European Central Bank President Christine Lagarde warned that the trade war between the US and Europe could cut eurozone growth by half a percentage point and raise inflation.

US President Donald Trump is threatening to impose tariffs of 25% on all goods from the European Union, which has a large trade surplus with the US. 
In an address to the European Parliament, Lagarde said the 20-member eurozone was “particularly exposed to changes in trade policies”, AFP reported.

ECB analysis shows that 25 percent US tariffs could reduce eurozone growth by about 0.3 percentage points in the first year, and if Europe retaliates, the drop could be as much as half a percentage point, she said. 

The eurozone has already seen meagre growth in recent years as it struggles with high input costs and weak demand from key trading partners. 

In its latest forecasts released earlier this month, the ECB predicted growth of just 0.9 percent for the eurozone this year and 1.2 percent in 2026. 

A trade war between the U.S. and the EU would also make the outlook for consumer prices “significantly more uncertain,” she warned.

A trade war between the US and the EU would also make the outlook for consumer prices “significantly more uncertain”, she warned.

Lagarde added that inflation could rise by about half a percentage point in the short term.

Inflation in the eurozone, which rose sharply after Russia's incursion into Ukraine, has been gradually slowing towards the ECB's two per cent target, reaching 2.3 per cent in March.

While noting that the estimates are subject to “very great uncertainty,” Lagarde called on the European Union to respond by establishing closer trade relations globally.

“The response to the current shift in US trade policies must be greater, not less, trade integration, both with trading partners around the world and within the EU,” she said. 

“Trade integration, including free trade agreements, is an engine of economic prosperity and can protect against unilateral trade measures,” the ECB head added.

The ECB cut interest rates again at its last meeting in early March, but its next move is uncertain as policymakers assess the impact of U.S. trade policies and European plans to increase defense spending. | BGNES