Brussels – Tariffs, exchange rates, and inflation: this is the cycle that draws the attention of the ECB. The European Central Bank is quietly but not without some apprehension watching how the world and markets react to US tariffs on foreign trade goods, and the Frankfurt institution’s president, Christine Lagarde, admits, “We are assessing the impacts of exchange rate changes on inflation.”
The underlying issue is the balance of power between currencies. In trade, tariffs make imported goods and products more expensive, reducing demand. With less demand for foreign products, the demand for foreign currency needed to make purchases also decreases, resulting in an appreciation of the domestic currency. In this case, the US dollar becomes stronger against the euro as it is no longer necessary in the same quantities to purchase a ‘Made in EU’ good that has become more expensive. Conversely, US exports would also slow because the currency costs more.
However, there is the issue of counter-tariffs, which also have an impact. In short, the trade war can lead to the appreciation or depreciation of a currency, with its repercussions on the cost of living. Lagarde has already warned of the adverse effects of US President Donald Trump’s tariffs on eurozone growth. The alarm bells for inflation went off at the informal Eurogroup meeting in Warsaw.
A justified alarm since the risk of a low-growth, high-inflation spiral could materialize — the stagflation spoken of within the EU in the aftermath of the outbreak of the Russian-Ukrainian. However, Lagarde assures, “We are ready to use the tools at our disposal to ensure financial and price stability.”
While the ECB is watching exchange rate developments with apprehension for repercussions on the cost of living, the European Commission is looking at growth. The EU executive will present its Spring Economic Forecasts in mid-May, but Economy Commissioner Valdis Dombrovskis gave a glimpse that is far from reassuring. According to the latest simulations of the impact of US tariffs, the US Gross Domestic Product would shrink from 0.8 percent to 1.4 percent by 2027. “The negative impact on the EU would be less than that of the United States, about 0.2 percent of GDP,” if tariffs were in place for a short time. “If tariffs are perceived to be permanent or if there are further countermeasures the economic consequences would be more negative: up to 3.1%-3.3% for the US, and 0.5%-0.6% for the EU and 1.2% for world GDP, while global trade would decline by 7.7% in three years’ time..”
English version by the Translation Service of Withub
