Donald Trump’s tariffs could hit EU development and push up inflation, posing a dilemma for the ECB. Whereas commerce slows and costs rise, some economists argue charge 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, the USA is predicted to unveil a brand new spherical of “reciprocal tariffs,” a key plank in President Donald Trump’s renewed push to slender 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 elements, 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 keeping with the Worldwide Commerce Centre. Of this, €46.3 billion got here from autos, together with automobiles, motorbikes and elements.
With the US accounting for roughly 10% of whole EU exports, the bloc is very uncovered to transatlantic commerce friction.
In accordance with 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 greater by the same margin within the first 12 months—assuming the EU retaliates in type.
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 development by easing financial coverage, or lean in opposition to the inflationary shock that such duties would possibly unleash?
‘Look by’ the inflation hump?
To economists like Sven Jari Stehn at Goldman Sachs, the reply hinges on the behaviour of inflation expectations.
“Our estimates counsel that US tariffs would have materially adverse results on development with modest (and momentary) results on inflation,” he mentioned in a current be aware.
The usual coverage playbook, Stehn famous, would argue in favour of charge cuts, so long as longer-term inflation expectations stay anchored.
Goldman’s fashions present that below such assumptions, the ECB’s optimum technique can be to “look by” 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 worth rises and regulate wage-setting accordingly, the ECB could also be compelled to behave to forestall 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 concerning the development hit from tariffs on this situation and must lean in opposition to inflation persistence.”
But, he additionally advised such second-round results would must 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 tendencies and inflation expectations stay benign sufficient, in keeping with Goldman, for the ECB to think about easing.
EU response to tariffs could 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 suppose,” he mentioned, referencing current press reviews.
In accordance with 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 doable if the EU retaliates.
Segura-Cayuela sees retaliation as seemingly, however warns that escalation could 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 might be strategically interesting to EU policymakers if it shields extra delicate elements of the European financial system.
Financial institution of America maintains a excessive conviction that the ECB’s first charge minimize will arrive in April, adopted by a discount to a 1.5% deposit charge 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 complicated setting the place tariffs exacerbate macroeconomic challenges.