Christine Lagarde, President of the European Central Bank (ECB), has raised alarms about the growing threats posed by escalating trade tensions between the U.S. and Europe. In an interview with the BBC, she cautioned that ongoing tariff disputes—particularly those spearheaded by former President Donald Trump—could severely disrupt global growth and inflation, with consequences that could reverberate across the global economy. Lagarde emphasized that trade wars often lead to adverse effects on both sides, impacting prices and stalling economic recovery.

Trade War Could Harm Global Economic Growth

Lagarde’s warning comes as the U.S. and Europe prepare to enter a new phase of trade conflict. Former President Trump has threatened to impose tariffs as high as 200% on French wine and other European exports, starting next month. These tariffs are part of what Trump has termed “reciprocal tariffs,” a policy aimed at balancing the U.S.’s trade deficit with the European Union (EU).

Lagarde warned that such protectionist measures would not only damage the countries directly involved but would also have far-reaching consequences for global trade. The U.S. remains a crucial market for European producers, particularly in sectors like alcohol, where it accounted for nearly 20% of exports in 2024.

“A full-blown trade war would significantly hurt global growth and prices, particularly in the United States,” Lagarde stressed. She explained that tariffs and trade barriers typically lead to higher prices, lower consumer confidence, and a decline in business investment—factors that could stall global recovery efforts.

Uncertainty Over Trump’s Tariff Strategy

Since his return to the political scene, Trump has revived his aggressive stance on tariffs, worsening global trade tensions. Lagarde pointed out that the uncertainty surrounding U.S. trade policies is already having a negative impact on economic activity. Investors are nervous, and business confidence has declined, creating a precarious environment for future growth.

“The initiator, the retaliator, the counter-retaliator—everyone will suffer. History has shown this time and again,” Lagarde added, referencing the lessons of past trade wars.

While Lagarde called for dialogue and diplomatic efforts, she defended the EU’s response to U.S. tariffs, stating that Brussels had “no choice” but to retaliate. However, she noted that the lag time between the announcement of tariffs and their implementation still presents an opportunity for negotiations, which could help prevent a full-scale trade war.

Lagarde Defends European Union’s Role in Global Stability

In response to Trump’s claim that the EU was created to undermine the U.S., Lagarde offered a pointed rebuttal. She reminded listeners that the U.S. played a pivotal role in Europe’s post-World War II integration, helping to ensure regional stability and peace.

“To claim that Europe was created to harm the U.S. is not only misleading but a distortion of history,” Lagarde said, emphasizing the collaborative history between the two regions.

Inflation and Economic Instability Continue to Pose Challenges

As global trade dynamics shift, Lagarde expressed growing concern over inflationary pressures that continue to challenge economies worldwide. She explained that rising military expenditures, climate-related disruptions, and the uncertainty surrounding trade policies are all contributing to unpredictable inflation levels.

“Maintaining stability in this new era will be a formidable task,” she warned. Lagarde explained that inflation is becoming harder to predict, with price increases in energy and services continuing to put pressure on wages and consumer spending. These inflationary shocks often take months to fully materialize, creating a lag that complicates efforts to stabilize the economy.

ECB Prepares for Potential Rate Cuts Amid Economic Slowdown

In response to weakening economic conditions, the ECB is preparing to lower interest rates in a bid to support the eurozone economy. Policymakers anticipate that inflation will reach the ECB’s 2% target by early 2025, which could create space for monetary easing.

However, Lagarde warned that the economic outlook remains fragile. New disruptions, whether from continued trade conflicts, energy price volatility, or supply chain challenges, could quickly reverse progress. She highlighted that the ECB’s recent success in curbing inflation had come at relatively low costs, but future economic shocks would require careful consideration and tailored policy responses.

Flexible ECB Strategy for Uncertain Future

As the global economy faces more uncertainty, Lagarde announced that the ECB will adjust its communication strategy. Moving away from rigid forward guidance on interest rate decisions, the ECB will focus on explaining its reasoning and responding to evolving economic indicators, such as core inflation trends, wage growth, and credit flows.

“The public must understand the range of possible outcomes and how the ECB will react once it has sufficient confidence in the economic trajectory,” she said. This shift will allow the ECB to respond more flexibly to changing economic conditions, offering policymakers the agility to act decisively when necessary.