European Central Bank (ECB) President Christine Lagarde warned on Thursday that a full-scale trade war with the United States could significantly harm the euro zone economy and potentially lead to a surge in inflation.
Lagarde argued that the solution lies in increasing trade integration rather than reducing it.
Lagarde informed EU lawmakers in Brussels that a 25% U.S. tariff on imports from Europe could reduce euro zone growth by approximately 0.3 percentage points in the first year. Retaliatory measures from the EU could potentially increase this impact to about half a percentage point.
Lagarde also suggested that in the short term, EU retaliatory measures and a weakened euro exchange rate, caused by reduced U.S. demand for European products, could increase inflation by around half a percentage point.
However, she noted that this effect would likely diminish in the medium term due to lower economic activity reducing inflationary pressures.
She also assured that the ECB would remain vigilant and prepared to act to maintain price stability. She clarified that the ECB remains open-minded about its next steps and will make decisions on a meeting-by-meeting basis.
In terms of a solution to any potential trade war, Lagarde suggested further trade integration with other countries. She indicated that this could potentially offset the negative effects of the U.S. measures.
