Germany Faces 20% U.S. Tariffs, Risks Third Year of Economic Contraction

Analysts have issued a stark warning that the latest round of tariffs imposed by the United States could have severe repercussions for Germany's economy, potentially leading to a third consecutive year of contraction. The tariffs, which took effect last Wednesday, apply to various countries and regions, with the European Union facing a 20% tax rate. Germany, as the largest trading partner of the United States in Europe, recorded an unprecedented trade surplus of 700 billion euros with the U.S. in 2024. As an export-oriented nation, Germany is poised to be the most adversely affected country in Europe by this trade conflict.

Marc Schattenberg, a senior economist at a prominent financial institution, highlighted that the overall economic risks for 2025 are leaning towards a third consecutive year of economic decline. Lisandra Flach, an expert from a leading economic research institute, pointed out that Germany's trade could be influenced by factors such as reduced exports to the U.S. and intensified international competition as other countries seek alternative export markets.

Carsten Brzeski, a global macro chief at a major financial group, echoed these concerns, predicting that Germany's economy will shrink in 2025. Germany has been the only G7 member that failed to achieve economic growth in the past two years, making economic recovery a pivotal issue during the recent elections. Following the elections, the incoming Chancellor led negotiations between the conservative party and the Social Democratic Party to form a government. They announced a 500 billion euro infrastructure fund and comprehensive reforms to borrowing rules to bolster defense and revive the economy.

Holger Schmieding, a chief economist at a well-known bank, stated that while Germany's unexpected large-scale fiscal stimulus could help mitigate the impact of the trade war, the economy still faces downside risks. The full effects of Germany's stimulus policies are expected to be seen in 2026 and 2027. Economists agree that the trade conflict underscores the urgency for Germany to undergo structural reforms, as subsidies alone cannot solve the problems.

Cyrus de la Rubia, a chief economist at a prominent commercial bank, noted that while Germany has the capability to provide subsidies, it should not rely on them to address the current issues. Economists have expressed disappointment with the economic plan negotiated by the future coalition government, calling for bolder measures to accelerate investment and enhance Germany's competitiveness.

Brzeski emphasized that the tariff policy serves as an additional warning, urging the current coalition talks to focus on structural reforms and sustainable strengthening of the domestic economy. The implementation of these reforms is crucial for Germany to navigate the challenges posed by the trade war and ensure long-term economic stability.