Germany in economic doldrums amid Trump tariff war, competition from China
‘Making Money’ host Charles Payne explores why Germany is critical of capitalism.
FRANCE – In the decades after WWII, Germany became the industrial engine of Europe. It remained so until two years ago. Then, its economy went down and, after that, it went bankrupt.
It has been the strongest within Europe, peaking in the third quarter of 2022 with an inflation-adjusted effect of $954 billion over the three-month period. “You have a sick economy in Germany,” said Elias Haddad, senior market strategist at Brown Brother Harriman in London.
Two major economic problems are the problem. The first was Germany’s long reliance on cheap energy (oil and natural gas) from Russia, which once fueled its industrial base. When the Russians invaded Ukraine and the West allowed the importation of Russian power, little was left of the German power structure.
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Water vapor and exhaust rise from a steel mill of Salzgitter AG, one of Europe’s largest steel producers, as residential buildings stand nearby on November 22, 2023, in Salzgitter, Germany. (Sean Gallup/Getty Images/Getty Images)
“It had already closed most of its nuclear power stations and was closing others in 2022 and 2023,” said Daniel Lacalle, an economist at Madrid-based investment firm Tressis. “Many times we hear about Germany as a rational and orderly country, but this is being done in the midst of a major energy crisis.”
The result of the lack of cheap energy has lifted the manufacturing sector, which has been shrinking since mid-2022, according to the HCOB manufacturing PMI, which measures the health of the sector.
Volkswagen AG (VW) employees take part in a rally at the company’s headquarters and car factories in Wolfsburg, Germany, Monday, Oct. 28, 2024. (Liesa Johannssen/Bloomberg via Getty Images/Getty Images)
In addition to the energy issue, Germany now finds its exports in direct competition with China “China competes for capital goods and investment where Germany produces,” said Felix Huefner, chief German economist at UBS investment bank in Frankfurt. “It means fewer exports to China and more competition in third markets.” That is especially true when it comes to car sales. And, of course, any major competition in that area hurts Germany’s export-led economy.
As if the energy crisis and competition with China were not big enough problems, Huefner also notes that the German economy will hit other storms. In particular, the country is facing fiscal pressure due to laws and regulations enacted after 2009 to curb government spending. As of 2020, the country had an annual deficit of 4.3% of GDP.
German Chancellor Olaf Scholz speaks at a joint news conference with German Economy and Climate Minister Robert Habeck and German Finance Minister Christian Lindner in Berlin, Germany. (Michael Sohn/Pool via Reuters/Reuters Images)
The debt freeze is designed to avoid national debt, and now the government must tighten its fiscal belt. “We estimate that fiscal consolidation is 20% of annual growth,” Huefner said. “With the economy in the new normal, Germany’s potential growth rate is between 0.7 and 0.8% per year.” That is the lowest in the country by historical standards.
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Although the economy seems to be stable, the political situation has recently become turbulent which may also harm businesses. Earlier this month, German Chancellor Olaf Scholz fired finance chief Christian Linder. The move has thrown the three-party coalition into trouble, and elections have now been called for February 23, 2025.
“It is not guaranteed that it will be a stable alliance of two or three parties,” said Jan Techau, director of the Eurasia Group in Europe, in Berlin. “There are many chances that we will get another government that moves.”
Tesla CEO Elon Musk, responding to X, called Scholz an idiot, saying in German, “Olaf ist ein Narr.”
Musk, who has become what some consider a close adviser to President-elect Donald Trump, is helping to push for smaller government and free markets.
Former US President Donald Trump speaks about the economy, inflation and productivity during a campaign event at Alro Steel on August 29, 2024, in Potterville, Michigan. (Photos by Bill Pugliano/Getty / Getty Images)
Finally, there is the threat of US tariffs sleeping around the world, including Germany, when Trump takes office in late January. That’s especially worrying because the US is Germany’s biggest trading partner, accounting for 9.5% of the total in 2022, the data shows.
Another thing that remains unclear is whether the tax call is merely a negotiating ploy or intended as a policy promise. “It’s very difficult to know what Trump will do,” said Leo Barincou, senior economist at Oxford Economics in Paris. “If the craziest things were done, that would be really bad,” he said.
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However, limited prices on selected products, such as cars, chemicals and agricultural products, may not be too much of a problem, Barincou said. A rising dollar, and therefore a falling euro, will offset some of the damage caused by the costs. “On a large scale, the impact will be limited,” he said.
Despite the country’s woes, the German stock market is up 13% this year, as tracked by the iShares MSCI Germany ETF.
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