European Central Bank President Lagarde called on European leaders to cooperate with Trump on tariff issues and to increase procurement of American products. She warned that a hostile trade war could lead to stagnation in the global economy. In her first interview after Trump won re-election, she stated that what the EU needs is 'not retaliation, but negotiation.'
Lagarde also warned that a 'massive trade war' would benefit no one and would lead to a 'decline in global GDP.' In response to Trump's claim that he can 'make America great again,' Lagarde stated bluntly:
'If global demand declines, how do you make America great?'
Lagarde: Views on Trump's re-election have changed.
Lagarde has been outspoken about the impact of Trump's re-election. She previously stated that Trump's second term 'is clearly a threat to Europe.' In an interview with the Financial Times, she referred to this statement as 'prescient.' She said, 'Just look at the discussions we have in many countries in Europe.'
Lagarde indicated that her views on how to respond to Trump's re-election have undergone 'some changes' in 2024. She believes Europe has a responsibility to use this election result to push for urgently needed economic reforms to address competitiveness issues.
'Now it is our turn as Europeans to turn this threat attitude into a challenge we must respond to,' Lagarde said. Although she denied that Europe is in crisis, she described the current situation as a 'major awakening.'
Lagarde agreed with her predecessor Draghi's view that the EU needs to take significant action to restore its economic competitiveness. For decades, the European economy has struggled to compete with the U.S. She said,
'Europe has indeed fallen behind, but I do not believe Europe cannot catch up.'
In contrast, Federal Reserve Chairman Powell has been more cautious in response to Trump's remarks. Trump once tweeted during his first presidential term that this Federal Reserve Chairman could be a 'greater enemy' to the U.S. economy than China.
How will U.S. tariffs affect Europe?
Trump's victory has raised concerns among European governments and officials, who worry that tariffs could erase the EU's significant trade surplus with the U.S. and force manufacturers in the region to relocate production to America.
Lagarde stated that Europe should respond to Trump's second term with a 'checkbook strategy' by collaborating through purchasing products such as American liquefied natural gas and defense equipment. She said:
'This is better than a simple retaliation strategy; when will the cycle of revenge end? In the end, there are no winners.'
The European Commission, responsible for trade policy among the 27 EU countries, is still considering how to respond, including increasing procurement of American products such as agricultural goods, liquefied natural gas, and weapons. Sources say the EU is also prepared to allow American companies to participate in joint procurement plans supported by EU taxpayer funds and to align more closely with the White House on trade and geopolitical policies toward China.
In addition, economists believe that Trump's threat to impose high tariffs on Chinese exports to the U.S. may lead Chinese manufacturers to turn to the European market, which would pose a further threat to Europe's already weakened competitiveness. A large influx of low-priced goods would exacerbate tensions between the EU and its main trading partner, China, and put greater pressure on Europe, which has been mired in economic stagnation since the pandemic.
The President of the European Central Bank stated that policymakers need to closely monitor this 'redirecting scenario' of Chinese goods.
Although Lagarde stated that it is still too early to assess the impact of U.S. tariffs on Eurozone inflation, overall, she believes that 'if there is an impact,' it would be a slight short-term 'stimulus to inflation,' due to reasons including a potential decrease in economic activity and fluctuations in exchange rates. 'But this can be viewed from two angles,' she added, 'it depends on the type of tariffs, the scope of application, and the duration of implementation.'
Trump will accelerate Europe's adjustments and changes.
Lagarde stated that for Europe, Trump's stance on trade and transatlantic cooperation is 'an accelerator for the necessary adjustments we need to make.'
She specifically mentioned the long-term vision of creating a capital markets union and urged the EU to 'move forward quickly.' This plan was first proposed in 2014 but has been stalled due to domestic opposition from the 27 EU countries. She also called for the regulation of capital markets to be transferred from the authorities of the 27 EU countries to the European Securities and Markets Authority (ESMA). She stated, 'We should have a single regulatory authority operating like the U.S. Securities and Exchange Commission (SEC).'
When asked whether the European economy is outdated and is becoming a 'museum,' Lagarde jokingly replied, 'If you ask me, it's a very attractive museum.' She pointed out that there is 'a lot of innovation' across Europe, citing the Dutch agricultural sector as an example: 'Did you know? The Netherlands is the second-largest agricultural exporter in the world. Look at the size of this country!'
When someone criticized the taste of Dutch tomatoes as bland, she humorously responded: 'But you still ate them.'
Article reprinted from: Jin Shi Data
