ECB will fail to get out ahead of US trade war

MAGA dependent. Donald Trump’s election victory is making Europe t-so-great again. new U.S. president’s plans for import tariffs will compound Old Continent’s ecomic woes. European Central Bank could help by slashing interest rates, starting from next month. Internal politics suggests that Frankfurt policymakers won’t do so – but y are only delaying inevitable.

ECB President Christine Lagarde likes to say her institution is “data-dependent”, a d to its supposed nimbleness in face of changing circumstances. As of this week, ECB has a new data point: Donald Trump will be 47th president of United States.

tycoon’s return to White House matters to euro zone because he has promised to impose 10% tariffs on all imported goods. Since United States is European Union’s largest tring partner, accounting for nearly 25% of its goods exports, any levy would affect bloc’s growth. That’s particularly true for Germany, EU’s largest ecomy, which h biggest tre surplus with U.S. in 2023.

If Europe retaliates, a tre war and or policies of second Trump ministration could kck 0.5% from euro zone GDP , according to Goldman Sachs analysts. Most of hit would come in 2025, reducing bloc’s GDP growth from 1.1% to 0.8% – in line with this year’s weak performance. By contrast inflation would barely change, Goldman reckons. That’s because slower growth will offset any price pressure caused by EU tariffs on U.S. imports.

A growth shock of this magnitude calls for a strong response from monetary authorities. Lagarde could make a statement of intent on Dec. 12, when ECB next sets interest rates. A cut of 50 basis points, bringing benchmark deposit rate to 2.75%, would make sense – t least because euro zone inflation has hit  ECB’s 2% target.

But that’s unlikely to happen because of sway inflation hardliners hold within central bank. se influential voices, usually with a German accent, will point to inflationary effects of euro’s 1%-plus fall against dollar since U.S. election.

A weaker currency does make imports more expensive. But it’s unlikely to offset or disinflationary pressures caused by slow growth, moderating ws and impact of past rate hikes. ECB may also be worried about acting too early, given that Trump may t impose threatened tariffs. But given bloc’s sluggish ecomy and subdued inflation, markets are alrey betting on rates falling to 1.75% in 2025. Taking a bigger leap w to get re would help to counter any nasty side-effects of Trump’s triumph.

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European Central Bank’s Governing Council meets on Dec. 12 to decide on level of interest rates for euro zone. Markets believe that re is a 90% probability ECB will cut benchmark deposit rate from 3.25% to 3%, according to derivatives prices collected by LSEG.