German economy faces threat from US tariffs, says Merz

Friedrich Merz, the leader of the CDU and prospective chancellor of Germany, stated that Donald Trump’s tariffs and their detrimental impact on the German stock market underscore the necessity for tax cuts and deregulation.

On Monday, Germany’s primary stock index was among the worst-performing in Europe, plummeting by 10% before partially recovering as investors reacted to Trump’s announcement of sweeping import tariffs that appear poised to reshape the global economy.

Merz commented on Monday, “The situation in international stock and bond markets is dramatic and threatens to worsen. It is more critical than ever that Germany regain its competitiveness. This must be central to the coalition negotiations.”

The strength of the German economy lies in its exports of goods such as machinery, chemicals, and vehicles, with the US being a key market. Approximately one in ten German exports are destined for the US.

German exports had already become less competitive in recent years due to rising energy prices and other factors. The imposition of a 20% tariff by the Trump administration is unwelcome news for the industry.

The market shock appears to have injected a new sense of urgency into coalition talks between Merz’s Christian Democrats (CDU) and the Social Democrats (SPD) following the federal elections on February 23.

According to German media reports, coalition discussions were briefly paused on Monday as Merz, outgoing Chancellor Olaf Scholz, and SPD leaders consulted on how to respond to the US measures.

An estimate by the Cologne Institute for Economic Research suggests that the total economic damage to the German economy during Trump’s four-year term could reach up to €200 billion, potentially leading to a 1.5% reduction in GDP levels by 2028.

Deutsche Bank economists noted in a report on Monday, “In the short term, the new government will struggle to cushion the immediate trade shock,” adding that Germany could face a third year of GDP decline in 2025.

Merz, long known as a “fiscal hawk,” had already faced criticism within his party and domestically after approving a constitutional amendment allowing up to €1 trillion in new borrowing, a key demand of the SPD and Greens.

His comments on Monday aimed to reaffirm the CDU’s traditional focus on fiscal and economic discipline in the face of a changing global landscape.

Since the elections, Merz has seen his party’s approval ratings decline as conservative voters increasingly doubt his ability to deliver pro-business reforms and tax cuts. Polls also indicate rising support for the right-wing Alternative for Germany (AfD), which emerged as the second-largest force in parliament in the February vote and now appears to be catching up with the CDU for the first time.

Critics within the party say Merz has failed to deliver on his pre-election promise to “sharply shift the CDU to the right” on key policy areas.

Divisions within the party have become increasingly apparent in recent days after members of the conservative bloc’s youth organization in Cologne wrote a letter to Merz expressing their unease.

The letter stated, “Mr. Merz, we believed in your political leadership. We trusted you and fought for you. But now we ask the question: For what? For a CDU that bows to the left-wing mainstream?”

Much of the criticism against Merz comes from the Young Union (Junge Union), the youth organization of the conservative bloc.

Johannes Winkel, the head of the organization who also sits on the CDU’s executive board, threatened to vote against a coalition agreement with the SPD that does not include “fundamental conservative policies.”

Winkel demanded that immigration be curbed and that economic competitiveness be restored by reducing regulation and bureaucracy.

In an interview with the Süddeutsche Zeitung, the youth organization leader said, “If we enter the coalition without a delayed and promised change of policy, the country will suffer great damage.”

The youth organization in Cologne demanded that Merz fulfill his pre-election promises to reject asylum seekers at the border, reject tax increases, and ensure a “major reduction” in bureaucracy, all of which the SPD has resisted to varying degrees.

The conservative youth organization wrote, “If this course is not corrected immediately, you will not only endanger the CDU’s profile but also destroy the public’s trust and the commitment of its members.”