Germany’s economy, the largest in Europe, could slip into recession due to U.S. trade tariffs, Bundesbank President Joachim Nagel warned on Thursday, as policymakers in Berlin debate potential fiscal reforms.
“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 also sits on the European Central Bank’s Governing Council, said in a BBC podcast.
Nagel highlighted that the added strain of new tariffs could further weaken Germany’s sluggish economy, which has contracted for two years amid ongoing fallout from the Covid-19 crisis and an energy supply crunch tied to Western sanctions on Russia.
After a period of easing inflation and interest rates in the eurozone, the return of Donald Trump’s trade policies in the U.S. is rattling financial markets and creating new tensions between Europe and its transatlantic partner.
On Wednesday, the European Union hit back at Trump’s newly enforced 25% tariffs on steel and aluminium imports by announcing its own set of retaliatory duties. The EU’s measures, targeting U.S. goods worth 26 billion euros ($28.26 billion), are scheduled to take effect in April.
“This is not a good policy,” Nagel said, calling the shift in trade relations a major global change. “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.”
Germany, one of the world’s biggest exporters, relies heavily on trade with the U.S., making it particularly vulnerable to tariffs. The country’s automotive and machinery industries could be hit hard by the new policies.
Exports accounted for 43.4% of Germany’s economic output last year, according to World Bank data. Meanwhile, figures from the federal statistics office show that the country’s trade surplus fell to 16 billion euros in January, down from 20.7 billion euros in December.
The uncertainty over tariffs comes as EU countries weigh the possibility of loosening budget constraints to increase military spending under a new initiative known as ‘ReArm.’ The plan, revealed last week, is aimed at strengthening Europe’s defence amid doubts over whether the U.S. will maintain its support for Ukraine.
On Thursday, Fitch Ratings warned that the proposal, which could channel nearly 800 billion euros into defence, might reduce the EU’s financial flexibility and put pressure on its AAA credit rating, though a downgrade is not imminent.
Debate Over Germany’s Debt Limits
In Germany, fiscal policy is also under scrutiny. Last week, Conservative leader Friedrich Merz, a key contender for chancellor in the next government, proposed easing the country’s constitutional “debt brake” to boost defence spending. His announcement triggered a rise in German bond yields and stock prices.
The proposal, which includes a separate 500 billion-euro infrastructure fund, has faced pushback from the Green Party. To pass the measure, Merz and his likely coalition partners, the Social Democrats, must persuade the Greens to support a constitutional amendment requiring a two-thirds majority.
Ahead of a parliamentary debate, Green Party leader Britta Hasselmann criticised gaps in the proposed financial plan, particularly regarding climate policies, according to Reuters. While Thursday’s session will only produce a draft law, a final decision is expected on 18 March.
A report from Deutsche Bank on Wednesday predicted a tough legislative battle ahead, stating that fiscal reforms are “unlikely to be a smooth passage” in parliament. However, the bank suggested that any compromise would still align with the previously estimated fiscal stimulus of 3–4% of GDP by 2027.
The analysis also raised the possibility that lawmakers might approve defence spending and debt rule adjustments first while delaying infrastructure funding for future negotiations.
“This would potentially change the composition of the infrastructure package and gear it more towards social housing,” the report noted.
