Germany's central bank, the Bundesbank, warned on the 17th (local time) that U.S. President Donald Trump's tariff policies would deal a heavy blow to Germany while also shrinking the U.S. economy.
Joachim Nagel, President of the Bundesbank, said in a speech in Frankfurt that day, "The loss of purchasing power and increased costs have a greater impact than the competitive advantage of U.S. industries," adding, "If there is no sharp rise in inflation and no clear tightening monetary policy, inflation will rise further." He continued, "Contrary to the U.S. government's statements, the result of tariffs will be negative for the U.S.," and argued, "Protectionist policies are likely to significantly shrink economic activity in the U.S. as well."
The Bundesbank analyzed that if the U.S. imposes an additional 60% tariff on Chinese imports and a 10% tariff on imports from other countries including the European Union (EU), and if the counterparties impose retaliatory tariffs, Germany's gross domestic product (GDP) will decrease by 1.5% by 2027.
The German economy experienced negative growth for two consecutive years in 2023 and 2024. The Bundesbank had forecasted in December last year that Germany's GDP would increase by 0.2% this year, 0.8% next year, and 0.9% in 2027, indicating a gradual economic recovery.
However, President Nagel pointed out that this forecast did not reflect the U.S.'s protectionist trade measures and noted that the depreciation of the euro, which strengthens export competitiveness, would not offset the negative impact of tariffs.
European financial markets have been volatile due to Trump-related factors such as universal tariffs and peace negotiations.
French President Emmanuel Macron convened leaders of major European countries that day to discuss responses to peace negotiations in Ukraine, causing long-term government bond yields across Europe to surge. This is due to expectations that, following President Trump's intentions, European countries will eventually relax fiscal rules and issue more government bonds to secure defense budgets. Bond yields and prices move inversely.
Experts predict that the European Central Bank (ECB) will lower the deposit rate to 2.00% by the end of the year and implement an additional rate cut in March next year. James Rossiter, Head of Macroeconomics at TD Securities, said, "The ECB can steadily lower rates without concerns about a sharp rise in inflation," adding, "The impact of Trump's trade war will be greater in the EU than in the UK. This means there is a need to lower rates below the neutral level."
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