ECB’s Nagel: May Be on Verge of 'Significant Escalation’ of Geoeconomic Fragmentation

18 November 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Monday that the world might be close to ‘significant escalation’ of trade tensions, but central banks would be able to control the situation.

In a speech at Tokyo University about geoeconomic fragmentation, Nagel, who heads the German Bundesbank, said that trade tensions justified concern because ‘inflationary pressures might rise if global integration were to reverse.’

However, one should not be ‘overly’ concerned ‘when considering the risk of higher inflation alone’ as research indicated that the impact on domestic price dynamics was limited, he said.

‘Of course, a sudden and drastic increase in trade restrictions, like tariffs, might change the picture. If one country raised tariffs strongly and the countries affected were to retaliate, we could see a significant rise in inflationary pressures’, he said.

Central banks had the necessary instruments to tackle such a situation through higher interest rates, he indicated.

Economic growth would weaken in such a situation, according to Nagel.

‘However, even a central bank focused solely on price stability cannot completely neglect output’, he said.

Tensions like these could influence inflation volatility, he said, and if there were more of these in the future, ‘it might become even more important to show strong commitment to achieving our price stability target and stabilising inflation expectations’.

The first symptoms of geoeconomic fragmentation were now more ‘evident’, suggesting that ‘we may be on the brink of significant escalation’, he said.

‘This is a concerning development, and we should all strive to restore cooperation and free trade’, he said.