Tariff Troubles for Germany Won’t Stay in Germany

Germany’s role as an anchor for Europe makes its export engine a risk for the continent

By Richard Barley



BIG TARGET
Germany's current account balance as a share of gross domestic product 1980-2017

Source: International Monetary Fund

Note: a positive reading indicates a surplus




Germany has become the focal point of troubling questions about Europe’s political fragility and the decline of globalization. But investors may be better off focusing on the country’s neighbors.

European markets breathed a sigh of relief Tuesday after German Chancellor Angela Merkel struck an agreement over immigration with Interior Minister Horst Seehofer. The threat of a collapse in Germany’s coalition government has subsided. But the issue hasn’t gone away: The rise of populist governments, especially in Italy, has put migration front and center. Europe’s porous borders ensure that any national problem becomes a European problem. 
Meanwhile, the trade dispute raging between U.S. President Donald Trump and China threatens to engulf Germany. The country’s current-account surplus amounts to some 8% of gross domestic product. Car exports to the U.S., which account for 0.7% of German GDP, according to Citigroup, are a particular bugbear for Mr. Trump. That has shaken investors: The Euro Stoxx automobiles and parts index is down 11% this year.


Still, Germany isn’t the best country for investors to bet against. Berenberg thinks a 25% U.S. tariff on car imports would mean just a 0.15% direct hit to German GDP. And the country is well-placed to withstand slower growth. Its economy has been humming and its fiscal position is strong, with government debt down to 64.1% of GDP at the end of 2017. 

TRADE ENGINE



German exports of goods and services as a share of gross domestic product 1980-2017

Source: World Bank 

The indirect impact on business confidence throughout the eurozone could be much greater than any direct hit from tariffs. Other countries, like Italy, are far weaker fiscally, and are still posting weak growth. With the European Central Bank still running ultraloose monetary policy, many economists are doubtful about the eurozone’s capacity to react to fresh economic trouble.

Moreover, Bunds are the haven asset in the eurozone, so markets offer Germany respite in times of trouble. While political risk in Italy has sent its bond yields soaring, stress in Germany has helped lower its cost of borrowing. The 10-year Bund yield dipped below 0.3% Monday.

Instead, trouble for Germany can spread quickly through markets to other parts of Europe. 


German Chancellor Angela Merkel and German Interior Minister Horst Seehofer shake hands at the start of a CDU/CSU parliamentary group meeting on Tuesday in Berlin. Photo: john macdougall/Agence France-Presse/Getty Images 



That reflects Germany’s position as an anchor in Europe. Politics and trade may yet cause that anchor to slip. But southern Europe, not Germany, would likely bear the brunt.

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