Today, the Vice President of the European Central Bank (ECB), Luis de Guindos, emphasized the “extraordinarily high level of uncertainty surrounding economic and trade policy” and stated that the institution must therefore be “extremely prudent in determining the direction of monetary policy”.
Guindos, speaking in Amsterdam, Netherlands, noted that “geopolitical tensions could lead to higher inflation due to trade shocks, rising raw material prices, and energy costs”.
According to Guindos, the uncertainty of economic policy in the Eurozone is now more than three times higher than the historical average, while the uncertainty of trade policy is more than eight times higher than the historical average.
These levels surpass those experienced during the pandemic, Guindos added at a CEO Forum in Amsterdam.
The President of the German central bank, the Bundesbank, Joachim Nagel, stated that “global economic stability is at risk” and that the ECB will need to re-examine the situation.
Nagel, who is a member of the ECB’s Governing Council, suggested that the result of tariffs will be less welfare, a decline in global growth, and rising prices.
ECB President Christine Lagarde recently opined that the U.S. trade war could reduce the Eurozone’s Gross Domestic Product (GDP) by 0.5%, even with Germany’s fiscal stimulus.
The ECB’s council, which is publishing the minutes of its March meeting today, will meet again on April 16 and 17, but it is unclear what decision will be taken this time, whether to lower interest rates once again or to pause and maintain them.
The ECB has sharply increased the deposit rate from July 2022 to September 2023 to 4% and lowered it from June last year to 2.5%.
It also increased the weekly lending rate to banks to 4.5% and reduced it to 2.65%.
Lagarde highlighted in a speech in Dublin on Tuesday that “Europe cannot afford to be disunited” as major economies use tariffs, for example, to obtain concessions on other strategic goals.
“If we cannot make decisions in a European manner, others will use them against us,” Lagarde stated.
This is why, according to the ECB President, Europe needs to change its decision-making process, meaning the EU should move away from making decisions solely by unanimity, as a single veto could undermine the collective interest of the other 26 countries.
“In this inverted world, a qualified majority vote would, therefore, be inherently more democratic,” said Lagarde.
The ECB President remarked that the negative impact of tariffs would depend on their magnitude, duration, and the success of negotiations.
Isabel Schnabel, a member of the ECB’s Executive Board, mentioned that U.S. policies would affect European economic decisions.
The Governor of the Austrian National Bank, Robert Holzmann, believes that inflation is low and that interest rates at the current level do not constrain growth, implying that there is no need for the ECB to further lower interest rates.
Holzmann also warned that a potential trade war due to Trump tariffs might force central banks to implement unconventional monetary policy.
