Everyone in Germany knows to beware the so-called enkeltrick or grandchild trick: phone calls from a panicked grandchild warning of looming disaster unless their beloved grandparent plunders their savings.
It’s a scam that can have an expensive outcome. Since Monday, Europe’s largest economy has been bracing itself for the biggest enkeltrick of all time: the incalculable cost of US tariffs of 30 per cent threatened on European Union products by US president Donald Trump, grandson of a German emigrant.
Like Ireland, Germany is particularly exposed to threats as the US is its largest export market. Last year it sold goods worth €161 billion to the US, nearly 10 per cent of the EU’s total, running up a trade surplus of nearly €70 billion.
Many German blue-chip companies are already feeling the squeeze of previous Trump administration tariffs on the vehicle, automotive components and pharmaceuticals sectors. Mercedes-Benz and Porsche sell every fourth luxury vehicle in the US, but have reported a slide of 12 and 6 per cent respectively – despite a rush to sell pre-tariff inventory.
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No one knows what next month, let alone next year, will bring, not even chancellor Friedrich Merz. The 69 year-old German leader, in office just 10 weeks, had been hopeful he had struck the right, pragmatic note in his first Oval Office meeting last month with Trump.
The two exchanged mobile numbers and last spoke by phone just over a week ago. In that call, Merz said in a subsequent interview, Trump gave no indication of what he would announce one day later.
If implemented as threatened, Merz said the tariffs would “strike at the German export industry’s bone marrow”. And not just that: two months after taking office, Merz conceded: “We would have to put large parts of our economic policy on hold because it would overshadow everything else.”
Exports make up 42 per cent of German gross domestic product but they have been in decline for more than two years, falling last year by 1.7 per cent and 0.9 per cent a year earlier.
The economy is in an unprecedented third year of recession and the exports outlook for next year looks grim. Even before last Saturday’s threat, Germany’s leading economic institutes predicted a decline in exports of 4.1 per cent this year.
Behind the boos and hissing however, many analysts in Germany concede the Trump trade war threats have merely exposed and exacerbated a long-term and home-made German economic decline.
Despite a general bounce in post-pandemic global trade, the tide is no longer lifting the German boat. Decline set in during Trump 1.0, according to a stark study this week from the Bundesbank as it laid out in black and white how much export weakness is hitting the wider German economy.
According to the central bank, in the three years to 2024 German GDP would have risen 2.4 percentage points more than it actually did if German exporters had merely maintained their global market share.
Its economists points to four key causes: weak demand in customer countries; a drop in the attraction of German products; supply shocks on foreign markets caused by sharp tariff increases; and, most urgently, the rise of competition and a decline in German exporters’ price-performance ratio.
[ Donald Trump pushes for 15%-20% minimum tariff on all EU goodsOpens in new window ]
This last factor – not Trump – is why, Bundesbank economists say, German exporters have been losing global market share. No less than three-quarters of the decline, its economists’ calculations suggest, can be attributed to a deteriorating price-performance ratio of German exports and exporters.
Among the reasons, the Bundesbank says, are an interplay of a skills shortage and steep pay hikes that are not matched by rises in productivity. Unit labour costs are rising more sharply in Germany than elsewhere, with costs rising sharper still further thanks to a rising tide of bureaucracy that is dampening corporate investment.
All of that is proving a toxic cocktail with no immediate antidote in sight. Regardless of what the US does, German exporters have consistently lost post-pandemic market share in markets where China have gained. Chinese companies are taking ever-larger bites out of growing sectors – including those long dominated by Germany.
Take cars and car parts, a key pillar of the German economy accounting for 17.2 per cent of all exports. This has stagnated for almost a decade and, has been in decline since 2019.
The days of relying on growth in the Chinese market has left German car makers dangerously exposed now as Chinese motorists abandon foreign-owned brands such as Volkswagen and turn to domestic companies. Those Chinese companies are now moving into the European electric car market.
The Bundesbank report has no magic solution, only proposals similar to those that have been circulating in Berlin for years.
Two months after taking office, the Merz Coalition has already begun work cutting bureaucracy, backed a new wave of tax write-offs and other sweeteners for companies to invest. Merz promises an ambitious “autumn of decisions” on the ticking demographic time bombs of pension and welfare reform – but a trade war could throw those plans into disarray.
What Germany urgently needs is young people with bright new ideas to counter its export slide and demographic decline. To this end, the Bundesbank report calls for an end to Germany’s schizophrenic practice of attracting in-demand skilled workers only to strangle them on arrival in red tape.
That could be as effective a shot in the arm as Germany’s embrace – after years of abstinence – of debt-financed investment, some central bank analysts think.
The Bundesbank board has given its thin-lipped approval for plans to borrow €500 billion for investment in the next decade, and allow effectively limitless defence spending.
A new and more flexible approach to public finances will see Germany’s debt pile grow by an additional €847 billion to 2029. The hope is it will boost the economy’s growth potential.
Bundesbank board member Michael Theurer says his institution understands that “there are certainly good reasons to make a temporary use of [fiscal] space and it’s important that catch-up required is addressed precisely in infrastructure and defence”.
“We assume that the debt ratio will increase to 66 per cent in 2027 and is likely to continue to grow in the years that follow, which is all reasonable in international comparison,” he told the Stuttgarter Zeitung daily this week. “There is no cause for concern regarding the stability of German finances ... on the other hand, it will be important how the additional financial scope is used.”
But not everyone in Frankfurt is elated about taking on extra debt – and interest repayment obligations – at what Bundesbank president Joachim Nagel has called an “extremely uncertain” geopolitical environment.
“Tariff uncertainty is putting a strain on the financial markets and harming economic development,” said Nagel to the Handelsblatt business daily this week
He said Merz and his EU allies needed a “steady hand” to help bring about a “swift” agreement with the US – “but not at any price”.
