Christine Lagarde, President of the European Central Bank (ECB), has cautioned that rising trade tensions, particularly those arising from the United States’ shifting trade policies, could significantly impact the eurozone’s economic recovery and drive inflation up by as much as 0.5 percentage points.
Speaking before the European Parliament on Thursday, Lagarde highlighted the growing threat of escalating tariffs and their potential to disrupt global supply chains, increase production costs, and dampen growth across the euro area. She warned that a surge in trade frictions could complicate the ECB’s efforts to stabilize inflation, ultimately weighing on the region’s economic momentum.
“Trade frictions are detrimental to global growth and welfare,” Lagarde stated, acknowledging that while inflation is on a steady decline, increased trade uncertainty—especially regarding US tariffs—could still trigger inflationary pressures in the eurozone.
The Impact of Rising Tariffs
Lagarde indicated that tariffs, particularly those imposed by the United States, could significantly elevate costs for European businesses and consumers. In the event of a new round of tariffs, the ECB projects that inflation could rise by 0.5 percentage points. This, Lagarde explained, would add to existing challenges as the ECB attempts to balance price stability with economic growth.
Tariff-related price increases could also hinder the eurozone’s growth prospects. The ECB’s analysis suggests that a 25% tariff on European exports could lead to a 0.3 percentage point drop in GDP growth in the first year, with this impact worsening if the EU responds with retaliatory measures.
“The effects on economic growth would be felt most acutely in the first year after the tariffs are introduced, but would persist over the longer term,” Lagarde added.
Trade Uncertainty and Global Growth
Lagarde expressed concern over the global trade environment, emphasizing the heightened levels of uncertainty due to policy changes in Washington. The Trump administration’s shift in trade strategy has raised fears of further disruptions to international trade flows.
“The world is not waiting for us,” she said, underscoring that rising trade frictions could have far-reaching consequences for both supply chains and global economic stability.
The ECB president also pointed out that the weakening of the euro, which could result from diminished US demand for European exports, may exacerbate inflationary pressures. In particular, the euro’s depreciation could further elevate prices, adding to the strain on European consumers.
Eurozone’s Economic Outlook
Despite these challenges, Lagarde emphasized that the eurozone’s economy is expected to continue growing, albeit at a more modest pace. The euro area saw a 0.9% expansion in 2024, nearly double the growth recorded in 2023, but there are signs that momentum is slowing.
“Manufacturing remains in contraction, though some indicators show signs of improvement,” Lagarde said, pointing to persistent uncertainty and global policy concerns as key factors holding back investment. Exports have also been weighed down by competitiveness issues, she added.
The ECB projects that GDP will rise by 0.9% in 2025, followed by 1.2% in 2026 and 1.3% in 2027. However, Lagarde warned that these forecasts are subject to “considerable uncertainty,” primarily due to the unpredictable trade policy landscape.
Inflation and Wage Growth
Lagarde noted that while headline inflation in the eurozone decreased to 2.3% in February from 2.5% in January, the outlook remains fragile. Core inflation—excluding volatile food and energy prices—slightly decreased to 2.6%. The ECB expects inflation to average 2.3% in 2025, with a gradual return to its 2% target by 2027.
Wage growth, which had surged following the post-pandemic inflation spike, has since moderated, contributing to the inflation slowdown. However, Lagarde cautioned that any major disruptions, such as trade shocks, could once again push inflation higher.
Monetary Policy Outlook
Earlier this month, the ECB reduced its key interest rates by 25 basis points, bringing the deposit facility rate down to 2.50%. Lagarde stressed that the ECB’s monetary policy has become “meaningfully less restrictive,” as cheaper borrowing costs begin to boost loan growth.
Despite these adjustments, Lagarde made it clear that the ECB is not committing to a clear path of rate cuts. “Given the rising uncertainty, we will continue to adopt a data-dependent approach, assessing economic conditions on a meeting-by-meeting basis,” she explained.
Boosting Economic Resilience Through Integration
Lagarde called for greater trade integration both within the EU and with global partners, arguing that the EU’s Single Market has been a key driver of economic resilience. She noted that the market has added between 12% and 22% to long-term EU GDP, with intra-EU trade more than doubling since its creation.
“The deeper the Single Market, the greater the scale for firms to grow and thrive,” she concluded, stressing that reducing trade barriers within Europe will be critical for minimizing the economic impact of external trade shocks.
Conclusion
As the eurozone faces growing trade risks, Lagarde’s remarks underscore the challenges the ECB will face in navigating the current global economic climate. The potential for rising tariffs, inflationary pressures, and slower growth highlights the complex balancing act ahead for European policymakers.
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