Christine Lagarde, the President of the European Central Bank (ECB), has warned that President Donald Trump’s growing tariffs could hurt both global growth and inflation. In a recent interview, she highlighted the risks of escalating trade conflicts between the US and Europe, saying they could have severe consequences for prices and economic stability.
Growing Tensions Between the US and Europe
The trade war between the US and Europe has heated up. Trump has threatened to impose 200% tariffs on French wine and other EU exports. These tariffs are part of a broader strategy to punish the European Union (EU). Trump also announced that “reciprocal tariffs” will start next month.
Lagarde pointed out that protectionist actions like these tariffs could harm both the US and Europe. They would hurt global trade and damage economies on both sides of the Atlantic. The US is an important market for European alcohol companies, accounting for about 20% of EU beverage exports in 2024. These tariffs could significantly impact businesses in Europe.
“A full-scale trade war would harm global growth and prices, especially in the US,” Lagarde said. She added that the uncertainty caused by trade conflicts is already slowing economic activity. Businesses, investors, and consumers are hesitant to make decisions in such an unpredictable environment.
The Cost of Trade Wars
Lagarde warned that trade wars have a history of hurting everyone involved. “The initiator, the retaliator, the re-retaliator – everyone will suffer,” she said. Her statement shows that trade conflicts don’t just harm the countries directly involved. They cause broader economic problems around the world.
Despite the risks, Lagarde called for dialogue between the US and Europe. While Brussels had no choice but to respond to US tariffs, she noted that there is still time for negotiations. “The delay between announcing tariffs and putting them in place leaves room for talks,” she explained.
Lagarde also responded to Trump’s claim that the EU was “formed to screw” the US. She explained that the United States played a key role in Europe’s creation, aiming to bring stability after two world wars. She added, “To say Europe was created to harm the US is not only false but a distortion of history.”
Inflation Is Harder to Predict
Lagarde raised concerns about the difficulty of predicting inflation amid the growing uncertainty in global trade. Global trade patterns are shifting, military spending is rising, and climate change is disrupting economies. These factors make inflation harder to forecast.
Lagarde emphasized that maintaining inflation stability in this new era will be a huge challenge. She also pointed out that inflation doesn’t respond immediately to changes in the economy. This delay makes it harder for the ECB to guide inflation back to its target of 2%.
The trade policy uncertainty index recently reached an all-time high, and geopolitical risks are at their highest level since the Cold War. Lagarde warned that this uncertainty could affect the global economy for years to come. She noted that energy inflation peaked in October 2022, while inflation in services peaked much later, in July 2023. This time lag complicates efforts to control inflation.
Rate Cuts Could Help, But Risks Remain
As inflation slows, the ECB is considering lowering interest rates to support the eurozone economy. The ECB expects inflation to hit its target of 2% by early 2025, which would allow the bank to ease monetary policy.
However, Lagarde cautioned that new shocks to the economy could change this outlook. If trade disputes or supply chain problems worsen, inflation could rise again, forcing the ECB to adjust its plans. She also noted that the current disinflation process has come at a low cost compared to previous episodes, but future economic shocks may require a different response.
A New Approach to Communication
Given the growing uncertainty in the global economy, Lagarde said that the ECB is changing its approach to communication. The bank will no longer give fixed predictions on interest rates. Instead, it will explain how it responds to economic changes. This shift will help the public understand the range of possible scenarios and how the ECB will act when there is enough clarity.
The ECB will base its decisions on key economic indicators, like core inflation trends, wage growth, and how monetary policy is transmitted through the economy. This approach will provide more flexibility and better reflect the unpredictable nature of the current economic climate.
The global economy faces many challenges, from trade wars to inflation uncertainty. Lagarde’s comments show that central banks must balance managing inflation with avoiding economic shocks. The coming months will be critical as Europe and the US try to navigate these turbulent times.