Germany's export-driven economy faces a potential crisis if Donald Trump secures the US presidency and implements his proposed high tariffs, according to recent analysis. The Ifo Institute, a renowned Munich-based economic research organization, warns that such measures could significantly impact Germany's vital automotive and pharmaceutical sectors.
The institute projects that German car exports to the US could plummet by 32%, while pharmaceutical sales might experience a 35% decline. These reductions would result in a yearly decrease of over €33 billion in German exports to the United States. This potential downturn adds to Germany's existing economic challenges, as the country has struggled to achieve substantial growth since the pandemic.
Olaf Scholz's Social Democratic Party is currently grappling with the rise of the far-right AfD in regional elections, further complicating the political landscape. The German economy, the largest in the Eurozone, has been heavily reliant on exports, with the US and China being key markets outside the European Union.
The manufacturing sector, a cornerstone of Germany's economic strength, is showing signs of distress. In September 2024, the purchasing managers' index (PMI) for manufacturing fell to a 12-month low of 40.5, indicating a deepening contraction. This decline has led to the fastest pace of job cuts in 15 years, excluding the pandemic period.
Germany's economic challenges are multifaceted. The country has been grappling with the loss of cheap Russian energy imports and weak demand from China, its largest trading partner. The shift towards renewable energy, known as "Energiewende," has also presented challenges for the industrial sector.
"If Trump is re-elected and starts a new trade war with China, Germany, as an exporting nation, would suffer greatly."
The potential impact of Trump's proposed tariffs could be more severe than the effects of Brexit, with a permanent decrease in real GDP by 0.25%, according to Ifo estimates. This situation highlights the vulnerability of Germany's export-oriented economy to global trade tensions.
France, Germany's neighbor and fellow EU member, is also facing economic headwinds. The end of the 2024 Paris Olympics triggered a significant slump in activity, with the composite PMI falling sharply from 53.1 in August to 47.4 in September.
As Germany navigates these economic challenges, it may need to rely on the resilience of its "Mittelstand" - the small and medium-sized enterprises that have historically been the backbone of its economy. The country's ability to adapt and innovate, reminiscent of its post-World War II "Wirtschaftswunder" (economic miracle), may be crucial in overcoming the current obstacles and potential future shocks to its export-driven model.