ECB's Lagarde warns US-EU trade war may hit growth
European Central Bank chief Christine Lagarde warned today that a trade war between the US and Europe could shave half a percentage point off eurozone growth and push up inflation.
US President Donald Trump is threatening to levy duties of 25% on all goods from the European Union, which runs a hefty trade surplus with the US.
Addressing the European Parliament, Lagarde said the 20-nation euro area was “particularly exposed to shifts in trade policies”.
ECB analysis suggested 25% US tariffs could dent euro zone growth by about 0.3 percentage points in the first year and, if Europe retaliated, the drop could be as much as half a percentage point, she said.
The euro zone has already been eking out meagre growth in recent years as it contends with high production costs and weak demand from key trading partners.
In its latest forecasts released earlier this month, the ECB predicted growth of just 0.9% for the euro area this year and 1.2% in 2026.
An US-EU trade war would also make the outlook for consumer prices “significantly more uncertain,” she warned, adding that inflation could increase by around half a percentage point in the near term.
Euro zone inflation, which surged after Russia’s invasion of Ukraine, has been gradually slowing towards the ECB’s 2% target, coming in at 2.3% in March.
While noting the estimates were subject to “very high uncertainty”, Lagarde urged the European Union to respond by forging closer trading relationships globally.
“The answer to the current shift in US trade policies should be more, not less, trade integration, both with trade partners around the globe and within the EU,” she said.
“Trade integration, including free trade agreements, has been a driver of economic prosperity and can protect against unilateral trade measures,” she added.
The ECB cut interest rates again at its last meeting earlier in March but its next move is uncertain as policymakers assess the impact of US trade policies and European plans to boost defence spending.