A full-scale trade war with the U.S. could significantly hurt the euro zone economy and drive inflation higher, ECB President Christine Lagarde warned on Thursday. She advocated for greater trade integration as a solution.
The U.S. has already imposed tariffs on global steel and aluminum and is reviewing its trade relationship with the EU, prompting planned retaliatory measures from Europe set to take effect in April.
Lagarde told EU lawmakers that a 25% U.S. tariff on European imports could cut eurozone growth by 0.3 percentage points in the first year, with EU countermeasures raising the impact to 0.5 points. Inflation could rise by 0.5 percentage points in the short term due to a weaker euro and lower U.S. demand for European goods, though this effect would fade over time.
She acknowledged uncertainty in these estimates but emphasized the ECB’s vigilance in maintaining price stability, stating that policy decisions would be made on a meeting-by-meeting basis.
Lagarde suggested that deeper trade integration with other global partners could offset losses from U.S. tariffs, warning that isolationist policies would ultimately harm only those who implement them.