ECB warns: Severe economic blows expected from Trump's trade wars!
A full-scale trade war sparked by US President Donald Trump's escalating tariff threats would deal a severe blow to global growth and inflation, European Central Bank (ECB) President Christine Lagarde said in a recent interview with the BBC. Lagarde warned that rising tensions between the US and Europe could have "serious consequences", particularly for prices and economic stability.
With Trump threatening 200% tariffs on French wine and other EU exports, on top of “reciprocal tariffs” set to start early next month, Lagarde made clear that protectionist measures would hurt all parties involved. The United States is a key market for European alcohol producers, accounting for about a fifth of the EU’s exports of beverages, spirits and vinegar products in 2024, according to data from the International Trade Center.
“ If we were to go into a real trade war where trade was significantly weakened, that would have serious consequences,” she said. “For growth around the world and for prices around the world, but particularly in the United States.” Since returning to office in January, Trump has revived his aggressive tariff agenda, gradually escalating global trade tensions. The ECB president said such measures were already dampening business activity through increased uncertainty for companies, consumers and investors.
“The initiator, the retaliator, the retaliator, and so on and so forth, all of this will hurt growth overall, ” she said. “Everyone will suffer, that’s a constant in the history of trade.” Despite the call for dialogue, Lagarde defended the EU’s position, saying Brussels had “no choice” but to respond to the US tariffs. However, she suggested that the time lag between the measures being announced and their implementation still leaves room for negotiation. She also rejected Trump’s claim that the European Union was “set up to break” the US.
“When Europe was formed, it was largely at the instigation of the United States of America, which wanted stability in our part of the world after World War I and then World War II ,” she said. “ To argue that it was created to break up the United States is not only bad language, it is an abuse of history.”
While trade tensions dominate immediate concerns, Lagarde also addressed the ECB’s long-term fight against inflation. Speaking at the Institute for Monetary and Financial Stability in Frankfurt earlier this week, she warned that inflation is becoming harder to predict, driven by changing global trade patterns, higher military spending and climate-related disruptions.
“Maintaining stability in a new era will be a difficult task, ” she said. “ It will require an absolute commitment to our inflation target, the ability to analyze which types of shocks will require a monetary response, and the readiness to respond appropriately. ” One measure of this volatility, the trade policy uncertainty index, is now at its highest level ever recorded. At the same time, indicators of geopolitical risk are at levels not seen since the Cold War, outside of major conflicts or terrorist events.
Lagarde highlighted the lagged impact of inflationary shocks, noting that price pressures do not dissipate immediately. For example, energy inflation peaked in October 2022, but services inflation did not peak until July 2023, a nine-month lag that continues to weigh on wages. This gradual adjustment complicates the ECB’s ability to return inflation to 2% in a predictable manner.
With inflation cooling, ECB officials are preparing to cut interest rates to support the slowing eurozone economy. Policymakers expect inflation to reach 2% by early 2025, creating room for monetary easing. However, Lagarde signaled that new shocks, whether from trade conflicts, supply chain disruptions or energy price swings, could quickly change that trajectory.
“The recent disinflation has been achieved at a relatively low cost compared with similar episodes in the past ,” she said, suggesting that well-anchored inflation expectations have helped stabilize prices. But she warned that future shocks should be assessed carefully, as they may require a different policy response.
As economic uncertainty grows, Lagarde stressed that the ECB should move away from rigid forward guidance that sets expectations for future rate decisions and instead focus on explaining its response function. “The public needs to understand the distribution of possible outcomes going forward and how the central bank will react once it is sufficiently certain which scenario it is facing ,” she said.
Rather than locking in a specific rate path, the ECB will focus on key economic indicators such as underlying inflation trends, wage growth and monetary policy transmission to guide its decisions.
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