European Central Bank (ECB) President Christine Lagarde on Thursday warned that rising trade uncertainty, fueled by shifting U.S. policies, poses a significant risk to the eurozone’s economic recovery and could push inflation higher.
Addressing the European Parliament, Lagarde acknowledged that while inflation remains on track, heightened trade tensions—particularly with the U.S.—could disrupt the eurozone’s economic momentum, driving up prices and complicating the ECB’s efforts to stabilize inflation.
“Trade frictions are detrimental to global growth and welfare,” Lagarde stated, adding that retaliatory tariffs and ongoing supply chain disruptions could lead to higher costs for businesses and consumers across Europe.
She cautioned that the introduction of new tariffs could increase inflation by as much as 0.5 percentage points, further complicating efforts to stabilize prices while dampening economic growth.
Impact of U.S. Trade Policies on the Eurozone
Lagarde specifically highlighted the uncertainty surrounding U.S. trade policy under the current administration, which has introduced a new set of challenges. “The world is not waiting for us,” she said, warning that escalating trade friction could hurt global growth, raise costs, and disrupt critical supply chains.
The ECB’s analysis suggests that a 25% tariff on European exports could reduce eurozone GDP growth by 0.3 percentage points in the first year, with the figure rising to 0.5 percentage points if the EU retaliates. Lagarde noted that while the immediate impact would be concentrated in the first year, the economic consequences could linger.
Inflationary Pressures and the Eurozone’s Recovery
Beyond the growth concerns, tariffs could lead to higher inflation. Lagarde warned that EU retaliatory measures, combined with a weaker euro due to reduced U.S. demand for European goods, could push inflation up by about half a percentage point.
Despite these challenges, the eurozone economy expanded by 0.9% in 2024, nearly double the 0.4% growth in 2023. However, Lagarde pointed out that the pace of recovery slowed in the final months of 2024, with early signs of similar trends in 2025.
“Manufacturing continues to contract, though survey indicators show improvement,” she explained, adding that both domestic and global policy uncertainty is holding back investment, while competitiveness issues are impacting exports.
The ECB has forecast modest growth for the coming years, with GDP projected to rise by 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027. However, Lagarde noted that these projections remain subject to considerable uncertainty, particularly due to ongoing trade policy shifts.
Inflation Trends and Wage Growth
Headline inflation in the eurozone dipped to 2.3% in February from 2.5% in January, with core inflation—excluding energy and food prices—slightly lower at 2.6%. Lagarde highlighted that a slowdown in wage growth, following a surge in response to the post-pandemic inflation spike, has been a key factor in moderating inflation.
Despite this, she cautioned that the inflation outlook remains fragile, particularly if trade-related shocks continue to push up costs.
Monetary Policy and Interest Rates
Earlier this month, the ECB lowered its key interest rates by 25 basis points, bringing the deposit facility rate to 2.50%, down from a peak of 4.00% in 2024. Lagarde described this adjustment as a shift to a “meaningfully less restrictive” monetary policy, which has made borrowing less expensive for businesses and households.
However, she emphasized that the ECB is not committing to a rate-cutting trajectory, instead taking a “data-dependent” approach in light of rising uncertainty. “We will follow a meeting-by-meeting approach to determine the appropriate monetary policy stance,” Lagarde stated.
Strengthening Europe’s Economic Resilience
Lagarde concluded by stressing the importance of further trade integration, both globally and within the EU, to bolster Europe’s resilience in the face of trade shocks. She highlighted the Single Market as a vital tool for economic stability, estimating that it has contributed between 12% and 22% to long-term EU GDP.
“The level of trade between Member States has doubled since the creation of the Single Market,” she noted, adding that “a deeper Single Market is crucial for reducing trade barriers within Europe and creating the scale necessary for firms to thrive.”
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