Lagarde Warns of Economic Impact from U.S.-EU Trade War

European Central Bank (ECB) President Christine Lagarde cautioned on Thursday that a full-scale trade war between the U.S. and the eurozone could significantly damage the European economy and drive inflation higher.

Key Points:

• Economic Impact of U.S. Tariffs:
  • A 25% tariff on European imports imposed by the U.S. could reduce eurozone growth by 0.3 percentage points in the first year.
  • Retaliatory EU measures could deepen the impact, lowering growth by up to 0.5 percentage points.
  • Lagarde emphasized that these estimates were subject to considerable uncertainty.
• Inflation and ECB Response:
  • Trade disruptions and tariffs could drive inflation higher, requiring close monitoring.
  • The ECB remains “vigilant” and is prepared to act to ensure price stability.
  • Policy decisions will be taken on a meeting-by-meeting basis, with flexibility to adjust to new developments.
• Call for Greater Trade Integration:
  • Lagarde advocated for deeper trade ties with other partners to counterbalance the negative effects of U.S. tariffs.
  • The ECB sees trade diversification as a potential buffer against economic shocks from U.S. trade policies.

With rising protectionism from the U.S., the eurozone faces heightened economic risks, making ECB policy decisions even more critical in the coming months.