Germany, often regarded as Europe's economic powerhouse, is currently facing significant challenges. The country is experiencing negative growth in both production and commerce, signalling an economic downturn. At the same time, political shifts are drawing attention, particularly with the rise of the far-right Alternative für Deutschland (AfD) in recent regional elections. Adding to these difficulties are strained trade relations with China, with newly imposed tariffs on Chinese imports that could have far-reaching effects on the broader European economy. For Malta, with its strong economic ties to Germany, these developments may carry important implications.

Germany's economy, traditionally anchored by a robust industrial base, is facing a challenging period. During the first two quarters of this year, production and commerce experienced declines. According to the Federal Statistical Office, Germany's GDP contracted by 0.8% in Q1 2024 and grew by 0.3% in Q2 (inflation-adjusted), marking a deepening economic slowdown. This follows a difficult 2023, which also saw consecutive quarters of negative growth. In 2023, the inflation-adjusted GDP grew by 0.6% in Q1, but then contracted by 0.4% in Q2, 0.7% in Q3 and 0.4% in Q4. The contraction has been especially severe in exports, with shipments to China dropping by 14% in May compared to the previous year. Several factors contribute to this decline, including China's increasing self-sufficiency in high-tech manufacturing and rising political tensions, particularly over Taiwan.

Further exacerbating the situation, the European Union has imposed tariffs on Chinese electric vehicles, ranging from 21% to 38%. This policy is placing additional pressure on Germany's export sector, particularly its vital automotive industry. Automakers like Volkswagen, which heavily depend on the Chinese market, are now grappling with increased competition and the looming threat of Chinese counter-tariffs.

Germany is one of Malta's key trading partners, especially in sectors such as machinery, chemicals, pharmaceuticals and vehicles. With over 60 German companies operating in Malta and German direct investments amounting to €17.5bn, Germany is a vital economic partner. As part of the EU single market, Malta is indirectly affected by broader EU trade disputes. The tariffs on Chinese electric vehicles could raise costs for Maltese companies that rely on German-manufactured products with Chinese components. Additionally, as Germany's role as the EU's primary trading partner with China weakens, Malta may face supply chain disruptions. In response, Malta may need to diversify its trading partners to ensure economic stability. At the same time, these challenges could also present opportunities. German businesses, under pressure from tariffs on Chinese imports, might look to diversify their supply chains within Europe, and Malta, with its strategic location and business-friendly environment, could emerge as an attractive alternative.

Germany's political landscape is also undergoing significant change, with the far-right AfD gaining momentum in regions like Saxony, Thuringia and Brandenburg. The rise of the AfD, which promotes a nationalist and populist agenda, could influence Germany's policies on European integration and international trade. For Malta, which relies heavily on EU integration for trade and tourism, any shift away from a pro-EU stance in Germany could present new challenges. A move toward isolationism or protectionism across Europe could have serious consequences for businesses, particularly in terms of stricter immigration controls, tighter trade regulations and decreased support for European cooperation. Eastern German companies, for example, are already expressing concern about migration policies and their impact on the skilled labour shortage (Fachkräftemangel) in the region.

Regarding Malta's strong tourism ties to Germany, one might expect Germany's economic struggles to reduce the number of German tourists visiting Malta. In 2023, Malta welcomed close to three million tourists, with German tourists accounting for a significant share, ranking fourth among all visitors. However, despite economic challenges, Germans seem to be prioritising travel this year and next. According to a report by the Stiftung für Zukunftsfragen, German tourists spent an average of €1,538 on their main holiday in 2023, a notable increase from the previous year. Post Covid-19, Germans remain eager to travel, and Malta, which is 21% cheaper than a domestic German vacation, continues to be an attractive destination.

Nevertheless, Malta's tourism industry should remain mindful of rising travel costs. While interest from German tourists is unlikely to wane, the affordability and availability of air travel could become a concern. Ensuring affordable and frequent flight connections between Germany and Malta will be crucial for sustaining tourism in the coming years. Additionally, Malta's infrastructure could become a concern in maintaining its appeal as a holiday destination. While hotel capacity is expanding, other infrastructure, such as energy, transportation and waste management, may struggle to meet the demands of increased tourism. Malta's tourism policymakers will need to balance this growth with sustainability concerns. Attracting more tourists, especially from Germany, brings immediate economic benefits, but the long-term implications for infrastructure and environmental sustainability must be addressed.

On the energy front, Malta could explore collaborative opportunities with Germany, especially as Europe increasingly focuses on sustainability. Malta aims to achieve climate neutrality by 2050 and is planning to expand its energy infrastructure, including a second electricity interconnection with Sicily and an H2-ready gas pipeline. Malta could position itself as an attractive foreign business destination for Germany's energy export initiative, Exportinitiative Energie, which has already fostered connections, including a virtual conference in March 2022 and a visit to Malta in May 2023. Malta has also established itself as a testbed for floating wind and solar power technologies, and collaborations through initiatives like the Sustainable Small Islands Initiative could further bolster its renewable energy prospects.

In conclusion, Germany's economic and political shifts will undoubtedly affect the broader European landscape, including Malta. While the immediate effects are difficult to predict, Malta must remain proactive in preparing for potential challenges in trade and tourism. This will be particularly important with the upcoming German federal elections on 28 September 2025. The recent regional elections in Eastern Germany offer a preview of the difficulties that will arise in forming a coalition, leading to political uncertainty, which can be detrimental to a stable business environment.

Dr Lina Klesper is an international legal assistant at PKF Malta