Germany’s economy is sliding down a steep cliff, and Donald Trump’s reelection might just be the final push over the edge.
See, with Trump back in the White House, Europe’s [former] economic powerhouse is under fire, facing what some economists are calling its “most difficult moment.” Germany was barely holding on before this — with a GDP increase of just 0.2% in the third quarter after a 0.3% contraction in the second. Now, as new U.S. trade restrictions loom, Germany’s already strained economy is staring into the abyss.
Moritz Schularick, president of the Kiel Institute for the World Economy, thinks Germany’s economy is up against “massive foreign trade and security policy challenges for which we are not prepared.” Trump’s return means trouble, big trouble, for the “sick man of Europe.”
Tariffs threaten Germany’s key export industries
Germany lives and breathes exports, and the U.S. is its top customer. Since 2021, the U.S. has been its second-biggest trading partner after China — and in the first half of 2023, it overtook China to become number one.
A full 9.9% of German exports went to the U.S. in 2023. That’s a huge slice of its income. But Trump wants tariffs. Big tariffs. We’re talking 10% to 20% on almost everything the U.S. imports, regardless of the country of origin.
The impact of these potential tariffs is devastating. Germany’s ifo economic institute warned, “German exporters must expect severe losses if Trump makes good on his threat to impose basic tariffs of 20 percent on U.S. imports from all trading partners.”
The institute estimated the damage could hit EUR 33 billion in Germany alone. A 15% drop in exports to the U.S. isn’t out of the question.
German auto and chemical sectors, major pillars of its industrial base, are particularly exposed. Morningstar DBRS, a top economic analysis firm, pinpointed autos and chemicals as the most vulnerable industries. Trump’s tariffs would hit them hard.
Lisandra Flach, director of the ifo Center for International Economics, believes it’s time for Germany and the EU to wake up. “Germany and the EU must now strengthen their position through measures of their own,” she said.
Her suggestions? Deepen EU market integration, impose credible retaliatory tariffs on the U.S., and prepare for an economic slugfest.
Political chaos amid economic crisis
Germany’s economy isn’t the only sector in crisis — the country’s government is unraveling at the seams. Hours after Trump’s win, Chancellor Olaf Scholz sacked his finance minister, Christian Lindner, effectively bringing down the coalition government. Lindner’s Free Democratic Party (FDP) stormed out, turning an already unpopular coalition into a memory. Political instability now piles on top of economic chaos.
The fallout from Lindner’s firing has left a leadership vacuum in Germany at the worst possible time. Scholz’s plan? Seek a confidence vote on January 15. If he loses, snap elections are expected in March, right around the time Germany might be grappling with the fallout from Trump’s trade war.
Scholz didn’t hold back in his criticism of Lindner either, calling him “selfish” and “irresponsible” and accusing him of “caring only about his own clientele and the short-term survival of his party.”
Lindner didn’t take the attack lying down. He fired back, saying Scholz “doesn’t have the strength to enable a fresh start for our country.”
The main issue? The “debt brake,” a constitutional cap on borrowing that Lindner has refused to bend on.
Scholz wanted it lifted to allow for more debt, which he argued would help support Ukraine and stabilize Germany’s economy. Lindner was having none of it, stating that suspending the debt brake would violate his oath of office.
This isn’t a new fight. Scholz and Lindner have been at odds for months, but the tension reached boiling point as the economy continued its downward spiral. In a last-ditch effort to reach common ground, Scholz proposed measures to cap network charges, cut energy costs for industry, and protect jobs in Germany’s critical auto industry.
Lindner rejected them all. Scholz’s response? A swift firing.
Rising pressure from trade tensions and domestic challenges
Meanwhile, Goldman Sachs has slashed its 2025 growth forecast for the Eurozone from a bleak 1.1% to a dismal 0.8%, with Germany expected to take one of the hardest hits. Trump’s policy agenda is expected to crush European growth through three main channels: trade tensions, increased defense spending, and financial market impacts.
Goldman’s economists predict a 0.5% hit to Euro area GDP, with Germany losing 0.6% and Italy 0.3%. The bulk of this impact is expected to hit between Q1 and Q4 of 2025. Trump’s tariff threats are already rattling markets and could push bond yields higher as deficits increase.
To make matters worse, Germany’s internal growth forecasts have also been downgraded. For the first time since the early 2000s, Germany is staring down a potential two-year recession. And while Trump’s tariffs might be the loudest threat, they’re not the only problem on the table.
Europe’s increasing defense costs in response to Trump’s policy shifts add even more strain to the budget, raising the likelihood of additional debt and higher bond yields.
German industry is in trouble too. With exports down, industries are scrambling to stay afloat. Germany’s Purchasing Managers’ Index (PMI) for October shows the reality: a slight increase but still in contraction territory. Data from S&P Global and Hamburg Commercial Bank show the struggling manufacturing sector isn’t rebounding quickly enough to counter the downturn.
