As the December meeting approaches, the ECB It is debated between a basic cut of 25 basis points and a ‘jumbo’ cut of 50 basic points. With inflation increasingly controlled and greater concern about the region’s economic weakness, supporters of accelerating the process are growing. However, faced with this idea, many ‘hawks’ have been asking for maximum caution since Donald Trump won the elections, anticipating that strong tariffs would unleash inflation in the US, keep Fed rates high and, consequently, sink the euro. bringing inflation to the old continent due to the rebound effect. This is what Joaquim Nagel, president of the Bundesbank and member of the council, thought, who stated that “in the face of a sudden change in US economic policy, great inflationary risks could arise for Europe and Germany.”
However, within the ECB itself and among analysts, the option that Trump’s measures not only do they not cause inflationary effects relevant, but, in fact, clearly contribute to the opposite: sinking inflation quickly and ensuring that the ECB achieves its price stability objectives much more quickly. Of course, with great parallel problems, such as the economic destruction of tariffs, which would lead to the falls.
In that sense, one of the last members of the institution to speak about it was Piero Cipollone, member of the central bank Committee. The Italian commented this Tuesday that “US tariffs would bring greater weakness to the European economy, causing both lower consumption and less pressure on prices.” In summary, Cipollone stated that “all this makes me think that we will have a reduction in both growth and inflation“.
Eurozone inflation is now in an area really close to the ECB’s objective, standing at 2.3% in November’s figures after a slight rebound. Of course, all this with a high underlying (removing prices of energy and fresh products), still at 2.7%, thanks to 3.9% in services. These figures plus downward revisions to the eurozone outlook have caused the market to give an increasing probability to a 50 basis point cut by December, but it is not yet the base case. The swaps market (OIs) expects that by June 2025 the price of money will have fallen by 125 points.
According to TS Lombard’s forecasts, US tariffs on Europe, if the promised 10% universal tariff that Trump proclaimed during his election campaign is applied, “would reduce the GDP of the euro zone between 0.5% and 1.5% in an approximate period of two to three years”, with Germany being the most affected. In that sense, “most scenarios indicate that this weaker growth will predominate”, although they point out that retaliation from Europe could raise prices. In any case Davide Oneglia, an analyst at the firm, points out that the dangers will begin in mid-2025. However, he explains that he does see an inflationary risk in the event that the economic shock of the tariffs causes a reaction from the different governments with large stimulus and greater defense spending, “something that would be inflationary.”
Wisdom Tree experts agree in their latest report, commenting that “the prospects in Europe have weakened after Donald Trump’s victory in the US elections. Not only because of the threat of new tariffs on its exports, but also because of its reduced internal capacity to react”. According to them, this reinforces the idea of cuts “more aggressive in 2025” mainly due to a drop in inflation due to this economic cooling. “It is likely that there will be a fall in inflation that will increase the purchasing power of households (as there will also be an increase in wages).”
Imported inflation?
The big argument that Trump would bring inflation to Europe comes from a euro in low hours, collapsing in the face of the strength of the dollar and, consequently, raising the costs of imports and skyrocketing prices throughout the economy. This makes special sense, since, despite the fact that Europe does not have a negative balance with the US (in fact, it has a surplus with this country of 15.3 billion euros), is the main energy supplier. Washington is the main supplier of crude oil (17% of the total) and the second of gas (19.4%). But it is not only US products, but the dollar itself, which is used as the reference currency in 50% of all imports from the European Union, according to EC figures, regardless of the country.
Therefore, it is clear: a cheaper dollar equals higher inflation, and the movement of the European currency leaves no room for doubt. Since Trump’s arrival, the euro has sunk at its intersection with the greenback, going from 1.12 dollars per euro to 1.05. Analysts are even openly discussing the possibility of parity between the two, a rare milestone that only occurred with the Ukraine war in recent years. What everyone agrees on, whether or not parity is achieved, is that the euro’s path appears downward for now.
However, many think that the weakness of the euro against the dollar should not translate into great pressure on prices. At least that’s what Steno Research thinks, where they point out that, despite these exchange rate movements, “If we look at the nominal exchange rate (comparison of the euro in an official index that compares it with a set of currencies and not only against the dollar), we find a much more nuanced panorama, which tells us that the euro can be weakened without the need to import inflation.
In that sense, this statistic published by the ECB shows that, although there has been a fall since Trump’s election, going from 124 points on November 1 to 122 Currently, far from the 126 points it reached in August, at its peak, it is still above its average (121 points) and very far from the 113 points at which it was trading in 2023. In summary, despite the fact that the dollar is A very relevant element, its good position against other currencies offers great protection against imported inflation.
Analysts such as those at Centura FX comment in statements to elEconomista.es that, although the impact is more nuanced, the strength of the dollar does play a certain role. “The euro is down 6% against the dollar and the currency factor is one of the reasons,” explains Juan Lafargue, an analyst at the firm. Although, as a whole, the euro may be staying stronger, he emphasizes that “you always have to keep the dollar in mind because it is the method of exchanging goods and services par excellence.” However, even taking these arguments into account, “60% of exports in Europe are at the intra-European level, so, in an environment of weak demand, companies would be more inclined to maintain stable prices to avoid losing competitiveness”.
In short, although there may be concrete impacts “for key inputs denominated in dollars“, more competitive exports could end up offsetting this effect, particularly in economies like the German one. In that sense, this buffer is complemented by a European economy damaged by tariffs. In any case, Lafargue states that “there will be a degree of imported inflation”, but the doubt lies in the extent to which it is balanced with the rest of the factors.
European inflation, winner of the war with China
Furthermore, apart from the parallel tariffs, there is another factor that would end up being key: Trump’s tariffs on China. Although there are still no concrete measures on Europe, the president has already warned that he will impose this measure with an increase of 10% of those that already exist over Beijing. This could be the first step in a much larger escalation. In fact, in various campaign speeches, such as those in Chicago, he already spoke of an option of certain tariffs of 2,000% on specific products and some more general ones for specific sectors of between 100% and 250%. The general and most established idea pointed to an increase of 60%. In that sense
With these tariffs on the table, China could massively send these products to Europe due to the lack of profitability in the US due to Trump’s measures, causing a general drop in prices on the continent. Olli Rehn, member of the ECB, mentioned this Wednesday that this conflict could lead to a real deflationary blow for the old continent. The reason is that hundreds of thousands of Chinese products that no longer find the same profitability in the US could change their course towards Europe, plummeting prices due to an oversupply such as has rarely been seen. “We should prepare for tariffsbut particularly for those that the US proposes about China, something that could cause Beijing to sell products at excessively cheap prices in Europe.
From TS Lombard they comment that “if Trump goes ahead with the tariffs, especially against China, It is fair to assume that the EU would not only retaliate against the United Statesbut would also need to raise barriers with China to avoid a massive diversion of exports towards the Single Market (as the US market is closed to Chinese companies) and the strong deflation that would bring with it.” In that sense, they explain that everything It will depend on the response from Brussels; if it is very aggressive, it could even generate inflation due to an escalation in a trade conflict with this massive arrival of products as a trigger. However, if the EU did not respond forcefully enough, the blow would be to the countries. prices would be clear.
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