ECB’s Lagarde Spells Out Cost of Trade War with US
European Central Bank President Christine Lagarde has detailed the potential economic impact of a trade war between the United States and the eurozone for the first time. This announcement comes in the wake of the US imposing tariffs on steel and aluminum products from around the world, as well as indicating a review of its trade relationship with the European Union. In response, EU retaliatory measures are expected to take effect in April.
Lagarde informed European lawmakers that a 25% tariff imposed by the US on imports from Europe could reduce eurozone growth by approximately 0.3 percentage points in the first year. She noted that with retaliatory measures from the EU, this reduction could increase to around half a percentage point.
“In the near term, EU retaliatory measures and a weaker euro exchange rate could lift inflation by around half a percentage point,” she explained. “The effect would ease in the medium term due to lower economic activity dampening inflationary pressures.”
Lagarde proposed that further trade integration with other partners could be a viable solution to the trade war, potentially offsetting any losses from unilateral tariffs, including retaliatory actions. Despite this, she cautioned that estimates of the economic impact of a trade war carry substantial uncertainty. The ECB remains vigilant and ready to act to ensure price stability.
Additionally, Lagarde expressed positive views regarding Germany’s latest plans for increased spending, which focuses on boosting military and infrastructure investments. Though there was a surge in bond yields following these announcements, Lagarde downplayed their significance.
“My suspicion is that markets are seeing it as a growth increase in the future financed over the course of a long period of time,” she stated. “Is there a little inflation anticipation associated with that? Probably, but not that significant according to our calculation.”
The ECB President’s insights underscore both the challenges and possible strategies in navigating the complex dynamics of international trade and fiscal policy amidst global tensions.
