As German voters prepare to head to the polls, the nation’s struggling economy is at the forefront of political debate. However, incoming U.S. tariffs under President Donald Trump are poised to complicate efforts to revive Europe’s largest economy. Analysts warn that failure to stimulate economic growth could have significant political consequences, potentially bolstering far-right parties like the Alternative for Germany (AfD).
Economic Stagnation and Political Risks
Germany’s economy, the world’s third-largest, has experienced minimal growth since the pandemic. It contracted in both 2023 and 2024, marking the first consecutive annual declines since the early 2000s. The International Monetary Fund forecasts a meager 0.3% growth rate for 2025, highlighting the economic challenges facing the nation.
Carsten Brzeski, a senior economist at ING, cautioned, “If the new governing coalition fails to revive growth, my hope is that… they know who’s going to win the next elections, and this would be the far-right AfD.” With the economy being one of the top concerns for German voters, the political stakes are high.
Challenges for Export-Driven Growth
Germany’s economy heavily relies on exports, which accounted for over 43% of its gross domestic product in 2023, the highest share among major economies. However, declining demand from key markets, particularly China, has weighed on exports of vehicles, machinery, and chemical products.
Once a booming market for German automakers like Volkswagen, China is now dominated by domestic electric vehicle manufacturers such as BYD and Xpeng. These Chinese brands have successfully captured market share both domestically and globally, posing a significant challenge to German carmakers that were slow to transition to electric vehicle technology.
Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, noted, “A world in which free trade is not the… dominant economic mantra is problematic for Germany.” As global trade dynamics shift, Germany’s export-oriented growth model faces increasing pressure.
Rising Costs and Deindustrialization
Germany’s industrial sector is grappling with high energy costs following the shift away from Russian gas imports. The war in Ukraine forced Europe to source natural gas from more expensive global suppliers, leading to increased production costs for German manufacturers. As a result, some industrial firms have reduced production or even shut down operations.
“We are in the midst of deindustrialization,” warned Lars Kroemer, chief economist at Gesamtmetall. The impact is particularly severe for Germany’s highly specialized industrial companies that rely on energy-intensive production processes.
In addition to soaring energy costs, high taxes, strict regulations, and outdated infrastructure are hampering productivity. “We haven’t yet digitized. Our bureaucratic burden is higher… than in other countries,” stated Achim Wambach, president of the Leibniz Centre for European Economic Research.
Trump’s Tariffs: A New Economic Threat
Adding to Germany’s economic woes, U.S. President Donald Trump has announced a series of import tariffs, including a 25% duty on steel and aluminum, and plans to impose tariffs on imported automobiles, semiconductor chips, and pharmaceuticals. As the U.S. is Germany’s largest export market, these tariffs could severely impact German manufacturers.
Economists estimate that about 1.2 million German jobs depend directly or indirectly on exports to the U.S. German automakers, including Volkswagen, which exports vehicles from factories in Mexico to the U.S., are particularly vulnerable.
Michael Böhmer, chief economist at Prognos, explained, “The whole (global) economy is like a network, so if you put a tariff or a hurdle… at one point, more or less the whole world economy will feel that.” He warned that the ripple effects of U.S. tariffs could extend beyond Germany, potentially disrupting global supply chains and increasing competition in other markets.
The Need for Economic Reform
Analysts agree that Germany’s current economic model, which relies heavily on exports and traditional industries like automotive manufacturing and heavy machinery, is becoming increasingly outdated. To ensure long-term growth, Germany must transition to a “future-oriented economy” focused on emerging technologies such as artificial intelligence and renewable energy.
Böhmer emphasized, “If over the next decade Germany fails to shift from ‘quite old’ industries… it will for sure not be the third-biggest economy in the world anymore.” Economic reform is not only crucial for growth but also for maintaining Germany’s competitive edge on the global stage.
A Critical Moment for Germany’s Economy
Germany stands at a crossroads as it grapples with economic stagnation, rising costs, and looming U.S. tariffs. With political stability and economic prosperity at stake, the new government faces immense pressure to implement effective reforms and stimulate growth.
The outcome of the upcoming election and the government’s policy response will shape Germany’s economic trajectory for years to come. As the nation navigates a rapidly changing global economy, the stakes have never been higher for Europe’s largest economy.