ECB’s Lagarde spells out cost of trade war with US

[FRANKFURT]  European Central Bank (ECB) president Christine Lagarde spelled out the cost of a trade war with the United States for the eurozone’s economy for the first time on Thursday (Mar 20) and welcomed Germany’s latest spending plans.

The US has imposed tariffs on steel and aluminium products from around the world and said it would review its trade relationship with the European Union (EU). The bloc’s retaliatory measures will take effect in April.

Lagarde said a 25 per cent tariff imposed by the US on imports from Europe would lower eurozone growth by about 0.3 percentage point in the first year, while retaliatory measures could increase this to about half a percentage point.

“In the near term, EU retaliatory measures and a weaker euro exchange rate... could lift inflation by around half a percentage point,” she told European lawmakers at a hearing. “The effect would ease in the medium term due to lower economic activity dampening inflationary pressures.”

She said the solution to any trade war could be further trade integration with others, which “could more than offset losses incurred from unilateral tariffs, including retaliation”.

She stressed, however, that any estimates of the cost of a trade war were subject to considerable uncertainty, and that the ECB would be vigilant and ready to act to protect price stability.

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She welcomed Germany’s massive spending plans to boost its military and infrastructure, downplaying the surge in bond yields that ensued.

“My suspicion is that markets are seeing it as a growth increase in the future financed over the course of a long period of time,” she said.

“Is there a little inflation anticipation associated with that? Probably, but not that significant, according to our calculation.” REUTERS