By Birgit Jennen

Bloomberg

The global order that underpins German prosperity is unraveling, and Angela Merkel doesn’t know what to do.

President Donald Trump’s America First policy is forcing Germany to make an impossible choice between the U.S. and China — pitting the force behind the country’s modern economic success against the key to its future growth.

The result is political paralysis at a time when Germany’s allies are looking for political leadership.

On issues from trade to cybersecurity to international tax reform, Merkel is hamstrung by her fear of antagonizing key trading partners.

The fear in Merkel’s inner circle is that any firm position risks a backlash that could see tensions spiral out of control, according to people familiar with her advisers’ thinking.

The urgency is intensifying. The economy is slowing; populists urged on by Trump are advancing across the European Union, and Merkel’s strategic rivals are hatching plans to prize more countries away from the multilateral system she treasures.

Her desperation has been increasingly evident.

“Are we splitting up into little puzzle pieces with everyone thinking they can best solve problems on their own?” Merkel asked last month at the Munich Security Conference. “If that’s case, as German chancellor I can only say: the prospects look bad for us.”

In the eye of the storm is Germany’s mighty car industry, which is grappling with the transition to an era of self-driving, electric vehicles.

Trump is threatening to levy tariffs on imported European cars, a move that would hit Mercedes-Benz, BMW and Volkswagen’s Porsche. U.S. tariffs would reduce German car exports by about $20.7 billion, according to a study by the Munich-based Ifo economic research institute.

Despite the antagonism from the White House, and to the frustration of the French, Merkel is determined to keep reaching out to Trump.

The German leader wants to get the U.S. involved in negotiations on a broader trade deal as quickly as possible and is concerned EU retaliation on tariffs would evolve into a full-scale trans-Atlantic trade conflict, a person familiar with the government’s position said.

The autos dispute is a sign of the way that geopolitics is becoming increasingly uncomfortable for Germany.

For decades, the country profited from an international trading system run by the West and backed up by the military might of the U.S.

The government just got out of the way and watched exports roll.

Those days are over.

Trump has sown doubts about his commitment to defending America’s NATO allies; populists across Europe are rallying opposition to free trade and challenging fundamental tenets of EU membership, and China is offering an alternative funding source to weaker nations like Italy, Portugal and Greece, frustrated by Germany’s insistence on budget tightening.

“Germany is caught up in a dilemma of changing trade patterns and doesn’t know how to react,” said Sebastian Dullien, an analyst at the European Council on Foreign Relations.

As a result, Merkel has flip-flopped between engagement and assertiveness. At times she tries to court the U.S. and China, at others she articulates a stronger national stance in response to threats, and she has yet to follow through.

One area where the chancellor has taken a stand is over a new gas pipeline to Russia.

Merkel stuck to her guns over the Nord Stream 2 project despite trenchant complaints from the U.S. about increasing dependence on Moscow and European concerns about weakening Ukraine.

The government has tightened rules on foreign takeovers in a bid to shield German technology from economic rivals like China, in line with Economy Minister Peter Altmaier’s new industrial strategy for Germany.

In most areas, the chancellor’s desire to avoid inviting trouble prevents Germany, and often the EU, from taking a stand.

A French push to forge a common European front to tackle the esoteric tax structures of internet giants like Amazon.com, Alphabet Inc. and Facebook is another victim of German caution, and again it’s the car industry that’s at the heart of it.

The French plan would have seen tech firms — in practice most of them U.S.-based — taxed on the basis of where their sales are generated, rather than where their services were produced.

That’s a frightening precedent for an export powerhouse like Germany, especially when Trump is looking for excuses to penalize its carmakers.

So rather than take the lead alongside France, Merkel’s administration wants to wait for an international consensus to emerge and provide cover, a person familiar with the government’s position said.

Finance Minister Olaf Scholz wants to tie the U.S. into an international accord before a European digital tax moves ahead.

The French, meanwhile, are introducing a national levy, despite the lack of support from its most important partner.

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