The U.S. Economy Could Enter Recession Amidst Global Trade War: Insights from French Central Banker
In a recent statement, François Villeroy de Galhau, the Governor of the French central bank, highlighted the significant risks that the ongoing global trade war poses to the U.S. economy. According to Villeroy, the United States may face an economic downturn due to the fallout from rising tariffs and escalating trade tensions. While the Eurozone may be affected to a lesser extent, the repercussions of such global economic strife will be widespread.
Speaking to the Atlantic Council in Washington, Villeroy emphasized that the current trajectory of international trade policies, including the imposition of tariffs by the United States on several countries, poses a severe challenge to global economic stability. Although the U.S. has suspended some of these tariffs, many remain in place, adding to the uncertainty that is already impacting confidence, investment, and overall economic output.
“The new measures announced as well as the increasing unpredictability, constitute a major negative shock to the global economy, but first and foremost to the U.S. economy,” Villeroy said. He further explained that the consequences of these measures might even lead to a U.S. recession, a possibility that seemed unthinkable just three months ago.
Trade War Impact on the Eurozone
While the U.S. economy appears to be at the epicenter of the trade-induced challenges, the Eurozone is also expected to feel the ripple effects. Villeroy, who is a prominent policymaker at the European Central Bank (ECB), suggested that the economic disruption could subtract a significant, though smaller, portion from the Eurozone’s GDP. He projected that the economic growth of the Eurozone could decrease by at least a quarter of a percentage point in 2025 due to the trade conflict.
Despite this, Villeroy assured that the Eurozone’s economic contraction would likely remain less severe compared to the United States, highlighting the region’s relative insulation from the worst effects of the trade war.
Inflation Concerns Amid Trade Tensions
While a trade war is often associated with rising inflationary pressures due to increased costs from tariffs, Villeroy downplayed concerns that inflation would significantly rise in the Eurozone. In fact, he suggested that the broader economic impact of the trade conflict might even exert downward pressure on prices, thus reducing inflationary risks.
“There is currently no inflationary risk in Europe,” Villeroy noted. “The impact (of a trade war) on inflation remains more uncertain but could be as a whole on the downside.”
This position stands in contrast to the views of some economists who have suggested that trade wars generally result in inflationary spikes as costs for goods and services rise due to tariffs.
The Role of Central Banks in Economic Stability
In his speech, Villeroy also addressed the role of central banks in maintaining economic stability amidst these turbulent times. He expressed concern over the increasing attacks on the independence and credibility of central banks, particularly in the United States, where President Donald Trump has been vocal in his criticism of Federal Reserve Chair Jerome Powell.
Earlier this week, President Trump backed off from his earlier threats to remove Powell from office, which had caused considerable uncertainty in financial markets. Villeroy praised Powell’s leadership, stating, “Let me … express again my gratitude to Fed’s Chair Powell, who admirably shows how a central banker must behave.” This comment reflects the importance of central bank independence in ensuring market confidence and stability, especially during periods of economic turbulence.
Conclusion: Global Trade Uncertainty and Its Far-reaching Effects
As the global trade war continues to unfold, the potential consequences for both the U.S. and the Eurozone remain uncertain. However, the insights provided by François Villeroy de Galhau underscore the fragility of the current global economic climate. While the U.S. faces the risk of a recession due to trade tensions, the Eurozone, although less affected, will still likely experience some economic slowdown. With inflationary pressures remaining subdued in Europe, the focus now shifts to how central banks can navigate these challenges and preserve economic stability in an increasingly unpredictable world.
