Trade war may lower growth and inflation in eurozone, ECB’s Cipollone says

A GLOBAL trade war could lower both economic growth and inflation in the eurozone, and it could have an “unambiguously recessionary effect” on the countries involved, ECB board member Piero Cipollone said on Tuesday (Apr 29).

Cipollone’s remarks strengthened the case for a further ECB rate cut in June and also warned about the risks of a more fragmented world, such as obstacles in the flow of capital and even a possible erosion of the US dollar’s status as the world’s safe haven currency.

“The recent increase in trade policy uncertainty could reduce euro area business investment by 1.1 per cent in the first year and real GDP growth by around 0.2 percentage points in 2025-26,” he said. “The observed increase in financial market volatility might imply lower GDP growth of about 0.2 percentage points in 2025.”

While the inflation impact is less clear, the short to medium-term effects may even prove disinflationary for the euro area, Cipollone added.

He also shed light on the deeper implications of moving from a world dominated by the United States and the dollar to one that is fragmented into economic blocs.

“If the long-term implications of higher tariffs materialise, notably in the form of higher inflation, slower growth and higher US debt, this could undermine confidence in the US dollar’s dominant role in international trade and finance,” he said.

Cipollone added central banks needed to prepare for “sudden stops in capital flows, payment disruptions and volatility in currency markets” via “robust contingency planning and crisis management frameworks” while major economies should look for alternatives to protectionism.

“The G20 countries committed to preserving open trade could call an international trade conference to avoid beggar-thy-neighbour policies and instead… support the global economy in this period of uncertainty and contribute to reduce global imbalances,” he said. REUTERS