Trump's Trade Agreement and Merz's Unfulfilled Honeymoon

Trump's Trade Agreement and Merz's Unfulfilled Honeymoon

In the heart of Europe, German Chancellor Friedrich Merz is facing a tumultuous journey as he grapples with a myriad of challenges, both domestic and international. The US-EU trade tensions, particularly the US-imposed tariffs on EU imports starting August 1, 2025, pose a significant threat to Germany’s export-driven economy.

The tariffs, which threaten to cut "to the bone" according to Merz, have compounded the economic strain on his government. Already juggling social reforms and coalition discord, Merz's efforts to overhaul social security systems are further complicated by these trade barriers.

Foreign policy presents another complex landscape for Merz. The ongoing Russia-Ukraine war, volatile Israel-Iran situation, and heightened US-China trade tensions, aggravated by Donald Trump’s return to the White House, shape a challenging environment. Despite the lack of a fully crystallized new foreign and defense policy, Merz has signaled a firmer stance, reaffirming support for joint EU defense projects like the Future Combat Air System (FCAS).

However, Merz’s handling of Germany’s arms exports, particularly concerning Israel and Gaza, has spurred criticism domestically and abroad. This contentious decision-making exposes tensions in Germany's international alignments and complicates its diplomatic relations.

The traditionally close Franco-German partnership also faces tests under Merz's tenure. While the US-EU trade frictions and EU cohesion challenges may not be extensively detailed, the general picture points to broader European unity challenges under pressure from external forces like US tariffs and internal disagreements within the EU regarding foreign policy and defense.

Policy-makers at the European Central Bank may be more open to a further quarter-point easing of interest rates when they meet on 10-11 September, due to the trade deal. However, the accord, while averting an immediate trade war, has interrupted a generally positive foreign policy record for Chancellor Merz.

The EU has agreed to spend hundreds of billions of dollars on US energy products and armaments, as well as accepting a broad 15% tariff across most exports. This deal, considered a heavy defeat for EU negotiators, presents three sets of problems for Chancellor Merz.

Criticism persists about a delayed reduction in corporation tax, with a decline by 1 percentage point a year for five years from 2028 deemed as 'too little, too late' by conservative economists. The CDU/CSU (Christian Democratic Union/Christian Social Union) is polling neck-and-neck with the extreme right Alternative for Germany (AfD), adding to Merz's challenges.

Despite these hurdles, Merz's personal popularity rating seems to have improved. However, the CDU/CSU's poll ratings may be affected by criticism of the EU’s negotiating tactics against President Donald Trump. There is doubt about estimates from Deutsche Bank that gross domestic product could rise as much as 2% in 2026, up from 0.5% previously forecast.

In an attempt to stimulate immediate corporate investments, increased tax depreciation allowances for the next three years have been introduced. Corporate representatives have pledged to invest €631bn in the coming years.

However, reaction to the deal is considerably more hostile in France than in Germany, opening potential for discord between Paris and Berlin. This follows a row over their expression of controversial left-leaning positions on issues such as abortion and mandatory vaccinations, and these issues do not seem likely to resolve soon.

In summary, Chancellor Merz is navigating a challenging landscape, with US tariffs posing a direct and severe threat to Germany’s economy, and contentious foreign policy decisions reflecting strained diplomatic balancing. The traditionally close Franco-German partnership faces tests as Merz's government manages these multifaceted crises amid calls for stronger EU cohesion to respond to US protectionism and evolving global security concerns.

1. The US-EU trade tensions, with tariffs on EU imports starting August 1, 2025, threaten to significantly impact Germany's export-driven economy.
2. German Chancellor Friedrich Merz acknowledged that the tariffs, which could cut "to the bone," have compounded economic strain on his government.
3. Foreign policy poses another complex landscape for Merz, with the ongoing Russia-Ukraine war, volatile Israel-Iran situation, and heightened US-China trade tensions shaping a challenging environment.
4. Merz has reaffirmed support for joint EU defense projects like the Future Combat Air System (FCAS), signaling a firmer stance in foreign policy.
5. Merz's handling of Germany's arms exports, particularly concerning Israel and Gaza, has spurred criticism domestically and abroad.
6. The ongoing US-EU trade frictions and EU cohesion challenges may not be extensively detailed, but the general picture points to broader European unity challenges under pressure from external forces.
7. Policy-makers at the European Central Bank may consider a further quarter-point easing of interest rates due to the trade deal.
8. The EU's agreement to spend hundreds of billions of dollars on US energy products and armaments, and accepting a broad 15% tariff across most exports, presents challenges for Chancellor Merz.
9. Criticism persists about a delayed reduction in corporation tax, with a decline by 1 percentage point a year for five years deemed as 'too little, too late' by conservative economists.
10. The CDU/CSU (Christian Democratic Union/Christian Social Union) is polling neck-and-neck with the extreme right Alternative for Germany (AfD), adding to Merz's challenges.
11. Merz's personal popularity rating seems to have improved, but the CDU/CSU's poll ratings may be affected by criticism of the EU’s negotiating tactics against President Donald Trump.
12. Deutsche Bank has expressed doubt about estimates that gross domestic product could rise as much as 2% in 2026, up from 0.5% previously forecast.
13. In an attempt to stimulate immediate corporate investments, increased tax depreciation allowances for the next three years have been introduced.
14. Corporate representatives have pledged to invest €631bn in the coming years.
15. The reaction to the deal is considerably more hostile in France than in Germany, opening potential for discord between Paris and Berlin.
16. This follows a row over their expression of controversial left-leaning positions on issues such as abortion and mandatory vaccinations, and these issues do not seem likely to resolve soon.
17. In the realm of AI and technology, insights from data and cloud computing are crucial for making informed decisions in finance, energy, lifestyle, fashion-and-beauty, food-and-drink, and home-and-garden industries.
18. Investing and wealth management industries rely heavily on data-driven insights to make strategic decisions, and a strong understanding of economic trends is essential.
19. Sports, such as football, provide opportunities for sports betting, casino-and-gambling, and sports-analysis, generating revenue and entertainment in the industry and personal-finance sectors.
20. Politics, policy-and-legislation, crime-and-justice, general-news, and war-and-conflicts continue to shape the global landscape, impacting business, career-development, education-and-self-development, and relationships in various ways.

Read also: