ECB Cautions About US Trade Policies and Internal EU Instability

Lagarde Flags Potential Economic Headwinds from Trump-Era Tariff Shifts

European Central Bank President Christine Lagarde has warned that potential shifts in U.S. trade policy under the incoming Trump administration could significantly impact the EU’s economy. Speaking in Vilnius during the 10th anniversary of Lithuania’s eurozone membership, Lagarde pointed to the risk of new tariffs on EU goods and geopolitical instability raising energy and freight costs. These developments, she noted, could disrupt vital trade flows that underpin economic growth across the bloc.

US Tariffs and Global Tensions Threaten EU Growth

Lagarde emphasized that the EU remains vulnerable to external shocks due to its export-driven economy. She cautioned that protectionist measures from Washington, such as renewed tariffs, would dampen European competitiveness. Rising energy prices linked to geopolitical tensions could further undermine the recovery, placing additional strain on households and businesses alike.

ECB Rate Cuts to Continue Amid Slow Growth

With eurozone inflation down from a peak of 10.6% in late 2022 to 2.3%, the ECB is shifting focus from inflation control to growth stimulation. Lagarde confirmed that interest rate cuts will continue if inflation remains low, noting the European Commission’s forecast of only 0.8% growth in 2024 and 1.3% in 2025. The bank faces a delicate balancing act between spurring investment and maintaining financial stability.

Political Uncertainty in France and Germany Adds Pressure

Lagarde also pointed to growing political instability in the EU’s largest economies as a key concern. France faces legislative gridlock following the resignation of Prime Minister Michel Barnier, while Germany’s ruling coalition collapsed in November, prompting elections next February. With both countries in political limbo, coordinated fiscal and economic policymaking becomes more difficult, compounding the region’s economic challenges.

Shift Toward Neutral Monetary Policy Possible

Finally, Lagarde hinted that the ECB may pivot toward a neutral interest rate policy in the near future. While restrictive rates were previously necessary to tame inflation, current conditions may no longer warrant such an aggressive stance. A move to neutral rates could support economic recovery without sacrificing the bank’s price stability mandate.