ECB economists find US tariffs are dampening euro zone growth and inflation, but lower interest rates could help mitigate the impact
US tariffs are exerting a notable drag on euro zone inflation and economic activity. However, sectors most affected are also highly responsive to interest rate changes, suggesting monetary policy could help offset the impact, according to a recent blog post by European Central Bank (ECB) economists.
The ECB study focused on what it calls “tariff-related trade surprises” (TTS)—unexpected declines in euro area exports to the United States linked to changes in US tariffs. The research indicates that the negative effects of reduced demand outweigh any inflationary pressures from higher production costs along global supply chains.
“At its lowest point, about one and a half years after a TTS that cuts euro area exports to the United States by 1%, the consumer price level is around 0.1% lower,” the ECB economists said.
Trade data over the past year has been volatile, with firms frontloading purchases to avoid tariffs. In the latest three-month period for which data is available, euro zone exports to the US were down roughly 6.5% year-on-year.
Sectors most affected
The impact of TTS is uneven across industries. Sectors producing final goods such as machinery, automobiles, and pharmaceuticals tend to experience a delayed but sharp decline in output. Upstream sectors, like chemicals that supply intermediate inputs, react more quickly to changes in tariffs.
“The sectors hardest hit also respond most strongly to interest rate changes,” the ECB blog notes, highlighting that around 60% of the studied sectors—representing roughly half of euro zone industrial output and exports to the US—could benefit from easier monetary policy.
Monetary policy as a buffer
The findings suggest that while tariffs are weighing on both growth and inflation, targeted monetary measures could soften the economic impact. Easing interest rates could partially offset declines in production and prices, particularly in sensitive sectors.
“This pattern holds for about 60% of the sectors we study… suggests that monetary policy remains a powerful tool to counter TTS-induced disinflation and to cushion the drag from higher trade barriers,” the ECB economists concluded.
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