What economic challenges do the EU and Germany face in 2019?

German Finance Minister Olaf Scholz said on Sunday that Germany would probably not taken in ‘high tax revenues’ this year.

"The good times in which the state kept taking in more taxes than expected are coming to an end,” the minister told the German newspaper Bild am Sonntag.

Germany’s economy in 2019

Scholz has his civil servants working on plans for the case of an economic downturn in Germany for this year.

“Should economic performance weaken, tax cuts and additional expenditures are planned,”he told the German magazine Spiegel. 

Though many experts have discouraged general tax cuts for Germany in recent years, due to its two trillion euros in state debts, minister Scholz believes that such measures would be justified as a means against a possible recession, which could hit the biggest economy of the EU.

Scholz therefore seems to expect a downturn. Moreover, the Social Democrat politician reiterated his plan to keep the ‘solidarity surcharge’ for high income earners, while for low and middle incomes it should expire by 2021. 

The solidarity surcharge is a tax introduced after Western Germany ‘absorbed’ the former Warsaw Pact member East Germany in 1990 - to overcome the economic burden this huge political step would cost.

Although the minister insists on not incurring new debt in the future, his fiscal policies foresee less revenue, tax cuts and more government spending, a combination that could increase the deficit.

The federal budget deficit has been consistently low since 2012, and since 2014, the German government was even able to record surpluses.

A possible downturn for Germany’s economy could affect its partners in the EU. Germany is has the biggest market and is the biggest contributor to the EU budget. It has played a crucial role in bailing out weaker EU members from the debt crisis.

Added to the probable fluctuations in the German economy, the disorderly Brexit process and the dispute over the Italian debt budget create additional uncertainty within the EU.

Economic challenges of the EU

In 2017, the EU grew 2.7 percent, the strongest gain since the global financial crisis ten years ago - but this trend seems to be over.

The gross domestic product grew by 2.1 percent in 2018 and is expected to grow by 2.0 percent in 2019.  

Besides declining economic growth, there are other factors that are important for the EU. 

One risk is the trade dispute between the United States and China. Various economists said they had already lowered their forecasts for the European Union due to the new special tariffs.  

A no-Brexit deal or non-implemented deal is also a problem. The upcoming decision in the British parliament is therefore not only politically significant for the EU.  

Unemployment rates are still high in several EU countries, especially in the southern EU member states. Forecasts for this year are 13.8 percent unemployment in Spain, Italy 10.6 percent and Greece 18.4 percent, with youth unemployment numbers much higher.

A weaker German economy will certainly have an impact on the EU. 

The question remains how EU members will deal with it.