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President Donald Trump’s drastic tariff risks have caused a major “negative demand shock” in the eurozone, saying the ECB is considering a rate decision later this month.
Greece’s central bank governor, Giannis Stonalas, warned in an interview with the Financial Times that the looming world trade war likely weighs heavily on European economic growth. “A significant negative impact on growth leads to much weaker activity than expected, dragging inflation under the target,” he said.
Stournaras, one of the longest-seat members of the ECB’s governing council, warned that the Euro region was already “slack” in growth outlook and was facing shock as it was on track to meet the ECB medium-term target of 2%. The ECB is set to make its next interest rate decision on April 17th.
Last week, Trump announced that Washington would impose a 20% tariff on most EU imports.
The US is the largest single export market for EU-made goods, accounting for nearly 21% of BLOC’s total exports in 2024. The job could curb demand in the US, but economists are also concerned that even higher tariffs on China could lead to further declines in re-routing of Chinese-made goods in Europe.
Ahead of Trump’s tariff announcement last week, the ECB had indicated a potential moratorium on interest reductions as it adopted more Hawkish language after cutting costs for the sixth time since mid-2024, cutting 2.5% last month. ECB President Christine Lagarde said in March that eurozone inflation could increase by half points in the trade war due to “weak EU retaliation measures and euro exchange rates.”
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Stournaras was troubled by his views and argued that “tariffs are undoubtedly a deflationary measure” in the eurozone. He emphasized that the protectionist measures in the United States were “worst than expected,” and that they created “unprecedented” and “global policy uncertainty” that focused on economic activity.
Analysts and investors said Trump’s tariff announcements increased the likelihood of further quarterly point rate reductions later this month. JPMorgan, which previously anticipated that the ECB would hold a steady rate at 2.5% in April, changed its view on Friday, with two more quarterly cuts expected to follow in June and September. A Goldman Sachs economist on Friday said the April cuts were “very likely now.”
Asked if the situation was critical enough to justify a 50 basis point rate reduction, Stournaras declined to comment.
While it was difficult to “appreciate the impact of tariffs,” he warned that the negative impact on growth in the Euro region “may be between 0.5 and 1 percent points.” In March, the ECB cut the Euro area’s 2025 growth forecast to just 0.9%.
