The German Economy Needs "Surgery": Tariffs, High Energy Costs, and Regulations — The Triple Burden on the German Economy, Merz's Gamble

"Structural Crisis" Rather Than "Economic Weakness" —— The Weight of Merz's Statement

On August 23, German Chancellor Friedrich Merz stated that the economic recovery is "far more difficult than initially anticipated," acknowledging that the German economy is in a "structural crisis" rather than a temporary economic slowdown. His speech in Osnabrück, Lower Saxony, drew attention for its in-depth expressions, including self-criticism.Bloomberg Law

Background: Q2 Negative Growth, Sluggish Exports and Investments, External Environment

Recent statistics show that the real GDP for the second quarter of 2025 (Q2) was revised downward to -0.3% compared to the previous quarter. The sluggish growth in exports and the stagnation of capital investments (-1.4%) were burdensome. Demand from the U.S. slowed due to increasing uncertainty over tariffs, with some suggesting that recovery is "unlikely before 2026."Reuters

Additionally, although the EU—U.S. trade agreement reached at the end of July avoided the "worst-case scenario," the introduction of a 15% tariff base has spread concerns about continued headwinds for the German export industry. Merz himself stated that "better conditions were not realized" and that it was a "significant blow to the German economy."Reuters

Policy: Tax Reduction, Investment Promotion, and Bureaucracy Reduction

The Merz administration is poised to advance measures to restore competitiveness, such as corporate tax cuts, investment tax reductions, energy cost reductions, and the streamlining of excessive regulations. Economic Minister Reiche also emphasized the necessity of "bold structural reforms" in response to the Q2 downturn, specifically mentioning the flexibilization of working hours, reduction of ancillary labor costs, tax burden relief, energy price reduction, and red tape reduction.Reuters

On the other hand, the significance of the Chancellor himself declaring that "structural" issues that cannot be explained by the current economic cycle alone (such as high energy costs, delays in digitalization, demographics, and shifts in external demand) are acting in a complex manner is substantial.Bloomberg Law

A Small Tailwind: PMI and Financial Environment

Currently, there is a glimmer of positivity in the preliminary private sector PMI for August, with a "slight increase accompanied by an improvement in new manufacturing orders." Additionally, the European Central Bank's rate-cutting cycle and expansive fiscal stance are expected to support the economic bottoming out. However, "structural issues" and U.S. tariffs could become weights that suppress upward momentum.Reuters

Social Media Reaction: Expectations and Distrust, Divided Over Prescriptions

When the news was released, discussions became active on X (formerly Twitter) as posts from various media spread. Starting with posts from Bloomberg and The Straits Times, voices evaluating the "realistic recognition of the situation" and those urging "not just recognition but also immediate action plans" intersected.X (formerly Twitter)

Meanwhile, on Reddit's r/europe, discussions about the "structural crisis" continued to be divided into positions such as (1) prioritizing tax cuts and regulatory reforms, (2) being cautious about painful reforms including the review of welfare and pensions, and (3) encouraging a shift away from an automobile-centered industrial structure. Overall, comments with a practical focus on "not just words but changes in the design of systems and investments" stood out.Reddit

What Will Be Key: Three Checkpoints

1. Redesigning Cost Structures: Can there be a sustainable reduction in electricity rates and ancillary labor costs? Will the quantitative effects of regulatory simplification (equivalent to tens to hundreds of billions of euros in annual savings for companies) become visible?Reuters

2. Absorbing External Shocks: Can the combination of U.S. tariffs, reduced dependency on China, and supply chain reorganization minimize fluctuations in exports?Reuters

3. Switching Investments: Will the ripple effects of public investments in digital, power grids, defense, and housing bring back private investments——will the slight improvement in PMI connect to real investments?Reuters

Outlook: Beyond an Honest Diagnosis

Merz's statement on the "structural crisis" complicates prescriptions but has a significant effect in aligning the premises of the discussion. Whether short-term economic support (monetary easing + fiscal) and medium-term institutional reforms (tax, labor, energy, regulation) can be advanced "in parallel" will be a touchstone. The implementation of specific measures——especially the simplification, visualization, and effectiveness measurement of administrative processes——will influence the trust of the market and voters.Bloomberg LawReuters

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