A trade war could push up eurozone inflation by half a percentage point alone with detrimental effects on growth, ECB’s Lagarde warns. The ECB president said rising trade tensions and a weaker euro could complicate monetary policy.
Trade uncertainty poses a significant threat to eurozone growth and inflation, with tariff-driven price pressures expected to intensify, European Central Bank President Christine Lagarde warned on Thursday.
Speaking at a European Parliament hearing, Lagarde acknowledged that while inflation is still on track, heightened trade uncertainty—especially stemming from the United States’ shifting policies—could disrupt the eurozone’s recovery and ignite price increases.
“Trade frictions are detrimental to global growth and welfare,” she said, warning that retaliatory tariffs and supply chain disruptions could lead to higher costs for European businesses and consumers.
A new wave of tariffs, she added, could push inflation up by as much as 0.5 percentage points, complicating the ECB’s efforts to stabilise prices while also dampening economic growth.
How will US trade tariffs impact the Eurozone?
Lagarde noted that the new Donald Trump administration in Washington has embarked on a different course, leading to “exceptionally high” levels of uncertainty regarding global trade.
“The world is not waiting for us,” Lagarde said, warning that increased trade frictions could disrupt supply chains, raise costs, and dampen global growth.
One of the biggest risks is the potential for higher US tariffs on European exports. ECB analysis suggests that a 25% tariff on European goods would reduce eurozone GDP growth by around 0.3 percentage points in the first year.
If the EU retaliates with its own tariffs, this figure could rise to 0.5 percentage points.
“The brunt of the impact on economic growth would concentrate around the first year after the rise in tariffs; it would then diminish over time, however leaving a persistent negative effect on the level of output,” Lagarde said.
Beyond growth concerns, tariffs could also push inflation higher.
“EU retaliatory measures and a weaker euro—resulting from lower US demand for European products—could lift inflation by around half a percentage point,” she said.
Is the eurozone’s recovery at risk?
The euro area economy expanded by 0.9% in 2024, nearly double the 0.4% recorded in 2023.
Yet, Lagarde pointed out that growth slowed in the final months of last year, with the first quarter of 2025 showing similar patterns.
“Manufacturing is still contracting, although survey indicators are improving,” she said, adding that “high domestic and global policy uncertainty is holding back investment, and competitiveness challenges are weighing on exports”.
Despite these headwinds, the ECB expects growth to continue, albeit at a modest pace, with GDP forecast to rise by 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027.
Lagarde made clear that these projections are subject to “considerable uncertainty, also owing to the trade policy environment”.
Headline inflation declined to 2.3% in February from 2.5% in January, while core inflation—excluding volatile energy and food prices—dipped slightly to 2.6%.
The ECB expects inflation to average 2.3% in 2025 before settling at its 2% target in 2027. A key driver of this trend has been the moderation in wage growth, which has slowed after a surge in response to the post-pandemic inflation spike.
Yet, Lagarde cautioned that the inflation outlook remains fragile, particularly in the face of potential trade shocks that could drive up costs.
The ECB’s rate path: Is easing coming?
The central bank lowered its key interest rates earlier this month by 25 basis points, bringing the deposit facility rate to 2.50%, down from a 2024 peak of 4.00%.
“Our monetary policy is meaningfully less restrictive,” Lagarde said, explaining that “new borrowing is becoming less expensive for firms and households, while loan growth is picking up”.
Yet, Lagarde stressed that the ECB is not prematurely committing to a rate-cutting path.
“Especially in current conditions of rising uncertainty, we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance,” she said.
Can Europe counter trade shocks?
“The answer to the current shift in US trade policies should be more, not less, trade integration, both with trade partners around the globe and within the EU,” she said.
She indicated the Single Market as a critical tool for boosting European economic resilience, estimating that it has added between 12% and 22% to long-term EU GDP.
“The level of trade between Member States has doubled since its creation,” she said, adding that “a deeper Single Market is crucial for reducing trade barriers within Europe and creating the scale necessary for firms to thrive”.
