“The answer to the current shift in the US trade policy should be more, not less, trade integration with trade partners around the globe, but also within the European Union”, was the recommendation of Christine Lagarde, President of the European Central Bank (ECB), when speaking to the European Parliament's Committee on Economic and Monetary Affairs on Thursday 20 March (see EUROPE 13599/3).
“Trade integration, including free trade agreements, has been a driver of economic prosperity, and can protect against unilateral trade measures”, she added.
She noted that the protectionist shift in the United States is causing exceptionally high levels of uncertainty. “Increased trade friction is detrimental to global growth and welfare. It raises costs, disrupts production and often leads to an adjustment of supply chains, which also encourages tit-for-tat retaliatory policies, further undermining the benefits of free trade”, she said. The euro area, which is very open to trade and deeply integrated in global supply chains, especially with the United States, is particularly exposed to shifts in trade policy.
According to the ECB’s estimates, which are subject to a considerable level of uncertainty, a US tariff of 25% on European imports to the United States would lower euro area growth by around 0.3% in the first year. In addition, a European response in the form of increased customs duties on US imports would raise this figure to almost 0.5%. In the near term, the EU’s retaliatory measures and a weaker euro exchange rate, resulting from a fall in US demand with regard to Europe for European products, could boost inflation by around 0.5%.
When asked by Gaetano Pedullà (The Left, Italian) about the heterogeneity of the impact of US policy, Ms Lagarde noted that, overall, 17% of European exports go to the United States. “It's both a two way street, but it’s also a two layers trade, where we import services more than we export, and we export more goods than we import, but at the end of the day, it’s almost a draw between the two”, she said.
With regard to the digital euro, which was mentioned several times during the discussion, Ms Lagarde felt that its introduction should be accelerated, both at wholesale and retail levels, as well as in terms of payment infrastructure (see EUROPE 13600/14). She does not want the EU to “depend on someone else deciding whether or not we should be entitled to continue to operate on the backbone of existing non-European solutions”.
In response to a question from Jonás Fernández (S&D, Spanish) on the “Mar-a-Lago Agreement”, which is based on perpetual debt and a devaluation of the dollar, Ms Lagarde remained cautious since information on this agreement is vague and lacks substance. Her advice is to be ready for anything and to strengthen the EU’s capacities. (Original version in French by Anne Damiani)