ECB Insight: Insiders Cautious on Potential Policy Implications of Trump Win

4 November 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank policymakers are nothing if not apprehensive about the US elections to take place tomorrow, given the potential implications of another Donald Trump presidency.

However, ECB insiders, whether in conversation with Econostream or in public remarks, are hesitant to venture specific guesses as to how the ECB might wind up having to react to having Trump back in the White House, citing his notorious unpredictability.

Trump, on the contrary, has shown no reticence about indicating the challenges Europe could face if he wins the election. At a rally in Pennsylvania last Tuesday, the former US president said that Europe would pay a ‘high price’ if it did not buy enough US goods.

Freed from the shackles of current office, former ECB Vice President Vítor Constâncio recently characterised a Trump win as his ‘biggest’ worry and called Trump ‘a menace to Europe’ in French journal Le Grand Continent.

His successor, current ECB Vice President Luis de Guindos, was more guarded in an interview with Italian news agency ANSA, saying merely that the central bank had to be ‘very prudent’ given the possible ramifications for trade, economic activity and prices globally.

He offered no hint, however, about how or whether the ECB’s monetary policy stance might need to adapt to a Trump presidency.

One Governing Council member suggested to Econostream that there was no point in pondering Trump’s ever-changing tariff threats now, precisely because of the candidate’s unpredictability.

‘There’s absolutely no point in discussing what Trump’s return could mean, because we don’t even know what tariffs he really wants’, he said. ‘The threat changes literally from one day to the next.’

Another Governing Council member told Econostream that US elections were only one of many factors the ECB needed to worry about.

‘The US is not the whole picture – we’ve got wars in two regions, just to cite one other aspect’, he said. ‘Of course, there is the potential for any US president to fundamentally change things, but that can also be said of other developments.’

Some governors appeared to disbelieve that Trump would even be able to carry out all his ideas.

‘[Y]ou cannot close the borders, [implement] higher tariffs and stop immigration at the same time’, Banco de Portugal Governor Mário Centeno said during the Q&A session of an event in Washington last month.

In an interview with Econostream, Centeno said that Trump would be forced to adapt his policies to reality, ‘because otherwise, the US economy would suffer.’

‘But from the perspective of monetary policy, that will be an external shock and we need to evaluate whether the impact on inflation will be permanent’, he said. ‘Whether the second-round effects contaminate inflation will depend on the way the economy reacts, on innovation, on our capacity to find alternatives. So, we may not need to worry too much about it.’

The first Trump administration brought tariffs, but no surge of inflation, he pointed out.

Others are less confident. Another ECB insider said that trade barriers would ‘certainly’ have an impact on the European economy and, in marked contrast to Centeno, expected ‘more of a longer-term impact on growth’ to result from Trump’s likely policies.

A Trump win ‘certainly could have an impact on our monetary policy’, he said.

ECB President Christine Lagarde reacted cautiously but with evident concern when asked at the most recent post-meeting press conference about the significance of Trump’s tariff proposals for euro area growth and inflation.

‘Any hardening of the barriers, the tariffs, the additional obstacles to that possibility to trade with the rest of the world, is obviously a downside’, she said.

More recently, in an interview with French newspaper Le Monde, Lagarde clearly stated that she was not willing to ‘give an opinion on any particular candidate’, but that if full decoupling were to take place after the election, ECB simulations suggested losses in global GDP would amount to 9% in a severe scenario.

‘But remember: when Joe Biden was elected, everyone thought that he would remove the customs barriers erected by his predecessor (Donald Trump). Nothing came of that’, Lagarde said, suggesting the element of unpredictability was high once again, independent of who the winner turned out to be.

Bundesbank President Joachim Nagel has been alone in doing a deep dive publicly into the potential implications of a Trump win for Europe's economy. In a speech on October 8, he said a Trump victory ‘could lead to noticeable losses in growth in the Eurozone and in Germany’.

Tariffs would not be the only driver of havoc in Europe. Uncertainty could also dissuade firms from investing, he said.

Inflation risks would also be on the table if Trump were to return to the White House, according to Nagel. ‘The main channel for this would be the exchange rate development, influenced by US monetary policy’ he said.

A spike in US inflation would ultimately put the Fed under more pressure to hike rates than the ECB, while at the same time, ‘a devaluation of the euro would be expected and thus an increase in our import prices’, he said.

Though it is clear that the ECB is quite wary of the risks Europe could face under a new Trump administration, policymakers prefer to see what actions he takes with their own eyes before venturing to reveal the central bank’s likely policy response, if any.