Donald Trump’s tariffs might hit EU progress and push up inflation, posing a dilemma for the ECB. Whereas commerce slows and costs rise, some economists argue fee cuts stay applicable, as long as inflation expectations keep anchored.
The European Central Financial institution (ECB) is bracing for renewed financial uncertainty as US President Donald Trump prepares to impose wide-ranging tariffs.
On 2 April, america is anticipated to unveil a brand new spherical of “reciprocal tariffs,” a key plank in President Donald Trump’s renewed push to slim America’s commerce deficit.
Whereas the precise scope and scale stay unsure, hypothesis has intensified that the White Home might impose tariffs of as much as 25% on European items. These duties would construct on present levies already utilized to autos and components, which have elevated the price of vehicle-related exports by as a lot as 50%.
The potential affect is important. In 2024, the European Union exported €382 billion value of products to the US, in line with the Worldwide Commerce Centre. Of this, €46.3 billion got here from automobiles, together with automobiles, motorbikes and components.
With the US accounting for roughly 10% of whole EU exports, the bloc is very uncovered to transatlantic commerce friction.
In response to estimates cited by ECB President Christine Lagarde, a 25% tariff imposed by the US might decrease euro space GDP by 0.5 share factors and push inflation increased by the same margin within the first 12 months—assuming the EU retaliates in form.
This presents a textbook case of a coverage battle: tariffs act as each a provide shock, by making imports dearer, and a requirement shock, by undermining confidence and disposable revenue.
Policymakers in Frankfurt discover themselves grappling with an uncomfortable paradox: ought to they help progress by easing financial coverage, or lean towards the inflationary shock that such duties may unleash?
‘Look via’ the inflation hump?
To economists like Sven Jari Stehn at Goldman Sachs, the reply hinges on the behaviour of inflation expectations.
“Our estimates recommend that US tariffs would have materially unfavourable results on progress with modest (and momentary) results on inflation,” he mentioned in a latest notice.
The usual coverage playbook, Stehn famous, would argue in favour of fee cuts, so long as longer-term inflation expectations stay anchored.
Goldman’s fashions present that below such assumptions, the ECB’s optimum technique could be to “look via” the inflation spike and thus decrease rates of interest.
Goldman Sachs continues to anticipate the ECB to chop rates of interest in April, adopted by one other discount to 2% by June.
The danger of inflation persistence
However this calculus shifts dramatically if the preliminary inflation burst feeds into expectations. If companies and employees start to anticipate sustained value rises and regulate wage-setting accordingly, the ECB could also be compelled to behave to stop inflation from changing into entrenched.
“On this case, we discover that the optimum coverage might name for tighter financial coverage,” Stehn mentioned.
“The ECB can’t afford to fret in regards to the progress hit from tariffs on this state of affairs and must lean towards inflation persistence.”
But, he additionally steered such second-round results would have to be “fairly sturdy”—that’s, involving a big and broad-based rise in long-term expectations—to justify such a hawkish shift.
For now, wage-setting traits and inflation expectations stay benign sufficient, in line with Goldman, for the ECB to contemplate easing.
EU response to tariffs might shift focus to US companies
Ruben Segura-Cayuela, economist at Financial institution of America, sees the same path, albeit with a extra cautious tempo. “It’s most likely not absurd to imagine we might see a generic 20% on EU imports, as EU officers appear to assume,” he mentioned, referencing latest press stories.
In response to his estimates, such a transfer might put roughly 0.25 share factors of euro space GDP in danger inside a 12 months, with extra substantial losses potential if the EU retaliates.
Segura-Cayuela sees retaliation as probably, however warns that escalation might transfer past items.
“If the US ‘entry bid’ was notably aggressive, escalation dangers stretching past ‘simply’ tariffs on items, together with EU motion on US companies, might characteristic extra prominently,” he mentioned.
Such a transfer could possibly be strategically interesting to EU policymakers if it shields extra delicate components of the European financial system.
Financial institution of America maintains a excessive conviction that the ECB’s first fee minimize will arrive in April, adopted by a discount to a 1.5% deposit fee by September—although dangers of a delay into December can’t be dominated out.
As 2 April approaches, markets will carefully watch how the ECB navigates this advanced setting the place tariffs exacerbate macroeconomic challenges.
