The impact of the US-China trade war on Europe: ECB's perspective

Thursday 06 February 2025 - 14:35

The European Central Bank (ECB) may further lower interest rates as inflation continues to moderate, according to board member Piero Cipollone. He also warned that escalating trade tensions between the United States and China could negatively affect the 20-member eurozone economy.

Since June, the ECB has reduced borrowing costs five times, prioritizing economic growth over inflation concerns. Investors anticipate at least three additional rate cuts this year to stimulate a sluggish economy. "We all agree there is still room for rate adjustments," Cipollone stated in an interview, adding that current policy remains restrictive despite progress toward the inflation target.

However, rising energy costs and global trade uncertainties present challenges, making it difficult to commit to specific policy moves, including a widely expected rate cut in March. Despite these uncertainties, the economic outlook remains consistent with previous ECB forecasts, which projected multiple rate reductions in 2025, starting with last month's unanimous decision to lower rates. Inflation, which reached 2.5% last month, is expected to return to 2% by mid-year after several years of exceeding the target.

Trade Risks and Europe’s Exposure

A major concern for Cipollone is the potential fallout from escalating U.S. trade policies. He cautioned that a full-scale trade war between the U.S. and China could pose significant risks to Europe, even before direct tariffs on European exports are implemented.

China, which accounts for 35% of global manufacturing, might redirect surplus goods to European markets if access to the U.S. is restricted, Cipollone explained. This influx of lower-cost products could suppress prices and economic growth within the eurozone. Recent analyses suggest that while the U.S. economy would also experience setbacks from tariffs, its impact would be more severe on its trading partners.

Despite these concerns, Cipollone downplayed the direct effect of tariffs on Europe, suggesting that businesses could absorb some of the additional costs, while a potential depreciation of the euro against the U.S. dollar could help mitigate trade imbalances.

Although trade disputes could slow economic growth, Cipollone believes they are unlikely to trigger a recession. Labor markets remain stable, consumer spending is expected to recover, and key sectors such as construction and manufacturing show signs of resilience. Furthermore, the impact of monetary policy adjustments is gradually supporting economic activity.

While trade tensions could exert downward pressure on inflation, energy prices continue to drive costs higher, maintaining a balanced outlook for price stability. Cipollone emphasized that, despite some concerns among policymakers, the ECB remains focused on ensuring inflation aligns with its long-term target.