ECB's Lagarde warns of severe economic hit from Trump's trade wars

A full-scale trade war triggered by US President Donald Trump’s escalating tariff threats would deal a heavy blow to global growth and inflation, European Central Bank (ECB) President Christine Lagarde said in a recent interview with the BBC.

Lagarde cautioned that rising tensions between the US and Europe could have “severe consequences,” particularly for prices and economic stability.

‘Everyone will suffer’ in a trade war

With Trump threatening 200% tariffs on French wine and other EU exports on top of ‘reciprocal tariffs’ which are set to begin as early as next month, Lagarde made clear that protectionist measures will hurt all parties involved.

The United States is a key market for European alcohol producers, accounting for about a fifth of beverages, spirits, and vinegar products exported by the EU in 2024, according to the International Trade Centre data.

“If we were to go to a real trade war where trade would be dampened significantly, that would have severe consequences,” she said.

“For growth around the world and for prices around the world, but particularly in the United States.”

Since his return to office in January, Trump has revived his aggressive tariff agenda, gradually escalating global trade tensions.

The ECB president said such measures are already dampening business activity through heightened uncertainty for companies, consumers, and investors.

“The initiator, the retaliator, the re-retaliator, and so on and so forth—all of that is going to hurt growth at large,” she said. “Everyone will suffer, this is a constant in history of trade.”

Despite calling for dialogue, Lagarde defended the EU’s position, stating that Brussels “had no choice” but to respond to US tariffs.

However, she suggested that the time lag between announced measures and their implementation still leaves room for negotiations.

She also dismissed Trump’s claim that the European Union was “formed to screw” the US.

“When Europe was formed, it was largely at the instigation of the United States of America, who wanted stability in our part of the world after the First and then the Second World War,” she said.

“To argue that it was set up to screw the United States is not just bad language, but it is an abuse of history.”

Inflation challenges deepen amid uncertainty

While trade tensions dominate immediate concerns, Lagarde also addressed the ECB’s long-term fight against inflation.

Speaking at the Institute for Monetary and Financial Stability in Frankfurt earlier this week, she warned that inflation is becoming harder to predict, driven by shifting global trade patterns, higher military spending, and climate-related disruptions.

“Maintaining stability in a new era will be a formidable task,” she said. “It will require an absolute commitment to our inflation target, the ability to parse which types of shocks will require a monetary reaction and the agility to react appropriately.”

One measure of this volatility, the trade policy uncertainty index is now at the highest level ever recorded. At the same time, geopolitical risk indicators are at levels not seen since the Cold War, outside of major conflicts or terrorist events.

Lagarde highlighted the delayed impact of inflation shocks, noting that price pressures do not ease immediately.

For example, energy inflation peaked in October 2022, but services inflation did not peak until July 2023, a nine-month lag that continues to influence wages. This staggered adjustment complicates the ECB’s ability to steer inflation back to 2% in a predictable manner.

Rate cuts ahead, but caution remains

With inflation cooling, ECB officials are preparing to lower interest rates to support the eurozone’s slowing economy. Policymakers expect inflation to reach 2% in early 2025, providing room for monetary easing.

However, Lagarde signaled that new shocks—whether from trade conflicts, supply chain disruptions, or energy price swings—could quickly alter this trajectory.

“The recent disinflation has been achieved at a relatively low cost compared with similar episodes of the past,” she said, suggesting that well-anchored inflation expectations have helped stabilise prices.

But she warned that future shocks must be assessed carefully, as they could demand a different policy response.

ECB shifts communication strategy

As economic uncertainty grows, Lagarde stressed that the ECB must shift away from rigid forward guidance—which sets expectations for future rate decisions—and instead focus on explaining its reaction function.

“The public must understand the distribution of possible outcomes ahead and how the central bank will react once it is sufficiently confident about which scenario it is facing,” she said.

Instead of locking in a specific rate path, the ECB will focus on key economic indicators—such as underlying inflation trends, wage growth, and monetary policy transmission—to guide its decisions.