ECB vice president: Trump destabilising economy worse than COVID-19 pandemic

The vice-president of the European Central Bank (ECB), Luis de Guindos, has warned that the economic uncertainty generated by the new Trump administration surpasses that of the pandemic crisis five years ago.

In an interview with The Sunday Times, de Guindos expressed concern over President Trump’s policies, including tariffs, deregulation of the financial system, and corporate tax reforms, which he believes are contributing to market volatility and complicating economic stability, per Caliber.Az.

De Guindos highlighted that the Trump administration’s stance on multilateralism was a key source of unpredictability. “What we’re seeing is that the new US administration isn’t very open to continuing with multilateralism, which is about co-operation across jurisdictions and finding common solutions for common problems,” he said, describing this shift as a significant source of uncertainty.

Despite these challenges, de Guindos remained confident that the ECB's goal of controlling inflation was still achievable, citing trends that suggest inflation would move towards the bank’s 2% target on a sustainable basis. “We also need to try to look through the short-term evolution of markets and distinguish between short-term volatility and permanent or medium-term forces,” he said.

De Guindos, alongside ECB president Christine Lagarde, is leading the effort to stabilize inflation in the euro area, which has been impacted by unpredictable international relations and rapidly changing economic conditions. Recently, the ECB approved its sixth rate cut since June, reversing much of its aggressive response to the inflation spike caused by the end of COVID-19 lockdowns and the geopolitical disruption following Russia's invasion of Ukraine.

In the context of this policy, de Guindos noted some positive developments, including moderated wage growth and a drop in energy prices, signaling a potential decrease in inflation from its current level of 2.4%. However, he pointed to a lack of significant recovery in household consumption and business investment, largely attributed to the uncertainty surrounding US economic policies under Trump. “Consumption is not picking up,” he observed, adding that consumers are cautious due to fears about future economic developments, such as a trade war or wider geopolitical conflicts.

The ECB vice president also emphasized the negative impact of trade wars, calling them a “lose-lose situation for everybody,” and noting how the ongoing tensions between the US and its trade partners have slowed euro area growth projections. However, he suggested that Trump’s approach to NATO defense spending could provide some economic benefits to Europe. “We have the European Commission’s proposal to increase national defense spending by 1.5% of GDP,” de Guindos explained. “This is certainly a decision in the right direction, and it will have an impact on the macroeconomic outlook.”

De Guindos also expressed caution about the long-term effects of increased defense spending, warning that much of it might be spent outside the EU or offset by higher taxes and reduced public spending, which could limit its positive impact on growth.

On the topic of housing, where ECB policies have significant influence, de Guindos placed responsibility on national governments to address shortages and improve rental market performance. “Improving the performance of the rental market will be very important in the near future,” he said, calling for coordinated action at the national level to address housing-related social unrest.

By Khagan Isayev