ECB president warns trade war with US could spark Euro zone inflation surge
Euro zone inflation could surge while growth would drop in the event of a full-scale trade war with the United States, European Central Bank President Christine Lagarde said on Thursday.
Euro zone inflation could surge while growth would drop in the event of a full-scale trade war with the United States, European Central Bank president Christine Lagarde said on Thursday.
A 25% tariff imposed by the US on imports from Europe would lower euro zone growth by about 0.3 percentage points in the first year, while retaliatory measures could increase this to about half a percentage point, Lagarde told European lawmakers in Brussels.
"In the near term, EU retaliatory measures and a weaker euro exchange rate – resulting from lower US demand for European products – could lift inflation by around half a percentage point," she said. "The effect would ease in the medium term due to lower economic activity dampening inflationary pressures."
The US has imposed tariffs on steel and aluminium products from around the world and said it would review its trade relationship with the EU. EU retaliatory measures will take effect in April.
Ms Lagarde said the solution to any trade war could be further trade integration with others, which "could more than offset losses incurred from unilateral tariffs, including retaliation". She stressed, however, that any estimates of the cost of a trade war were subject to considerable uncertainty and that the ECB would be vigilant and ready to act to protect price stability.
Ms Lagarde also welcomed Germany's massive spending plans to boost its military and infrastructure, downplaying the surge in bond yields that ensued. "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 said. "Is there a little inflation anticipation associated with that? Probably, but not that significant according to our calculation."
Reuters
