Policymakers are currently wrestling with an unusually high level of uncertainty, according to Christine Lagarde, the European Central Bank’s president. Her remarks came on Wednesday, shortly after the European Commission unveiled tariffs on U.S. imports, a direct retaliation to those imposed by the Trump administration. A few hours later, Canada followed suit with new tariffs on American goods.
Lagarde pointed out that the chaotic landscape of trade policies and global political developments is setting the stage for more frequent and severe economic shocks. This unpredictability, she stressed, poses a significant challenge for central bankers striving to maintain inflation at the target of 2 percent.
At the annual gathering in Frankfurt, where Lagarde shared her insights, there was a palpable sense of bewilderment among ECB officials, economists, and analysts. The mounting trade tensions and plans for substantial military budget increases by European countries, Germany in particular, have dramatically altered the economic landscape.
In another scenario, the event might have been more festive. After all, inflation in the eurozone had eased to 2.4 percent in February, aligning closely with the central bank’s goals. Plus, policymakers had successfully reduced interest rates six times since the previous summer.
However, President Trump’s sweeping tariffs and his unpredictable stance on military support for Ukraine have left European leaders on edge. European officials are now considering borrowing more to bolster defense and infrastructure, a move that could significantly reshape the region’s fiscal policies. The conference kicked off with a speaker underscoring the paradox of needing to prepare for war in order to maintain peace.
“The familiar certainties of the international order are now in disarray,” noted Lagarde. “Strained alliances have emerged alongside those growing stronger. We’ve witnessed political maneuvers that seemed unimaginable mere months ago.”
François Villeroy de Galhau, the governor of the French central bank, opened a panel by acknowledging the volatility of the current environment, which he said could change dramatically with a single tweet. He cautioned panelists that their presentations might relate to topics that could become outdated by day’s end.
“We exist in a world filled not only with uncertainty but with a greater sense of unpredictability,” he observed, “and, more so in recent days, a hint of irrationality.”
