Weekly Selection: Does German Industry Have a Future & Is Milei’s Chainsaw Working?

This article has been automatically translated from Dutch. Click here to see the orginal article including all links to sources.

Radical spending cuts led by a president who campaigned with a chainsaw—how is Argentina’s economy doing now? Has Javier Milei turned the tide? Meanwhile, dark clouds are gathering over German factories once again. After years of high energy costs and regulatory pressure, a trade war now looms. Does German manufacturing still have a future? Read on!

Argentina Update: Is Milei’s Chainsaw Working?

It’s been a while since we looked at developments in Argentina. What impact has Javier Milei’s radical “chainsaw” policy had so far? If we are to believe the international media, things are looking up.

Economic Activity in Argentina (source: Reuters)

According to new data, economic activity in Argentina rose by 6.5% in January compared to January 2024. Growth is clearly accelerating and exceeded analysts’ expectations. Initially, the Argentine economy took a major hit from the radical cuts, but a new growth phase now seems to be underway. Could Mark Rutte’s old motto—“cut to grow”—actually hold some truth?

Javier Milei (source: Gage Skidmore)

Inflation has been a decades-long issue in Argentina. A product that cost 100 pesos in 1980 would cost 6.142 trillion pesos by early 2025, following multiple periods of hyperinflation and repeated currency reforms that removed zeros from the currency. According to the latest official data, Milei has managed to get inflation under control. Monthly inflation reportedly stands at just 2.5%.

Inflation Rate in Argentina (source: Bloomberg)

This is an impressive result. However, Bloomberg urges some skepticism regarding the official figure. Milei owes much of his popularity to falling inflation and thus has every incentive to keep that number as low as possible.

Bloomberg notes that the basket of goods used to calculate the price index is outdated and no longer reflects the actual consumption habits of many Argentines. Even the head of Argentina’s statistics bureau has reportedly acknowledged that the index needs updating. Many economists agree that a revised index would result in a significantly higher inflation figure. In practice, Argentines still suffer from currency devaluation. A revision could therefore be politically risky for Milei.

Still, Argentina’s economy appears to be improving. Employment is rising, and the peso is strengthening. After a major devaluation when Milei took office in December 2023, he allowed the peso to fall by only 2% per month last year—despite much higher inflation. As a result, the peso has appreciated 47% in real terms.

According to the Financial Times, Argentines are gaining easier access to foreign goods such as Chinese solar panels and Uruguayan butter, now that Milei is relaxing protectionist import restrictions. Cheaper imported goods can help fight inflation. Imports of foreign products have increased by 30% over the past six months.

The combination of a stronger peso and relaxed import rules has helped bring inflation under control, the paper says—but not without risks. Since Argentina is spending more dollars abroad, it is hardly building up foreign reserves. This leaves the country vulnerable to external shocks or a major devaluation. That’s why Milei is now seeking a loan from the IMF.

With a new $20 billion loan, he aims to rebuild Argentina’s dollar reserves. These reserves are needed to support the peso, repay debt, absorb shocks, and ease capital controls. Economy Minister Luis Caputo said the agreement still needs approval from the IMF board, which could take several weeks. “What we want with this agreement is for people to trust that the peso is backed… That will give us a healthier currency,” Caputo said.

We’ll keep monitoring it for you!

Does the German Economy and Industry Still Have a Future?

This week, Donald Trump announced a 25% import tariff on cars built outside the U.S. “If you build your car in the U.S., there’s no tariff,” said Trump. A new blow for German industry, already under pressure from overregulation and high energy costs. The tariffs, effective April 2, will also apply to auto parts.

Shares of German Automakers After Tariff Announcement (source: Holger Zschaepitz)

The stock prices of German automakers such as Mercedes, Porsche, and BMW took a hit after Trump’s announcement. BMW fell less sharply, likely because it already produces much in the U.S. Von der Leyen spoke out against the decision. Within the U.S., there is also opposition to the tariffs, including from American automakers concerned about supply chain disruptions.

The announcement is not just a blow to German industry but to the entire economy. Germany earns substantial revenue from exports to the U.S. If Trump follows through, it could be the final straw for German manufacturers, potentially prompting them to relocate some production to the U.S. to avoid the tariffs.

Germany’s Trade Balance, incl. with the U.S. (source: Daniel Kral)

Does German manufacturing still have a future? Energy policy may be the key factor. Earlier this month, Bild published an interview with incoming Chancellor Friedrich Merz, titled “Is the Climate Lobby Destroying Our Economy?” Last week, we wrote about how climate policy is impacting Dutch industry—Germany is no exception.

The German government wants to enshrine climate neutrality by 2045 in the Constitution. Critics fear this would give environmental groups even more legal tools to enforce climate goals. Merz dismisses those concerns in the interview and supports the climate neutrality target. Bjorn Lomborg, a well-known energy and climate policy critic, wrote: “Net zero means that by 2045, Germany will be impoverished and deindustrialized—and thus unable to defend itself.”

While energy prices remain high and volatile, Germany continues dismantling modern power plants. Earlier this week, a six-year-old coal plant in Hamburg—extremely costly to build—was demolished. Reliable and affordable energy is essential. One way to achieve that could be to resume gas imports from Russia. We discussed this in this week’s podcast. Some in German industry are already calling for this, but the situation makes it uncertain whether it will happen.

Another option is nuclear power. Germany shut down all of its nuclear plants in recent years—only to import nuclear energy from France. In doing so, it raised both costs and emissions. Now, voices are slowly emerging to restart the old plants. Welt even calls a nuclear comeback “realistic.”

According to the article, six reactors could be back online by 2030. Some companies say a restart is entirely feasible. Politically, however, the future remains uncertain. The Financial Times also notes that a global nuclear renaissance is far from guaranteed.

Can German industry wait that long—or is it already too late, with the sector sliding irreversibly toward decline? We’ll keep you posted on further developments in Germany as well!