ECB’s Villeroy: We Must Support Economic Growth Once 2% Inflation Target is Reached

9 April 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Wednesday that the ECB should support weak economic growth once its inflation target of 2% is reached.

In this year’s letter to the President of the French Republic, Villeroy, who heads the Banque de France, said that ‘once the 2% inflation target is assured, it is our duty to support weakened European growth.’

Risks to inflation looked ‘balanced’, as US tariffs exerted upward pressure while weak demand, commodity prices and the recent strengthening of the euro generated downward pressure, he said.

The ECB’s key interest rates were now getting close to the range of neutral estimates, he said.

The European economy would only suffer a limited impact if it were to deliver a proportionate retaliation of 20% tariffs on US products, according to Villeroy.

‘Our initial analyses suggest that a proportionate retaliation of 20% and immediately in the second quarter of 2025 would have a limited effect on the Eurozone.’

The hit to the US economy of such retaliation would be around 1.5% in terms of GDP, he said.

This proportionate retaliation would therefore ‘be justified to preserve the EU’s credibility and ultimately discourage the adoption of additional measures’, according to the Banque de France governor.

The imposition of 20% tariffs by the US to European goods could have an impact of at least -0.25% on European GDP, he said.

‘Several factors would mitigate the negative impact on the Eurozone’, he said. ‘For example, the Eurozone could gain in relative competitiveness compared with its competitors, such as China, to which the United States will apply higher tariffs.’

The economic impact would be heterogeneous among European countries and sectors, depending on the extent of their exposure, he said.

‘The impact of the shock on inflation is uncertain and could be very slight, or negative’, he said.

Factors that would impact inflation negatively included weaker economic growth, lower oil prices and tthe redirection of inexpensive Chinese and other Asian countries’ goods, according to Villeroy.

‘At this stage, the bullish factors for inflation in the Eurozone are less certain, as the euro exchange rate has not fallen following the announcements made on April 2, and the EU's retaliatory measures in terms of tariffs have not been specified at the time of writing’, he said.

Regarding the impact on the US, Villeroy said that the recent announcements could start to reduce long-term confidence in the US dollar as an international reserve currency.

The uncertainty stemming from trade tensions was already affecting financial stability, he said.

‘On the one hand, the accentuation of vulnerabilities within the real economy, particularly for the most indebted players, could increase the credit risk for financial institutions’, he said.

The recent rise in volatility had increased market and liquidity risks, he said, which suggested vulnerable financial firm like hedge funds ‘could face significant liquidity risks.’

Higher spending in Europe could boost economic growth in the euro area by 0.1-0.3% in upcoming years, he said, while the impact on inflation ‘would be very limited.’