Germany Faces Economic Challenges as Coalition Agreement is Unveiled

Things could be about to change rapidly, as on Wednesday, Friedrich Merz, Germany’s opposition Christian Democratic Union (CDU) leader, presented a new coalition accord. This deal projects an anemic growth rate of just 1.3% through 2026. That pact comes as concerns are increasing about outside forces further impacting the nation’s economy. In particular, the tariffs that the United States, under former President Donald Trump, imposed have been a huge cause for concern.

Together with strong weaknesses in other parts of the coalition agreement, a scary picture emerges for Germany’s future economic playing field. Famed economist Larry Summers even cautioned that the nation could suffer through a recession in 2025 at best. Some of those economic forecasts predict economic contraction over the next two years. This prediction comes in line with a short-term forecast from five of Germany’s top economic institutes. Indeed, both think that Germany’s economy will grow just 0.1% this year.

Among major advanced economies, the tariffs on all aluminium and steel imports and on vehicles are projected to have the largest negative impact on Germany’s overall economic performance. Each of those tariffs is expected to decrease German GDP growth by 0.1 percentage points. Some observers feared that these short-term measures had the potential to double the negative effect on Germany’s gross domestic product. This would create even worse economic impacts.

The uncertainty surrounding the Trump administration’s trade policy has further complicated predictions for Germany’s economy. The previously announced tariffs remain largely on hold. If they return, they would threaten recovery from recession and hinder future prosperity. Economists have argued that this unpredictability makes for a terribly risky environment for businesses and investors in general.

Merz’s coalition agreement addresses these urgent priorities directly. It doesn’t shy away from acknowledging the constraints that international trade relations place on the U.S. government. It’s possible that Germany’s economy is already under siege from several fronts. The imposition of US tariffs further complicates the path toward realizing sustainable economic growth.