BRUSSELS: Europe’s economy could face significantly less growth and more inflation, should Donald Trump win re-election as US president, European Central Bank (ECB) Governing Council member Joachim Nagel warns.
Victory for Trump “could be accompanied by drastic increases in tariffs, an expansionary financial policy and severe restrictions on immigration,” the Bundesbank chief said.
“If implemented, this could lead to noticeable losses in growth in the eurozone and Germany.”
Speaking at the German central bank’s annual reception in Berlin, Nagel said that “in this scenario, the sharp shift in US economic policy could also bring inflation risks for the eurozone and Germany”.
The comments come less than a month before Americans vote and reflect widespread alarm in Europe at the prospect of a second Trump term, should he edge out his rival – current Vice-President Kamala Harris.
ECB president Christine Lagarde has already raised concerns about his potential return to power.
Trump is, among other things, pledging 60% tariffs on China and as much as 20% on everyone else – the biggest trade shock since the Smoot-Hawley Act that deepened the Great Depression of the 1930s.
The eurozone economy is already struggling, dragged down by Germany, which may already be in a recession and could experience a second consecutive year of contraction in 2024.
“In the event of massive tariff increases and likely counter-tariffs, it seems plausible that the negative effect of this will have a stronger impact on the US economy than the financial stimulus,” Nagel said.
US inflation could also rise significantly, as tariffs push up the prices of imported goods, according to the German official.
“This could prompt the US central bank to raise interest rates,” he said.
The eurozone and Germany could be badly affected, should tariff hikes directly or indirectly affect the export industry. In addition, higher uncertainty “could increase the tendency for companies to hold back on investments”, Nagel said.
He cautioned that the drag on economic growth could be greater for Germany because of its close trade ties with the United States.
As for inflation, the main channel would be the exchange rate, he said.
“If the Federal Reserve had to react more strongly to a surge in inflation in the United States by raising interest rates than the ECB Governing Council given price trends here, a devaluation of the euro would be expected and thus an increase in our import prices,” Nagel said.
“Compared to Trump’s agenda, Harris’ proposals would probably have manageable macroeconomic effects and ripple effects,” he said. — Bloomberg
