The Hindu: Published on 13th May 2025:
Why in News?
Friedrich Merz has been elected as the new Chancellor of Germany amid a backdrop of economic contraction and U.S. President Donald Trump’s announcement of new tariffs on the EU, significantly affecting German industries like automobiles.
Background:
Friedrich Merz, leader of the Christian Democratic Union (CDU), was elected Chancellor on May 6, 2025, after two rounds of voting — an unprecedented situation in post-war German politics.
Germany has experienced negative GDP growth for two consecutive years.
Donald Trump imposed a 20% tariff on EU goods, with a specific 25% tariff on cars and parts — hitting Germany hard due to its large auto exports to the U.S.
The EU is unable to act unilaterally and is cautious about retaliating due to critical imports from the U.S., like oil and pharma products.
Key Issues:
Weakening Economy: German economy under structural stress, with manufacturing output declining.
Trade War Threat: U.S. tariffs threaten Germany’s exports; $6,000 cost increase per car exported to the U.S. expected.
Coalition Challenge: Merz heads a mixed coalition with SPD, facing pressure to balance conservative and progressive agendas.
EU Limitations: Germany can't respond alone to tariffs due to EU trade policy; EU also reluctant to retaliate due to energy and pharma dependency.
Economic Impact:
Germany could lose up to 1.5% of GDP by 2028 if a full trade war escalates.
Automotive sector is especially vulnerable — over 4.5 lakh cars exported to the U.S. in 2024.
Consumers and businesses may delay investment due to tariff uncertainty, leading to reduced economic activity.
International Response:
The EU has moved to file a WTO dispute against the U.S. over the tariffs.
Preparing a counter-tariff list worth €95 billion.
Exploring deeper trade relations with other partners (Canada, Mexico, Japan, South Korea).
India could benefit if EU shifts focus to newer FTA partners.
India’s Angle:
India lacks a full FTA with the EU but may engage in sectoral trade agreements (especially industrial goods).
EU sees India as a strategic partner in Asia.
India may emerge as a substitute manufacturing and export partner if EU-U.S. tensions grow.
Sector-Wise Concerns:
Automobile Industry: Most directly impacted due to tariffs and fear of Chinese product dumping.
Energy and Pharma: EU heavily dependent on U.S. imports — limiting retaliation options.
Standardised Goods: Lesser impact; not Germany’s export strength.
Structural Challenges:
Merz faces pressure to maintain Germany's status as a manufacturing powerhouse.
Needs to create economic frameworks to shield German industry from global volatility.
Way Forward:
Germany must lead EU efforts to seek trade balance with U.S. while diversifying trade partners.
EU should focus on targeted instruments to tackle dumping, not broad protectionism.
Domestic policies must support innovation, investment, and economic resilience.
Conclusion:
Chancellor Friedrich Merz’s term begins amid a fragile economy and turbulent global trade environment. The way Germany and the EU respond to U.S. tariffs will define their economic direction and geopolitical posture for years to come.
