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U.S. tariffs could thrust Germany into recession: ECB’s Joachim Nagel

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3 months ago

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The German parliament building, the Reichstag, which has been the seat of the Bundestag since 1999.

Fhm | Moment | Getty Images

U.S. tariffs could push Europe’s largest economy into a recession, German central bank President Joachim Nagel warned Thursday, as Berlin faces a debate over the potential overhaul of its fiscal policies.

“Now we are in a world with tariffs, so we could expect maybe a recession for this year, if the tariffs are really coming,” Nagel, who leads the Bundesbank and serves as a member of the Governing Council of the European Central Bank, said during a BBC podcast interview.

Global tariffs are set to exacerbate the existing symptoms of what Nagel described as Germany’s “stagnating economy,” which has contracted for two consecutive years amid the combined aftershocks of the Covid-19 pandemic and the energy crisis triggered by Western sanctions on Russia for its three-year invasion of Ukraine.

Mere months after inflation and interest rates began descending in the euro zone last year, returning U.S. President Donald Trump’s tariff-heavy strategy, aimed at reducing his country’s perceived deficits with trade partners, is rattling markets – and fracturing Europe’s traditionally strong relationship with its transatlantic ally.

On Wednesday, the European Union retaliated against Trump’s 25% duties on steel and aluminum imports that came into effect that day with a spate of counter-tariffs set to affect 26 billion euros ($28.26 billion) worth of U.S. goods, starting in April.

“This is not a good policy,” Nagel said, bemoaning the “tectonic changes” now facing the world at large. “I hope that there is understanding within the Trump administration that the price that has to be paid is the highest on the side of the Americans.”

As the world’s third-largest exporter, according to 2023 data, and numbering the U.S. as the foremost importer of its goods, Germany is especially vulnerable to tariffs, which could erode its automative and machinery sectors.

Cripplingly, exports of good and services accounted for 43.4% of Germany’s gross domestic product in 2023, according to World Bank data, although federal statistics office data indicate its typically high foreign trade surplus most recently slimmed to 16 billion euros in January, compared with 20.7 billion euros in December.

The tariffs-led uncertainty come at a time when the EU nations could be set to loosen their budgetary strings and accommodate additional defense expenses, under the bloc’s ‘ReArm’ plan revealed last week amid uncertainty over the U.S.’ ongoing commitment to assist Ukraine.

Fitch Ratings on Thursday warned that the initiative, which could mobilize close to 800 billion euros of defense expenditures, risks lowering the headroom of the EU’s current AAA rating because of the additional debt likely to be undertaken, without leading to an outright downgrade.

Foot on ‘debt brake’ pedal

Germany set the tone last week as the Conservatives’ Friedrich Merz, who is expected to emerge as chancellor in the country’s upcoming ruling coalition, announced plans to overhaul the national so-called “debt brake” to allow for higher defense spend – in a move that sparked a rally in German bund yields and broader stocks.

The initiative, which combines the fiscal change proposals with a 500 billion euro fund for infrastructure, has been met with resistance from the Green Party – which Merz’s conservatives and probable future coalition partner, the Social Democrats, must sway in a bid to clinch a two-thirds majority needed to change the constitutionally-enshrined debt brake.

Ahead of a parliament session debating the potential reform, senior Green official Britta Hasselmann flagged “serious gaps and errors in the conception” of the debt plans toward items like climate change prevention, according to comments reported by Reuters. The Thursday session will only lead to a draft law, while the March 18 reading will likely be decisive for the legislation.

In a Wednesday note, Deutsche Bank analysts retained their base case of the reforms ultimately undergoing what is “unlikely to be a smooth passage” in parliament over the course of the next week, signaling that a “compromise proposal would not significantly alter the expected fiscal stimulus of 3-4% of GDP by 2027 at the latest” that the bank previously calculated based on the Conservatives’ original proposal.

The analysts also factored in the possibility of a splintered fiscal package, with the immediate passage of defense and debt brake policies and the later adoption of the infrastructure plans under a new parliament.

“This would potentially change the composition of the infrastructure package and gear it more towards social housing,” they noted.

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Economics

How young voters helped to put Trump in the White House

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9 hours ago

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May 27, 2025

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THE 2024 election unfolded like a political thriller, replete with a last-minute candidate change, backroom deals, a cover-up, assassination attempts and ultimately the triumphant return of a convicted felon. But amidst the spectacle, a quieter transformation unfolded. For the first time, millennials and Gen Z, people born between 1981 and 2006, comprised a plurality of the electorate, and their drift towards Donald Trump shaped the outcome.

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Economics

Trump hails ‘positive’ step in U.S.-EU trade talks as markets await deal

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15 hours ago

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May 27, 2025

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U.S. President Donald Trump gestures at the annual National Memorial Day Observance in the Memorial Amphitheater, at Arlington National Cemetery in Arlington, Virginia, U.S., May 26, 2025.

Ken Cedeno | Reuters

U.S. President Donald Trump said Tuesday he welcomed the European Union, after he agreed to delay a 50% tariff on goods from the bloc until July 9.

“I have just been informed that the E.U. has called to quickly establish meeting dates,” Trump wrote in a post on the Truth Social platform.

“This is a positive event, and I hope that they will, FINALLY, like my same demand to China, open up the European Nations for Trade with the United States of America.”

Trump also said Tuesday that the EU had been “slow walking” in negotiations with the White House over a trade deal.

The sudden prospect of even greater tariffs on one of the U.S.’ biggest trade partners rattled markets when it was threatened by Trump last Friday. In a post last week, Trump said discussions with the EU were “going nowhere.”

However, sentiment turned positive on Tuesday amid hopes of a breakthrough. EU Commission President Ursula von der Leyen said in a post on X over the weekend that the EU was “ready to advance talks swiftly and decisively,” while European Trade Commissioner Maros Sefcovic said Monday that he had “good calls” with U.S. Commerce Secretary Howard Lutnick.

Europe’s regional Stoxx 600 index slightly extended gains after Trump’s comments on Tuesday, last trading up 0.55% on the previous session, while U.S. markets opened broadly higher.

The 27-member alliance was hit with a 20% tariff on the EU on April 2 as part of Trump’s “reciprocal” tariff strategy, which was then cut for almost all trading partners to 10% for 90 days. Concurrent U.S. duties on autos, steel and aluminum are also hitting the bloc’s exporters.

EU officials have repeatedly stressed that they want to reach a deal with the White House, but that this will not come at any cost. The European Commission, the EU’s executive arm, earlier this month launched a consultation on tariff countermeasures targeting U.S. imports worth 95 billion euros ($107.4 billion) if a deal is not reached.

CNBC has contacted the European Commission for comment.

On May 8, the U.S. unveiled the outline of a trade deal with the U.K., the first such agreement under the latest Trump administration, although businesses say they are awaiting further details. The deal maintains a 10% baseline tariff on U.K. imports to the U.S., suggesting other countries will face a similar rate at a minimum.

Trump has generally struck a favorable tone toward the U.K. due to its more balanced trade relationship in goods with the U.S. He has accused the EU, however — with which it has a deficit in goods — of treating the U.S. unfairly. EU-U.S. trade is roughly balanced when accounting for both goods and services, according to EU figures.

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Economics

Consumer confidence for May was much stronger than expected on optimism for trade deals

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15 hours ago

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May 27, 2025

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Consumer confidence comes in strong at 98 vs 86 estimated

Consumer optimism got a much-needed boost in May on hopes for trade pace between the U.S. and China, according to a survey Tuesday.

The Conference Board’s Consumer Confidence Index leaped to 98.0, a 12.3-point increase from April and much better than the Dow Jones consensus estimate for 86.0.

Much of the positive sentiment, according to board officials, came from developments in the U.S.-China trade impasse, most notably President Donald Trump’s halting of the most severe tariffs on May 12.

“The rebound was already visible before the May 12 US-China trade deal but gained momentum afterwards,” said Stephanie Guichard, the Conference Board’s senior economist for global indicators.

May’s rebound followed five straight months of declines. Consumers and investors had grown sour on economic prospects amid the intensifying trade war that Trump has launched against U.S. global trading partners, with China a particular target.

However, the two sides reached a truce in early May, marking the second major walk-back of Trump’s so-called reciprocal tariffs since he levied them in his April 2 “liberation day” announcement.

Other board sentiment indicators also increased.

The present situation index increased to 135.9, up 4.8 points, and the expectations index posted a major surge to 72.8, a 17.4 point gain. Investors also showed more optimism, with 44% now expecting stocks to be higher over the next 12 months, up 6.4 percentage points from April.

Views on the labor market also improved, with 19.2% of respondents expecting more jobs to be available in the next six months, compared to 13.9% in April. At the same time, 26.6% expect fewer jobs, down from 32.4%.

Survey officials said sentiment improved across age, income and political affiliation, though noting that the “strongest improvements” came from Republicans.

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