Merz warns of ‘dramatic’ impact of US tariffs on German economy

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Germany’s chancellor-in-waiting Friedrich Merz has warned against the “dramatic” impact of US tariffs on global markets and how this is affecting his country, in his first comments since US President Donald Trump unveiled sweeping levies against the EU.

“The situation on the international equity and bond markets is dramatic and threatens to deteriorate further,” he told Reuters on Monday. “It is therefore more urgent than ever for Germany to restore its international competitiveness as quickly as possible.”

The 20 per cent tariffs on all European exports come at a time of acute political and economic challenges for Germany and risk erasing any gains from Merz’s announced €1tn spending spree to boost the country’s defence industry and ageing infrastructure.

European stocks tumbled when stock markets opened on Monday, with the Stoxx Europe 600 index sinking 5.7 per cent, while Germany’s Dax was down 6.4 per cent having briefly plunged more than 10 per cent. The FTSE 100 was down 5.1 per cent.

The Eurozone’s largest economy relies on exports to the US for about 4 per cent of its GDP — more than France or Italy. The German economy has been stagnating for three years as it has been hit by higher energy costs, lower demand for German goods in China and fierce competition from Chinese rivals.

According to an estimate by the Cologne Institute for Economic Research, the total economic harm to the German economy over Trump’s four-year term could add up to €200bn, leading to a GDP level that is 1.5 percentage points lower in 2028. The US accounts for one in ten German exports.

“Over the short term, the incoming government will struggle to cushion the immediate trade shock,” Deutsche Bank economists wrote in a note on Monday, adding that Germany may even face a third year of declining GDP in 2025.

If implemented in full US tariffs would “massively damage” the German economy and could lead it to contract this year, the Munich-based Ifo Institute for Economic Research said last week. “Some key industries such as automotive and mechanical engineering would be particularly hard hit,” it said.

“As Germany’s economy is already stagnating, it is possible that the US tariffs will push economic growth in Germany below zero,” said ifo president Clemens Fuest.

Merz, whose conservative CDU/CSU bloc won elections in February, is under mounting pressure to conclude complicated talks with the Social Democrats to form a government. He told Reuters that the impact of US tariffs “must now be at the centre of the coalition negotiations”.

Since the elections Merz has seen his party’s approval ratings slump as conservative voters grow sceptical he will be able to deliver pro-business reforms and tax cuts. Meanwhile, support for the far-right Alternative for Germany (AfD), which emerged as the second-largest parliamentary force in the February vote, has risen.

Within days of winning the elections, Merz took the unusual step of using the old parliament to pass a reform of the country’s constitutional debt limit to allow unlimited borrowing to fund defence spending.

The reform needed a two-thirds parliamentary majority, which he would have been unlikely to have won in the newly elected Bundestag, where the AfD and far left Die Linke have won together more than a third of the seats.

In exchange for its support on defence, the SPD has secured the creation of a €500bn 12-year infrastructure fund to modernise the country’s ageing roads, hospitals and schools.

The package — which could lead Germany to add an estimated €1tn in borrowing in the next decade — has marked a seismic shift in fiscal policy for Europe’s largest economy.

But since then, Merz has been embroiled in difficult negotiations with the SPD over social benefits, tax cuts and migration. Merz’s only possible coalition partner needs its members to approve the coalition deal before electing Merz as chancellor, probably in early May, according to party insiders.