European Central Bank (ECB) President Christine Lagarde has issued a stark warning that uncertainty is back due to renewed tariff threats from U.S. President Donald Trump. Speaking at the World Economic Forum in Davos, Lagarde emphasized that these trade tensions are eroding trust between the U.S. and Europe, which could have severe economic consequences.
Lagarde stated that the uncertainty surrounding potential tariffs is more damaging than the tariffs themselves. This ambiguity is causing companies on both sides of the Atlantic to delay investment and hiring decisions, which the ECB fears will slow economic growth. The ECB has held interest rates steady since June, with no immediate changes expected, underscoring the delicate economic environment.
The Bank of France Governor, Francois Villeroy de Galhau, noted that while new tariffs must be assessed, their direct impact on prices might be muted. However, Lagarde highlighted a deeper risk: sudden tariff increases could disrupt the ECB's goal of price stability by making imported goods more expensive and complicating inflation control.
Concurrently, Trump's threats have triggered significant volatility in global financial markets. The S&P 500's year-to-date gains were erased, with the index dropping over 2%, and the Nasdaq also declined. In a flight to safety, gold and silver reached record highs as investors sought havens amid the weakening U.S. dollar.
Michael Field, Chief European Markets Strategist at Morningstar, commented, "After a strong start to the New Year, the last thing equity markets needed was an act of self-harm by the US administration." While the U.S. bond market showed some resilience, the overall sentiment reflects heightened instability in global trade relationships.
Lagarde urged U.S. and European leaders to protect their strong trade ties, built on decades of mutual investment and job creation, warning it is not "good business policy" to jeopardize these links. With the euro zone's resilience to protectionism tested, officials continue to flag elevated risks for the future.
