【By Observer Net, Xiong Chaoran】On August 22 local time, official data released by the German Federal Statistical Office showed that Germany's gross domestic product (GDP) fell by 0.3% in the second quarter of this year compared to the previous quarter, further revised downward from the previously estimated decline of 0.1% in July.

AFP reported that due to the impact of U.S. tariffs on exports, the economic contraction exceeded expectations, which will put more pressure on German Chancellor Merkel, who needs to reverse the downturn of Europe's largest economy. Data shows that Germany's goods exports fell by 0.6%, and machinery and equipment expenditures dropped sharply by 1.9%, highlighting the difficulties faced by German manufacturing in the first full quarter after the implementation of U.S. tariff measures.

The United States is Germany's largest trading partner, accounting for about 10% of its exports, and is also a major destination for German products ranging from cars to chemicals. Data on German household consumption also fell below initial estimates, and the performance of the manufacturing and construction sectors was also below expectations. Data published at the beginning of August showed that Germany's industrial production fell to the lowest level since the start of the COVID-19 pandemic in 2020.

According to Bloomberg, on August 23 local time, Merkel delivered a speech in Osnabrück, Lower Saxony, in northern Germany, stating that the current challenges facing Germany's economy are far more difficult than he initially expected. "I say this with a sense of self-criticism. This task is more or less much more difficult than we could imagine a year ago. We are not only in a period of economic weakness, but also in an economic structural crisis."

Reuters reported that at the same time, German Economy and Energy Minister Katharina Reiche called for urgent economic reforms on August 22 local time. "These data indicate that we need to take action urgently. If Germany's economy wants to enhance its competitiveness, it must carry out deeper and bolder structural reforms," she said in a statement. These reforms include more flexible working hours, reducing non-wage labor costs, streamlining procedures, lowering energy prices, and easing the tax burden on businesses.

On August 23 local time, 2025, in Osnabrück, Lower Saxony, Germany's federal chancellor Friedrich Merz delivered a speech at the Christian Democratic Union (CDU) state congress in Lower Saxony. The state congress was held at the Osnabrück Convention Center from August 22 to 23, 2025. Visual China

"By this week, no one should have any illusions about how deep and far-reaching the challenges we face are," Merz told his CDU members in Lower Saxony, where the headquarters of carmaker Volkswagen Group is located, on August 23. For example, Volkswagen's second-quarter net profit fell by 36%, which was just "one of many pieces of information."

"Most areas of our economy are no longer really competitive; this is a price competitiveness issue," Merz did not name any specific company, but said: "(Although) the quality is still good, company leaders recognize these challenges, but over the past decade, the basic conditions in Germany were simply not good enough."

Bloomberg noted that since taking office this year, Merz has promised comprehensive reforms aimed at reducing bureaucracy, modernizing infrastructure, and stimulating domestic demand. His government plans to invest billions of euros in road, bridge, and military construction to boost productivity.

That day, Merz emphasized new tax incentives for business investment and reiterated his opposition to increasing taxes on small and medium-sized enterprises. He also acknowledged that the 15% tariffs imposed by the United States on German export products would burden the economy, but he warned that a full-scale trade war with the United States could have even more severe consequences.

AFP pointed out that Germany is a traditional export powerhouse in the eurozone, and restoring its own economy has always been Merz's top priority.

In 2023 and 2024, Germany's economy contracted by 0.3% and 0.2%, respectively. In the first quarter of this year, Germany's economy grew by 0.3% compared to the previous quarter. The German government had previously downgraded its growth forecast for 2025 to zero growth, but several major economic research institutions predict that Germany's economy may grow this year driven by fiscal stimulus measures such as the infrastructure fund.

Germany's business climate index rose for the seventh consecutive month in July, reaching a historical high. Several think tanks, including the German Institute for Economic Research (DIW), have simultaneously raised their growth forecasts for 2026.

However, ING analyst Carsten Brzeski pointed out that the latest data indicates that this optimism is not based on a sustained economic recovery, but rather on short-term front-loaded demand caused by U.S. customers placing orders before the new tariffs took effect.

"Optimism alone cannot restore (economic) growth," Brzeski said: "The complete reversal of the previous upfront investment effect has pushed Germany's economy back into a recession."

Although the U.S. and EU reached an agreement in late July to avoid a full-scale trade war, uncertainties in the implementation of the agreement continue to impact German exporters. Details of the agreement announced by both sides on August 21 local time showed that most EU goods will still face a 15% tariff rate. However, car tariffs remain at 27.5%, and this rate can only be reduced to 15% once the EU passes legislation to cancel taxes on U.S. industrial products.

Brzeski commented on this: "The German economy, which relies heavily on exports, finds it hard to escape the seemingly endless stagnation."

Currently, German Vice Chancellor and Finance Minister Lars Klingbeil from the Social Democratic Party (SPD) proposed the possibility of raising taxes to fill a 30 billion euro gap in spending plans for 2027, which quickly drew condemnation from his conservative coalition partners.

Katharina Reiche, the German Economy and Energy Minister from the same center-right CDU as Merkel, stated: "The tax burden on German companies is already high, and we need to discuss reducing taxes, not increasing them."

Brzeski believes that this debate may further suppress Germany's economic growth and weaken the impact of large-scale infrastructure and defense spending plans. "The longer the debate on potential austerity measures continues, the higher the risk that households and businesses will cut spending and investment decisions," he said: "Germany's economy has fallen into a 'comfort zone' of stagnation and may not see more substantial recovery until next year."

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