ECB policymakers warn economic ‘worst-case scenarios’ are materializing

The European Central Bank (ECB) predicts a sharper-than-expected downturn in the eurozone economy, triggered by US trade tariffs it believes have caused global financial instability. According to one senior ECB official, some of the institution’s worst-case economic scenarios are now unfolding in real time.

José Luis Escrivá, the governor of the Bank of Spain and a member of the ECB’s governing council, told the Financial Times on Wednesday that the tariffs imposed by US President Donald Trump were delivering a “very significant negative shock on economic activity.” 

Speaking ahead of the ECB’s April 17 policy meeting, Escrivá said the full impact of the high reciprocal tariffs is not yet clear but is closely monitored by central banks across Europe.

Euro is an alternative to the dollar in global trades, BDE Governor says

Per Escrivá, trade disputes between Europe and the US could have global financial repercussions that could affect the US dollar’s status as a reserve currency. He asserted that these developments challenge American financial markets, adding that “economic agents and authorities everywhere” are now reconsidering the future relevance of the dollar.

According to CNBC data, the dollar index (DXY) declined for the second straight session on Wednesday, dropping 0.65% to 102.29, down from 102.96 in the prior trading day.

The BDE official forwarded the euro as a replacement for the falling USD, claiming the eurozone has a more stable economic area embedded with fiscal governance and the rule of law. These factors, he argued, could make the euro a more attractive global currency alternative.

Escrivá also disclosed that the ECB will revise Spain’s economic growth forecast for 2025, which currently stands at 2.7%. He said the declines in global equity markets since early April had “tested the resilience of the financial system globally,” though he reckoned markets were still functioning in an “orderly” manner. 

“For the time being, the system is far more resilient than it used to be,” Escrivá surmised.

The ECB had previously predicted that a full-blown trade war with America could shave 0.5 percentage points off eurozone GDP growth in the first year. That estimate was based on models assuming limited escalation and potential EU retaliation. 

Yet, according to four officials with direct knowledge of the matter, US tariffs are proving far more disruptive than the ECB originally anticipated. Those officials, speaking to Reuters, said internal discussions have already begun about revising those forecasts upward, nullifying the region’s expected 1% economic expansion for the year. 

Inflation outlook plagued by uncertainty

Projections had placed consumer prices and inflation heading up if the EU responded with retaliatory tariffs, but the reality appears to be different. Analysts now say that in the near term, economic stagnation will likely pull inflation down rather than push it up.

Energy prices have fallen, the euro is strengthening, and corporate bond yields are rising, all contributing to disinflationary pressures. ECB insiders also confirmed that financial markets are still functional and that monetary policy transmission mechanisms are intact. As a result, there is no immediate need to introduce new liquidity measures or credit support tools.

Germany, known for its traditionally strict budget rules, recently relaxed its borrowing limits to fund increased defense and infrastructure spending. At the same time, the European Union is crafting broader measures to facilitate debt-financed military expenditures.

Escrivá noted that any inflationary impact from the trade dispute would depend in part on the EU’s reaction, both in terms of trade policy and fiscal expansion. He expects fiscal authorities, not central banks, to bear more responsibility in managing the eurozone’s economic response to external factors.

Rate cut expected despite internal dissent

Given the deteriorating outlook, financial markets have already priced in another ECB rate cut, expected to be announced on April 17. If delivered, it would mark the central bank’s seventh rate reduction since June, bringing the main rate down to 2.25%.

Many ECB policymakers have publicly backed another rate cut, bar Austria’s Robert Holzmann. Bundesbank president Joachim Nagel, a hawkish member of the ECB council who is expected to go against borrowing rate cuts, insinuated that he was aligned with the majority in a press briefing held Monday. 

Nagel stated the ECB would “do its bit” to reinforce the resilience of the eurozone, while noting that inflation was broadly on track to meet the ECB’s 2% medium-term target.

ECB officials also confirmed no discussion about restarting the bank’s bond purchase program, known as quantitative easing (QE). The central bank will let its bond holdings from previous stimulus rounds expire to shrink its balance sheet and withdraw liquidity from the system. 

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