ECB Warns of Recession Risks as Global Trade Tensions Threaten Eurozone Stability
GerikSummary:
ECB executive board member Piero Cipollone warned that a global trade war could trigger a recession in the Eurozone, with reduced investment, lower GDP growth, and a risk of disinflation, reinforcing the likelihood of an ECB rate cut...
Eurozone Faces Recession Threat as ECB Flags Trade War Fallout and Disinflation Risk
Amid escalating global trade tensions, the European Central Bank (ECB) has raised serious concerns about the economic fallout from a prolonged trade war. In a stark assessment delivered on April 29, ECB Executive Board member Piero Cipollone projected that the Eurozone could face notable declines in growth and investment, coupled with a disinflationary environment, if trade disruptions persist.
Economic Drag from Trade Fragmentation
Cipollone emphasized that the Eurozone may see business investment decline by approximately 1.1% in the first year of a full-scale global trade conflict. Moreover, the region’s real GDP growth could fall by 0.2 percentage points between 2025 and 2026. Additional volatility in global financial markets, which has already emerged in the wake of U.S. protectionist policy moves, could contribute another 0.2 percentage point decline in GDP by 2025.
While the impact on inflation remains ambiguous, Cipollone stressed that in the short to medium term, the consequences might be disinflationary rather than inflationary—undermining already tepid price growth across the Eurozone. These projections reinforce the market’s expectations for a rate cut at the ECB’s upcoming June 2025 meeting, as policymakers seek to cushion the economy against external shocks.
Shift Away from a Dollar-Dominated Global System
The ECB’s warning also reflects broader structural changes in the global economy. Cipollone underscored the risks posed by an increasingly fragmented global trade system. As the U.S. pursues aggressive tariff policies, the long-term effects—slower growth, persistent inflation, and ballooning public debt—could undermine trust in the dollar's dominance as the world’s primary reserve and trade currency.
This erosion of confidence in U.S.-led financial architecture, Cipollone warned, could accelerate the emergence of alternative regional systems and weaken global economic cohesion.
Central Banks Urged to Strengthen Crisis Readiness
In light of these risks, the ECB board member urged central banks to prepare for potential capital flight, payment system disruptions, and heightened currency volatility. This includes developing robust contingency plans and crisis management frameworks.
Cipollone also called on G20 nations to reaffirm their commitment to open trade and resist protectionist impulses that risk triggering "beggar-thy-neighbour" dynamics, which harm global economic stability. He suggested convening a high-level international trade summit to reinforce collective action and promote more equitable economic adjustment across countries.
Policy Urgency Amid Systemic Transition
As the Eurozone teeters on the edge of disinflation and slowing investment, the ECB’s message is clear: the consequences of uncoordinated trade policies now extend far beyond tariffs and balance sheets. They are reshaping the architecture of the global economy itself.
While short-term stimulus, such as interest rate cuts, may help buffer the impact, the deeper challenge lies in preserving international cooperation in an increasingly multipolar and protectionist world. The ECB’s call for collective action may be one of the last efforts to prevent fragmentation from becoming the new normal in global trade.
Source: FT
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