Germany’s economic malaise needs EU-wide solution

Ongoing turmoil in Europe’s largest economy will be exacerbated by Donald Trump’s pledged import tariffs, highlighting the need for EU countries to pull together to withstand transatlantic  trade disruption, writes Judy Dempsey

Pity Germany’s next government. Olaf Scholz’s successor will have no time to lose when the federal elections end on 25 February 2025, bringing Scholz’s bickering coalition to a close. 

Now, the economy is the priority.

Germany’s outgoing government believed the old industrial model just needed a bit of tinkering to effectively counter China’s ever-increasing economic presence – but those days are over. 

Massive job cuts announced by Volkswagen and ThyssenKrupp (the traditional giants of the car and steel industry, respectively) demonstrate how this government and its predecessor, led by Angela Merkel, failed to prepare for the inevitable impact of de-industrialisation.

The replacement of the combustible engine with electric alternatives – which China has rapidly embraced – has been a shock for German industry, which had mistakenly earmarked China as a reliable export market. 

No more. 

Germany’s high energy costs and fierce competition from Beijing have combined to catalyse the failure of Germany’s old industrial model – so Berlin’s next government must hit the ground running. 

This means making the transition from an old industrial base to more modern sectors driven by digital culture. 

It means grappling with a demographic crisis that will only cost more unless the government introduces a robust immigration policy to address the huge labour shortages affecting most sectors. 

None of this will happen unless Germany’s next leader loosens the ‘debt brake’ constitutionally limiting government spending. 

Germany is in dire need of public financing if it is to invest in defence, climate adaptation, security, housing, transport health and education.
 
The debt brake (and overbearing bureaucracy) has starved investment. The government already has a spending gap of €64 billion for 2025. If, between 2025 and 2030, defence spending targets were to rise from two to three percent of GDP, it would cost another €300 billion. 

This German malaise has serious consequences for Europe. 

Last year, Germany had the highest level of intra-EU trade, contributing to 21 percent of the European Union’s exports of goods to other countries. What happens in the EU’s largest economy impacts the entire bloc.

To make matters worse for Germany’s next Chancellor – and for the EU – is US President-elect Donald Trump’s stated intention to impose a 10 percent tariff on goods imported from Europe and 60 percent on goods from China. 

Germany’s export-driven car industry, one of Trump’s targets, is particularly vulnerable and speeding up the manufacturing of electric-driven vehicles would only solve part of the problem.

To escape tariffs, it is reasonable to expect the car industry to move manufacturing to the US. This is exactly what Trump wants. 

However, back in Germany, the dwindling market in China for German cars could lead to further job losses. 

Trump, too, will pile the pressure on Berlin and NATO allies to spend more on defence. It won’t be easy. Not only because of the costs involved but also because Germany’s far-right and far-left parties are opposed to NATO, opposed to supporting Ukraine and generally pro-Russia.

All in all, Germany’s ability to deal with its finances, defence and investment issues will be complicated by the Trump administration. 

Ultimately, EU countries need to pull together – even integrate – to withstand the pressures on the transatlantic relationship.