Silke Mayr Christine Lagarde, President of the European Central Bank (ECB), has warned that escalating trade tensions under former President Donald Trump’s policies could severely impact global growth and inflation. In an interview with the BBC, Lagarde highlighted the potential economic dangers of rising tariffs between the US and Europe, stressing that these protectionist measures could harm both regions. She also addressed ongoing inflation risks, which she believes are heightened by shifting global trade dynamics, military spending, and climate-related disruptions.
Global Trade Risks Amid Tariff Threats
Former US President Donald Trump’s trade policies have once again taken center stage, with threats of 200% tariffs on French wine and other European Union (EU) exports. These tariffs, along with reciprocal measures from the EU, are set to come into effect as soon as next month.
Lagarde cautioned that such protectionist moves would severely disrupt global trade, with detrimental effects on both the US and Europe. “A full-scale trade war would severely impact global growth and prices, particularly in the United States,” she stated. The US is a crucial market for European alcohol producers, with nearly 20% of the EU’s beverage and spirit exports directed to the US in 2024.
Since returning to office, Trump has reignited his aggressive tariff policies, escalating tensions and economic uncertainty. Lagarde warned that the ripple effects of these trade wars would hurt businesses, investors, and consumers, slowing investment and creating instability. “The initiator, the retaliator, and the re-retaliator—everyone will suffer,” she remarked, emphasizing that trade wars inflict pain on all sides.
While calling for constructive dialogue, Lagarde defended the EU’s decision to respond to US tariffs, noting that Brussels had no choice but to act. Despite the escalating tensions, she pointed out that the delay between tariff announcements and implementation still provides room for negotiation.
A Misrepresentation of History: EU’s Role in Global Stability
Lagarde also addressed claims made by Trump regarding the EU’s origins, rejecting the notion that Europe was established to exploit the US. “The United States played a key role in Europe’s formation to ensure stability after the two world wars,” she said, emphasizing that to suggest Europe was created to harm the US is not only historically inaccurate but a misrepresentation of history itself.
Inflation Challenges Amid Uncertainty
While trade tensions dominate the current economic landscape, Lagarde also expressed concern about persistent inflation risks. She warned that inflation remains volatile due to shifts in global trade, rising military spending, and disruptions caused by climate change. “Ensuring economic stability in this new era will be a major challenge,” Lagarde noted. “It requires a firm commitment to our inflation target, the ability to differentiate between temporary and long-term shocks, and the agility to respond effectively.”
The trade policy uncertainty index has reached unprecedented levels, and geopolitical risks are now at heights unseen since the Cold War. Lagarde pointed out that inflationary shocks, such as the sharp rise in energy costs, can take months to fully manifest in consumer prices and wages. For instance, energy inflation peaked in October 2022, but services inflation didn’t reach its highest point until July 2023—nine months later, continuing to impact wages and prices today.
Inflation Slows, but Economic Risks Persist
Despite some signs of inflation slowing, Lagarde and other ECB officials are preparing to lower interest rates to support the eurozone economy, which continues to show signs of weakness. The ECB forecasts inflation to fall to 2% by early 2025, potentially allowing for monetary easing. However, Lagarde cautioned that unexpected economic shocks—whether from trade disputes, supply chain issues, or volatility in energy prices—could easily disrupt these projections.
“The recent decline in inflation has been achieved with relatively low economic costs, compared to previous disinflation periods,” she stated. However, Lagarde also highlighted that future economic shocks must be carefully evaluated, as they could demand tailored policy responses.
ECB Shifts Communication Strategy Amid Rising Uncertainty
Given the increasing economic uncertainty, Lagarde emphasized that the ECB must move away from rigid forward guidance regarding interest rate decisions. Instead, the central bank will focus on explaining its reaction strategy in detail, ensuring greater transparency in monetary policy adjustments.
“The public must understand the range of possible economic scenarios and how the ECB will respond accordingly,” Lagarde stated. The ECB plans to base its decisions not on a fixed rate path but on key economic indicators, such as core inflation, wage growth, and the transmission of monetary policy. This flexible approach will allow the ECB to respond more effectively to evolving economic conditions.
Christine Lagarde’s comments underscore the pressing challenges facing the global economy, from the threat of trade wars to ongoing inflationary pressures. As Europe grapples with these issues, the ECB’s ability to adapt its policies and communicate effectively will be key in navigating the uncertain economic landscape. With inflation risks still high and trade tensions escalating, all eyes will be on the ECB’s next moves as it seeks to stabilize the eurozone economy.