By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Fabio Panetta on Saturday said euro area inflation is expected to stabilize around the 2% target over the medium term, while warning that both upside and downside risks remain significant.

Panetta, who heads the Banca d'Italia, said in remarks at the 32nd ASSIOM FOREX Congress in Venice that Eurosystem staff projections foresee a period in which inflation is “expected to remain slightly below the target” before returning to around 2% over the medium term.

Energy and geopolitics could still push inflation higher via commodity prices and supply chain fragmentation, while euro appreciation, a sharp correction in financial markets, or tighter credit standards could keep inflation below target for longer, he argued.

A key issue to watch is imports from China, which he said have risen sharply in volume since early 2024 while prices have declined. The disinflationary impact is already visible in the goods most exposed to Chinese competition “and could become more pronounced in the coming months,” he said.

“Faced with risks pointing in opposite directions, monetary policy must keep a flexible approach, anchored to the medium-term outlook and based on a comprehensive assessment of the data and their implications for inflation and growth,” he said.

“The March projections will provide the ECB Governing Council with additional elements to guide decisions in the coming months,” he added.

On the global economy, he said 2025 growth was stronger than expected despite geopolitical and trade tensions, with activity supported by an artificial-intelligence boom and an unexpectedly rapid pickup in world trade.

“Based on the available estimates, until now the tariff burden appears to have been borne primarily by the US economy; foreign exporters seem to have shouldered a portion of it estimated at around 10%,” he said.

“Initially, the impact was absorbed by US firms' profit margins, and was then partially passed on to consumers, who now bear about half of it,” he continued. “Overall, tariffs are estimated to have contributed just over half a percentage point to inflation, which remains above the Federal Reserve's target.”

Tariffs have not produced a contraction in global trade, he said, pointing to lower-than-announced effective duties, limited retaliation, and an AI-related boost to trade flows.

Rather than collapsing, trade is being rerouted, he suggested, citing a steep drop in US imports from China alongside rising US imports from third countries and increased Chinese exports to some of those same economies.

Such “trade triangulation” implies that actual US-China decoupling may be less than bilateral data suggest, he said, while cautioning that tariffs still impose costs by making value chains more complex and less transparent.

Panetta said trade fragmentation has accelerated, but a rupture between the United States and its allies remains hard to envisage given US systemic weight in technology, security, and finance, as well as Europe’s importance for US exports, profits, and holdings of US government securities.

Still, he argued that a more conflictual global environment is changing government and corporate decision-making, with efficiency increasingly weighed against security and geopolitical considerations.

Turning to markets, Panetta said last spring’s tariff announcements triggered atypical moves, including a sharp dollar depreciation and a selloff in US Treasuries, before tensions proved short-lived and equities resumed their climb to new highs in the second half of 2025.

He warned that high valuations, especially in segments tied to artificial intelligence, could be vulnerable to outsized adjustments in an environment of macro uncertainty and profound technological change, even if many firms have strong balance sheets.

The international monetary system remains centered on the dollar, he said, though structural forces could gradually push it toward a more multipolar setup, which would be more diversified but also more exposed to fragmentation and contagion risks.

Stablecoins could reinforce the international role of the dollar in cross-border payments, he argued, while raising financial-stability and monetary-sovereignty concerns that require stronger governance and oversight.

In that context, he said the Eurosystem is advancing the digital euro project and initiatives to extend central bank money into wholesale markets via distributed ledger platforms, alongside banks’ work on deposit tokenization.

On Europe, Panetta said the region has strong foundations but continues to be held back by incomplete integration, weak innovation performance, and strategic dependencies, arguing that recent crisis-era tools should become a more structural capacity to act.

He called for deeper financial integration via a genuine European capital market and reiterated his case for a common safe asset, saying a European sovereign bond would help finance European public goods and provide investors with a liquid benchmark.

Discussing Italy, he said GDP expanded 0.7% in 2025 and that the banking system has strengthened, but warned that a growth model driven by rising employment and low wages is not sustainable amid demographic decline.

Without faster productivity growth, he said, Italy and Europe risk stalling, arguing that digital technologies offer an opportunity that “cannot be put off,” while banks should avoid excessive caution that could penalize viable investment.

In closing, Panetta said geopolitical disputes and trade fragmentation remain the most significant sources of uncertainty, and he urged countries to strengthen cooperation and shared rules, arguing that “openness is not weakness, but foresight.”