Tariffs Will Undermine Growth and Inflation, Warns ECB's Cipollone

The worldwide economy is poised for a phase of reduced expansion due to strained trade and financial connections, warned a high-ranking ECB official on Tuesday. The official emphasized that more collaboration among nations that support open markets will be essential to prevent even poorer results.

During his address, executive board member Piero Cipollone stated that the implementation of tariffs by the U.S. could potentially diminish the dollar’s position in global commerce and monetary transactions, resulting in increased rivalry amongst different currencies vying for " reserve currency" standing.

Cipollone stated that in the upcoming years, increased tariffs imposed by the US on goods imported globally will hinder economic expansion domestically as well as in the nations affected by these measures.

He stated that over the medium term, tariffs are expected to unequivocally lead to a downturn, impacting both the nations enforcing these limitations and those experiencing their effects.

The expenses for specific nations, like those within the European Union, will increase "if exchange rates do not mitigate tariff impacts," he further explained.

Generally, economists anticipate that the currencies of nations subject to targeting will depreciate upon the imposition of tariffs, which can aid exporters. However, contrary to this expectation, the euro has appreciated against the dollar following the announcement of these tariffs, thereby intensifying their impact.

Cipollone stated that the tariffs might affect inflation in varied ways; however, they could potentially result in a reduction of rising prices within the eurozone.

He mentioned that the short to medium-term impacts could lead to decreased inflation in the Eurozone, as real interest rates have risen and the euro has strengthened subsequent to the U.S. tariff announcements.

In March, the eurozone experienced an annual inflation rate of 2.2%, nearly meeting the European Central Bank’s target of 2%. Analysts predict this decreased slightly to 2.1% in April. Given that further drops could push the inflation rate beneath the targeted level, Cipollone’s remarks suggest potential backing for lowering the ECB’s main interest rate even more.

The policymaker stated that the tariffs represent the most recent in a chain of events that has divided the worldwide economy.

"What we're witnessing isn't just a short-term disturbance—it's a significant change in the way countries engage with each other economically, financially, and diplomatically," he stated.

He pointed out that unlike past instances of market fragmentation, the U.S. has not been seen as a refuge for investors this time around.

"This could have significant long-term effects on capital movements and the global financial system," he stated.

As a result of this fragmentation, gold’s importance in the foreign exchange reserves managed by central banks worldwide has increased, whereas the proportion attributed to the U.S. dollar has diminished. This trend might persist, leading to an era where multiple currencies vie for prominence within these financial reserves.

"If the long-term effects of increased tariffs come into play, particularly through heightened inflation, reduced economic growth, and elevated U.S. debt levels, this might erode trust in the U.S. dollar's predominant position within global commerce and financial systems," stated Cipollone.

The ECB official stated that it is crucial for governments to prevent repeating the errors of the 1930s, during which an increase in American tariffs led to a chain reaction of comparable actions among various trade allies.

Certainly, Cipollone mentioned that major economies aiming to maintain fairly open trade should collaborate tightly to avoid such outcomes, which might end up isolating the U.S.

“He suggested that the G20 nations dedicated to maintaining free trade might organize an international trade summit to prevent beggar-thy-neighbor strategies and adopt alternative measures instead.”

Send the letter to Paul Hannon paul.hannon@wsj.com