In a bid to alleviate growth concerns in the Euro area, the European Central Bank (ECB) has only recently lowered core interest rates for the seventh consecutive month. The change in its monetary policy is intended to help sustain economic activity in each of the 20 euro-using nations by easing access to credit for consumers and businesses.
International Trade War Fears
Then, on Thursday, ECB President Christine Lagarde said the rise in global trade tensions, along with its uncertainty, is expected to dampen euro area growth through lower exports and perhaps also dampen investment and consumption. In Frankfurt, the governing council of the bank opted to reduce the cost of borrowing to 2.25%, a quarter percentage point. This decision was followed in line with all other central banks. This is after rate hikes were made against inflation that is now subsiding in 2022–2023. In March, inflation hit 2.2%, on target with the ECB 2% target, following 0.2% growth in the Euro in the quarter Q4 2024.
Consequences of the Potential Tariff Implementation
Prior to that, the Eurozone growth outlook had turned even cloudier after US President Donald Trump announced on April 2nd a series of hefty tariffs of between 10%-49% on imports, including the introduction of a 20% tariff on the European Union, the work of Jayme L. Despite what has been a temporary three-month reprieve from President Trump on these tariffs, the imminent potential for their coming into force has triggered concerns over increased business costs and slower economic growth. You are still the biggest trading buddy in the world, exchanging billions of dollars in goods and services between your shores every working day.
Uncertainty in the Trade Deal Negotiations
While tariff rates will be confirmed in a 90-day window for negotiations, any clearer maximum price between competing enterprises may lead to firms’ failure to commit to key plans. Afterward, the EU proposed eliminating tariffs on a variety of industrial goods, including autos, “zero for zero.” Still, Mr. Trump said that was insufficient and proposed further expansion of US exports of liquefied natural gas to Europe.
Other Key Insights
Economists at Berenberg Bank believe that it will reduce tariffs back to around 12% during the first half of the year. However, that is still quite an elevated average level compared to the pre-Trump era. Also, President Trump announced recently that he would not negotiate on a number of items, including the 25% tariff on automobiles and aluminum and steel, which continues to this day — the latter two things particularly affecting the EU’s strong automotive sector. Lagarde, on the other hand, said that the “tariff cloud” added uncertainty, which means that “meetings should be focused on the data” and decisions on rates “meeting by meeting” will depend on developments over the 90-day tariff truce and trade talks.
