaliatory tariffs from trading partners, as already indicated by the EU.
The U.S. government has so far enacted a 10 percent tariff on Chinese imports and announced a 25 percent tariff on aluminum and steel, effective March. Tariffs against Mexico and Canada are also under consideration, along with a recent directive from Trump to raise tariffs wherever the U.S. currently imposes lower rates than its trading partners.
Economists warn that these new tariffs represent a significant risk to Germany’s economy, which has already experienced contraction for two consecutive years. The federal government and economic leaders project minimal growth for the current year. Given that the U.S. is Germany’s primary trading partner, an intensifying trade dispute could jeopardize thousands of jobs, particularly in industrial sectors.
Despite the challenging labor market, which has seen an increase in unemployment recently, there are prospects for job creation through heightened defense spending. A study by the Institute for Employment Research (IAB) suggests that raising defense expenditures from two to three percent of Germany’s GDP could generate up to 200,000 new jobs. If this spending is financed through new debt, a one percent increase in economic output may be anticipated.
While additional defense spending could impose a significant burden on Germany, it is viewed as manageable by IAB researcher Enzo Weber. The potential for job creation exists in various sectors, including the military, construction, and metal production.