Germany's economy may suffer from Trump's return to White House

The head of Germany's Bundesbank, Joachim Nagel, has urged Berlin to ease its strict spending rules, warning that Europe's largest economy faces a "complicated" and "weak" outlook.

With German elections scheduled for February, the post-pandemic stagnation in the economy has contributed to growing dissatisfaction among voters with Chancellor Olaf Scholz’s ruling coalition. Nagel called on the next government to reform the "debt brake" - a rule that limits borrowing to 0.35 per cent of GDP annually - to better address long-term economic challenges, Caliber.Az reports, citing foreign media.

He emphasised that creating more fiscal space to tackle structural issues, such as increasing defence spending and modernising infrastructure, would be a "very smart approach." This marks the most direct statement yet from the Bundesbank president on how he believes a future chancellor should handle Germany’s limited fiscal flexibility. Nagel also described the current economic situation as "even more complicated" than at the start of the 21st century. While unemployment was higher back then, he pointed out that "there was no geopolitical fragmentation and world trade was growing strongly."

Germany's economy, he noted, has experienced virtually no real growth since mid-2021, with its manufacturing sector struggling under the weight of high energy costs and diminishing competitiveness. The potential return of Donald Trump to the White House could further complicate Germany's economic challenges, with the president-elect threatening to impose a blanket tariff of up to 20 per cent on all US imports.

While the Bundesbank will not release an official update to its growth forecast until later this month, Nagel predicted that 2025 is likely to be “another year of weak growth” for the German economy, with the central bank’s estimate hovering around 0.4 per cent. Growth would be even more subdued if Trump followed through on his proposed tariffs, according to the Bundesbank president.

"If you put major increases in tariffs on top of current forecasts, the economy might broadly stagnate for even longer," he warned, adding that “even the labour market might show more noticeable weakness.”

Germany's seasonally adjusted unemployment rate remains relatively low at 6.1 per cent, according to the Federal Employment Agency. 

However, this figure partly reflects a surge in low-paid jobs within the services sector, at the expense of higher-paying manufacturing roles. Despite these pressures, Nagel expressed confidence that Germany could overcome any crisis, stating: "Past experience shows that when Germany is feeling the pain, Germany will change."

He cited ongoing discussions over reforming the constitutional debt brake as an example of Germany's ability to adapt. 

“We can think about making a distinction between consumption expenditures and investments to get more leeway on the structural investment side,” he explained, noting that Germany's debt-to-GDP ratio has fallen significantly and is approaching the EU’s 60 per cent threshold under its Stability and Growth Pact rules. 

By Naila Huseynova