Implementation Measures finalized for the Single Act agreed upon by the Council
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In the midst of the uncertainty swirling around the escalating trade dispute with the U.S., the European Central Bank (ECB) can only set its course meeting-to-meeting, as per Bundesbank President Joachim Nagel. This high level of uncertainty stems from the ongoing dispute's unclear impact on tariffs and economic burdens.
At a joint press conference with Finance Minister Joerg Kukies in Washington, Nagel expressed his concern over the persisting unpredictability. He argued that the "meeting-to-meeting approach" is more necessary than ever in these uncertain times. The next ECB interest rate meeting is slated for June 4 and 5 in Frankfurt.
Nagel underscored his apprehension about the trade dispute's impact on inflation in the U.S., asserting it would be more pronounced compared to the Eurozone. As for economic growth, he anticipated substantial effects on Europe and Germany. Nagel even reiterated his earlier prediction that a recession in Germany this year is a potential possibility.
Apart from the trade dispute, Nagel also discussed the recent turbulence in the US Treasury market. He pointed out that if the uncertainty persists, the volatile nature of such a critical market segment could resurface. He suggested that it's in the best interest of the U.S. government to ensure that doubts about the continued safe-haven status of U.S. Treasury securities are kept at bay. The U.S. dollar, being the most important global currency, won't likely change its status in the short or medium term, according to Nagel.
The euro, on the other hand, has seen a boost against the dollar as the trade conflict intensifies. (Reporting by Frank Siebelt; Editing by Kerstin Doerr; For further questions, please contact our newsroom under [email protected] (for politics and economics) or [email protected] (for companies and markets).)
As additional insights, it's essential to note that the ECB regards the escalating trade tensions with the U.S. as a significant economic risk. The ECB officials are concerned about both near-term disruptions and longer-term threats to stability. Some salient concerns include the impact of tariffs on trade and growth, inflation dynamics, policy response, and geopolitical spillovers.
1. Tariff impact on trade and growth: Average tariffs on goods have surged from under 3% to around 13% due to recent measures, causing a "negative demand shock." The ECB fears these disruptions could dampen economic activity through supply chain bottlenecks and reduced trade flows.
2. Inflation dynamics: While tariffs could temporarily raise import prices, the ECB appears more worried about demand-side deflationary pressures from weakened economic growth compared to the Fed’s emphasis on tariff-driven inflation risks.
3. Policy response: The ECB is leaning toward monetary accommodation, with a 0.25% rate cut implemented on April 17 and signals for further easing to counter growth risks. This stands in contrast to the Fed’s inclination to hold rates amid inflation concerns.
4. Geopolitical spillovers: Recent statements highlight concerns about trade policy escalation undermining the global rules-based order, with ECB representatives advocating for de-escalation and multilateral dialogue. The bank is particularly apprehensive about secondary effects like market volatility and redirected trade flows disrupting European supply chains.
The ECB warns that sustained tariff increases could force a reassessment of inflation forecasts and necessitate stronger policy intervention beyond rate adjustments.
- The escalating trade tensions between the U.S. and the eurozone, resulting in increased tariffs, have created uncertainty that necessitates the European Central Bank (ECB) to adjust its course meeting-by-meeting, as indicated by Bundesbank President Joachim Nagel.
- The ECB's primary concern revolves around the potential negative impact of these trade disruptions on economic activity in the Eurozone, as surging average tariffs from under 3% to around 13% could cause supply chain bottlenecks and reduced trade flows.
- While temporary tariff increases may push up import prices, the ECB focuses more on the demand-side deflationary pressures from weakened economic growth compared to the Fed, as the trade conflict dampens business and consumer confidence.
- Concerning policy responses, the ECB has implemented a 0.25% rate cut and signals for further easing to tackle growth risks, contrasting the Federal Reserve's stance of holding rates amid inflation concerns.
- The ECB fears that prolonged trade tensions could lead to reassessments of inflation forecasts and necessitate stronger policy interventions beyond interest rate adjustments, potentially disrupting European supply chains and posing threats to the global rules-based order.
