Will the tank manufacturing sector in Germany contribute significantly to economic recovery?
The recently announced agreement between the USA and the European Union (EU) has sparked a wave of reactions, particularly in the economic sphere. A study published by the Kiel Institute for the World Economy suggests that the deal could have significant repercussions for the EU's economy.
The study indicates that increasing defense spending from 2 to 3.5 percent of GDP could generate additional growth of 0.9 to 1.5 percent, provided that the investments remain on the continent and not go to the USA. However, the agreement does not specify where the increased defense spending will be invested, potentially affecting the EU's economic growth.
Oliver Dörr, the CEO of the German defense company Hensoldt, has described defense spending as a "gigantic economic stimulus package." Yet, the condition for this growth is that the investments remain on the continent, which could limit the economic stimuli that European governments hope to gain from increased defense spending at the NATO summit in June.
The agreement's terms may impact the balance of economic power between the USA and the EU. Economically, the EU will face a substantial increase in tariffs on its exports to the US, from an average of around 2% before Trump’s presidency to a fixed rate of 15% under the new deal. This rise is expected to put particular pressure on the European automotive sector, where tariffs will remain well above pre-Trump levels (15% now versus 2.5% previously), contributing to ongoing challenges in this industry.
From the perspective of some EU leaders and commentators, the deal has been criticized for being one-sided, favoring US economic and geopolitical interests. The EU commitments include large purchases of US energy and military equipment and acceptance of tariffs that may disadvantage European exporters vis-à-vis competitors like the UK, which benefits from a lower 10% US tariff. This has sparked concerns about long-term political and strategic implications, such as increased EU reliance on US energy and collaboration on containing China, which may impinge on EU autonomy and geopolitical positioning.
Germany and France, representing leading EU economies and exporters, have voiced apprehensions about the deal's effects on their manufacturing competitiveness and broader economic sovereignty. German industries, especially automotive manufacturers, are wary of sustained tariff burdens in their key US markets. France shares concerns about the deal potentially undermining EU-wide industrial strength and the balance of transatlantic trade relations.
The potential negative impacts on the EU have been described as a "black day" for Europe by Minister-President François Bayrou. The agreement's consequences for the German economy are unclear, as Germany's government was largely behind Brussels' negotiations with Trump. However, the agreement's terms may lead to further negotiations and potential revisions to the agreement's terms.
In sum, while the aggregate economic growth impact on the EU is modest and less severe than on the US economy, significant challenges remain at the sectoral level and politically. The deal introduces pronounced tariff barriers for European exporters, benefits US economic leverage, and provokes fears among major EU countries like Germany and France about competitiveness loss and reduced policy autonomy.
The financial implications of the agreement between the USA and the EU extend beyond the economy, impacting politics and general news as well. The increase in tariffs on EU exports to the US, especially in the automotive sector, could potentially be a contentious point in future political discussions and business negotiations between the two parties.
The EU's commitments to purchase US energy and military equipment, coupled with higher tariffs and potential limitations on economic stimulus invested on the continent, could lead to strategic shifts and policy adjustments within the EU, affecting the balance of power and trade relationships between the two regions.
