ECB's Lagarde warns: Trade tariffs could increase eurozone inflation by 0.5%!
Trade uncertainty poses a significant threat to eurozone growth and inflation, with tariff-driven price pressures expected to intensify, European Central Bank President Christine Lagarde warned on Thursday.
Speaking at a European Parliament hearing, Lagarde acknowledged that while inflation is still on track, heightened trade uncertainty particularly stemming from shifting United States policies could derail the eurozone recovery and fuel price increases.
“Trade frictions are harmful to global growth and welfare, ” she said, warning that retaliatory tariffs and supply chain disruptions could lead to higher costs for European businesses and consumers. A new wave of tariffs, she added, could push inflation up by up to 0.5 percentage points, complicating the ECB’s efforts to stabilize prices, while also dampening economic growth.
How will US trade tariffs affect the Eurozone?
Lagarde noted that the new Donald Trump administration in Washington has set a different course, leading to "extraordinarily high" levels of uncertainty about global trade. "The world is not waiting for us," Lagarde said, warning that rising trade frictions could disrupt supply chains, raise costs and dampen global growth.
One of the biggest risks is the potential for higher US tariffs on European exports. ECB analysis suggests that a 25% tariff on European goods would reduce eurozone GDP growth by about 0.3 percentage points in the first year. If the EU retaliates with its own tariffs, that figure could rise to 0.5 percentage points.
“The main growth effect would be concentrated around the first year after the tariff increase; it would then diminish over time, but leaving a persistent negative effect on the level of output,” Lagarde said. Beyond growth concerns, tariffs could also increase inflation. “The EU’s retaliatory measures and a weaker euro resulting from lower US demand for European products could increase inflation by about half a percentage point ,” she said.
Is the eurozone recovery in danger?
The eurozone economy expanded by 0.9% in 2024, almost double the 0.4% recorded in 2023. However, Lagarde noted that growth slowed in the final months of last year, with the first quarter of 2025 showing similar patterns. “Output is still contracting, although survey indicators are improving,” she said, adding that “ high domestic and global policy uncertainty is holding back investment and competitiveness challenges are weighing on exports.”
Despite these headwinds, the ECB expects growth to continue, albeit at a modest pace, with GDP forecast at 0.9% in 2025, 1.2% in 2026 and 1.3% in 2027. Lagarde made clear that these forecasts are subject to "considerable uncertainty, also due to the trade policy environment".
Headline inflation fell to 2.3% in February from 2.5% in January, while core inflation excluding volatile energy and food prices eased slightly to 2.6%. The ECB expects inflation to average 2.3% in 2025 before settling at its 2% target in 2027. A key driver of this trend has been the moderation of wage growth, which has slowed after a pick-up in response to rising inflation following the pandemic. However, Lagarde warned that the inflation outlook remains fragile, particularly in the face of potential trade shocks that could raise costs.
ECB rate path: Is easing coming?
The central bank cut key interest rates earlier this month by 25 basis points, bringing the deposit facility rate to 2.50%, from a 2024 high of 4.00%. “ Our monetary policy is significantly less restrictive, ” Lagarde said, explaining that “ new borrowing is becoming less expensive for firms and households, while credit growth is picking up.”
However, Lagarde stressed that the ECB is not prematurely committing to a rate-cutting path. “Particularly in the current conditions of increasing uncertainty, we will follow a data-dependent and meeting-by-meeting approach to determine the appropriate monetary policy stance, ” she said.
Can Europe withstand trade shocks?
“ The response to the current shift in US trade policies must be more, not less, trade integration, both with trading partners around the globe and within the EU, ” she said. She pointed to the Single Market as a critical tool for increasing European economic resilience, estimating that it has added between 12% and 22% to the EU’s long-term GDP.
"The level of trade between member states has doubled since its creation," she said, adding that " a deeper single market is crucial for reducing trade barriers within Europe and creating the scale needed for firms to thrive."
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