Impact of Higher U.S. Tariffs on Eurozone Growth and Inflation

Higher U.S. tariffs on Eurozone growth and inflation imports may stunt the eurozone’s economic expansion, warns Philip Lane, Chief Economist of the European Central Bank (ECB). The ECB recently downgraded its 2025 growth forecast from 1.3% to 1.1%. Lane highlighted that these tariffs could further slow down economic growth in the eurozone, especially for exporters dealing with their largest foreign market, the U.S.

Uncertainty Surrounding Inflationary Effects

Lane noted the unpredictability of tariffs on inflation. While higher tariffs could slow inflation in certain scenarios, they might also lead to inflationary pressures, depending on currency fluctuations. He emphasized that the ECB cannot yet predict the full inflationary impact. “We believe this would negatively affect output, with inflation’s impact remaining uncertain,” Lane commented during a webcast.

Challenges for ECB’s Policy Response

This uncertainty complicates the ECB’s ability to plan its monetary policy in response to U.S. tariffs. With investors expecting rate cuts at each ECB meeting in the first half of 2025, following four rate reductions in 2024, the ECB’s actions will depend on how inflation responds. Lane reiterated the ECB’s “flexible approach” to rate changes based on evolving inflationary pressures.

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ECB’s Inflation Goal and Policy Flexibility

Lane expressed confidence that eurozone inflation will likely stabilize near the ECB’s target of 2%. “We believe we are on track to meet our inflation goal,” he said, emphasizing the ECB’s readiness to adjust policy depending on economic conditions.

Diverging Views Among ECB Officials

ECB officials have differing opinions on the impact of tariffs. Isabel Schnabel, a board member, argued that tariffs would likely push inflation higher with little effect on economic growth. In contrast, ECB President Christine Lagarde cautioned that tariffs could delay the eurozone’s recovery, advocating for diversifying growth sources beyond exports.

Mixed Economic Outlook for the Eurozone

Although the eurozone economy performed better than expected in the third quarter, surveys suggest a slowdown as the year concludes. Lane reassured that the region is not heading toward an economic downturn but warned that new economic shocks, such as escalating tariffs, could lead to a reassessment of the eurozone’s outlook.

Higher U.S. tariffs could impede Eurozone growth, with reduced exports and inflationary pressures, deepening the region’s economic challenges, according to wall street journal subscription.