^{Source: Reuters}

Germany’s Stimulus vs. Tariff Turbulence: Eurozone’s Economic Outlook Darkens

The eurozone’s economic recovery is hitting turbulence, and not even Germany’s massive €500 billion ($548 billion) spending spree will be enough to steer it safely through, warns the International Monetary Fund (IMF).

At the IMF-World Bank Spring Meetings last week, Alfred Kammer, director of the IMF’s European department, emphasized that escalating trade tensions—particularly those driven by U.S. tariff policies—are casting a long shadow over Europe’s growth prospects.

Eurozone Growth Forecast Slashed

The IMF downgraded its growth forecast for the eurozone for the second consecutive year.

• 2025 growth: Revised down by 0.2 percentage points to 0.8%
• 2026 growth: Trimmed to 1.2%

The downgrade reflects not only Europe’s internal economic challenges but more critically, the global slowdown triggered by President Donald Trump’s aggressive trade policies. Kammer noted that the tariff impact far outweighs any near-term fiscal benefits from Germany's stimulus.

"It's not the boost from fiscal spending that's dominating the outlook — it's the drag from trade tensions and tariffs," Kammer explained in an interview with CNBC’s Carolin Roth.

Germany’s €500 Billion Bet on Growth

In an attempt to inject momentum into its sluggish economy—the largest within the eurozone—Germany has overhauled its fiscal framework. Relaxing its rigid "debt brake" rule, Berlin has unleashed a massive €500 billion infrastructure and climate fund, aimed at upgrading roads, digital infrastructure, renewable energy, and strengthening defense.

Economists have hailed this move as a potential "game changer" after years of tight fiscal restraint, which critics argue starved Germany—and by extension, Europe—of needed investments.

The fund includes:

• €200 billion earmarked for green energy projects.
• €100 billion directed toward modernizing the military.
• Significant allocations for public transportation and digital transformation.

Yet, even this historic stimulus cannot fully counteract the external economic headwinds.

U.S. Tariffs Threaten Global Trade

The ripple effects of U.S. trade tariffs, introduced as part of a volatile America First agenda, have spread far beyond China and direct trade partners. The World Trade Organization (WTO) recently warned that global trade volumes could grow by less than 1% in 2025, compared to an average of 2.6% pre-pandemic. Europe, with its export-driven economy, is particularly vulnerable.

Kammer pointed out that for advanced European economies, growth projections have seen "meaningful downgrades," while for emerging euro area countries, the downgrades are twice as large over the same two-year window.

Other sources, like the OECD, have also flagged that prolonged tariff uncertainty could shave up to 0.6% off global GDP over the next two years if tensions escalate further.

What About Inflation and ECB Policy?

Despite the turbulence, there is a silver lining. The IMF believes the disinflation process across the eurozone is on track, thanks largely to the European Central Bank’s (ECB) proactive rate cuts.

Since June 2024, the ECB has lowered interest rates seven times, each by 25 basis points, bringing its key deposit facility down to 2.25%. The latest cut came in April 2025.

Kammer endorsed a cautious approach going forward:

"We recommend just one more 25-basis-point cut during the summer, after which the ECB should hold steady, unless major external shocks necessitate recalibration."

This view diverges slightly from current market expectations, where overnight index swaps indicate investors are pricing in two more cuts in 2025.

Kammer underscored the importance of patience:

"Europe is on track to sustainably achieve the 2% inflation target by the second half of 2025. Premature easing could derail that progress."

A Balancing Act Ahead

Germany’s fiscal courage could breathe new life into Europe’s economy—but global forces, particularly U.S. trade policies, remain the dominant risk factor. Policymakers at the ECB and across the continent face a delicate balancing act: stimulating growth without stoking inflation or underestimating external threats.

As Kammer put it, “The foundations for a recovery are being laid domestically, but the global climate remains stormy.”

‍