“A year ago, most would have assumed that U.S. tariffs … would trigger a major adverse shock to the euro area economy,” Lagarde said in a speech at a central banking conference in Helsinki, Finland. “Yet some of these assumptions have not been borne out.”
There had been little impact on inflation, she said, and effects on growth have been “relatively moderate” due to European governments taking pro-growth measures in response. Lagarde said that as a result the ECB’s interest rate policy was “in a good place” and that the bank couldn’t commit to any future rate path, whether one of action or inaction. The bank’s next policy meeting is set for Oct. 30; it left its key rate unchanged at 2% at its last meeting on Sept. 11.
The European Union’s executive commission prepared a list of goods to hit with retaliatory tariffs, or import taxes, but suspended them once the tariff deal was struck between Trump and Commission President Ursula von der Leyen in July. Reasons for non-retaliation included pressure from business groups not to enter a prolonged cycle of tit-for-tat tariff increases, as well as concerns about jeopardizing U.S. support for Ukraine.
As a result, Europe was still getting the imported raw materials and goods it needs for its economy without hindrance from high tariff costs or bottlenecks that could raise prices. “As a result, we have not yet seen significant supply chain disruption,” Lagarde said. “Global supply chain pressures remain contained, and in the euro area, bottleneck indicators are close to historical averages.”
Trump’s policies have been accompanied by a fall in the dollar and a corresponding strengthening of the euro. That makes Europe’s imports cheaper and helps the ECB in its efforts to contain the annual rate of inflation, which was a moderate 2% in August.
So far, Trump’s series of import taxes appears to have sown more concerns within the U.S. economy, as hiring has sharply cooled while inflation remains elevated. The cost of tariffs is generally paid by domestic consumers and businesses, even if the taxes can disrupt sales of foreign companies.
The EU and member governments have taken other measures to strengthen growth, such as free trade deals with the South American Mercosur countries — Argentina, Brazil, Bolivia, Paraguay and Uruguay — and with Mexico. National governments have ramped up defence spending due to the perceived threat from a newly aggressive Russia, while Germany has committed to large-scale investment in roads, rail and bridges after years of underspending.
Nonetheless, growth remains mediocre, coming in at only 0.1% in the second quarter over the quarter before. Tariffs and the associated uncertainty will still knock some 0.7 percentage points off growth through 2025 to 2027.