The United States’ decision to increase tariffs on its trading partners poses increased risks to financial stability in the European Union (EU), warned the European Systemic Risk Board (ESRB) today.
In the 2024 annual report regarding the activities of European banks between April 1, 2024, and March 31 of this year, the body responsible for macroprudential oversight of the financial system in the EU analyzes the implications of the new trade policy of the Trump Administration beyond this period, in April and May.
According to the European body, the imposition of “very high customs duties poses additional risks to financial stability in the EU.”
If the tariffs persist, these risks “could materialize,” with implications for economic growth, inflation, corporate earnings, and financing costs.
“Lower growth and greater uncertainty about inflation may reduce demand for goods, potentially leading to lower profits and higher insolvency rates for companies. Furthermore, unemployment is likely to rise, putting more pressure on households,” notes the committee, which is part of the European System of Financial Supervision (ESFS).
If U.S. tariff policy continues and there is a “prolonged period of trade restrictions and high uncertainty,” this combination “could also trigger a disorderly correction in asset prices, potentially amplified by the non-banking financial sector” by companies, warns the European body.
In this context, a possible “combination of low growth and falling asset prices may have adverse implications for the banking sector, including higher financing costs, reduced profitability, and deterioration in asset quality,” underscores the ESRB.
Although a forward-looking analysis, the European body’s assessment only reflects the succession of tariff measures decided by the United States until May 31, not including the recent decision of July 12 to impose 30% tariffs on all EU and Mexico products starting from August 1.
Regarding the first measures implemented on April 2, imposing a minimum tariff of 10% on all imports and higher tariffs on 57 trading partners, the European committee notes that the restrictions have already led to a reduction in economic growth projections for “most major markets,” including the United States.
At the same time, they have led to “higher inflation expectations in the United States, as the increased import costs were expected to be partially passed on to consumers.”
As the “magnitude” of the customs duties exceeded expectations, “high-risk asset prices, such as stocks and high-yield corporate bonds, fell sharply amid extreme volatility as investors shifted their funds to safer assets,” adds the committee, referring to what happened at the beginning of April.
Meanwhile, in the second half of April and into May, “risks slightly diminished as the U.S. Administration reduced some tariffs” and, even with “low liquidity” in certain asset classes, “global financial markets remained generally resilient, with no discernable impact on price discovery,” the committee further notes.
ECB President Christine Lagarde, who chairs the organization’s general board, highlights in the preamble of the report that the European financial system “has shown resilience,” but warns that “now is not the time for complacency,” as “radical and rapid changes in the geopolitical context continue to be a challenge for all of us.”
