German juggernaut may face economic jam as tariffs and Brexit loom

BERLIN (Reuters) - Germany faces the risk of steep U.S. tariffs on cars and a no-deal Brexit, a double whammy which could bring a golden decade of growth in Europe's powerhouse economy to an end.

Chancellor Angela Merkel and her ministers are working behind the scenes to mitigate the impact should the worst-case scenario come to pass.

A stagnating German economy or even a recession would hold back the euro zone as a whole and cast uncertainty over the European Central Bank's planned exit from its loose monetary policy.

The Berlin government is already facing a budget shortfall of up to 25 billion euros by 2023 as the economic slowdown means tax revenues will come in below previous estimates, according to a finance ministry document.

Nonetheless, faced with the threat of a recession, Finance Minister Olaf Scholz is prepared to bend Germany's strict debt rules, a senior government official told Reuters on condition of anonymity.

"If the double whammy should materialize, we want to pull something out of the hat," the official said, suggesting that the government is working on a fiscal stimulus package.

"This will be a test to our policy of no new debt and Germany's debt brake," the official added.

The finance ministry declined to comment on this.

Germany, which barely avoided a recession last year, is especially vulnerable to both the risks of U.S. tariffs of up to 25 percent on cars and Britain sliding out of the EU on March 29 without a deal to govern future trade relations with the bloc.

Exports make up nearly half of its economic output and cars are by far its main export with annual sales worth 230 billion euros ($263 billion), data from the Federal Statistics Office showed.

The most important export destination for German cars last year was the United States with revenues of 27.2 billion euros, followed by China with 24.7 billion euros and Britain with 22.5 billion euros, the data showed.

In terms of the number of exported cars, Britain tops the list with 666,000 and the United States is second with 470,000, according to data from the VDA industry association.

U.S. President Donald Trump, pursuing an "America First" agenda, has repeatedly criticized Germany's bumper trade surplus and warned that Washington will impose tariffs on European cars if it is unable to reach a trade deal with the European Union.

A confidential report by the U.S. Commerce Department sent to Trump in mid-February is widely expected to pave the way to impose duties on imported autos and auto parts by designating them a threat to American national security.

Trump had 90 days to decide whether to act upon the recommendations, until mid-May.