European Central Bank President Christine Lagarde spelled out the cost of a trade war with the United States for the euro zone's economy for the first time on Thursday and welcomed Germany's latest spending plans.
The U.S. has imposed tariffs on steel and aluminium products from around the world and said it would review its trade relationship with the European Union. EU retaliatory measures will take effect in April.
Lagarde said a 25% tariff imposed by the U.S. on imports from Europe would lower euro zone growth by about 0.3 percentage points in the first year, while retaliatory measures could increase this to about half a percentage point.
"In the near term, EU retaliatory measures and a weaker euro exchange rate...could lift inflation by around half a percentage point," she told European lawmakers at a hearing. "The effect would ease in the medium term due to lower economic activity dampening inflationary pressures."
Lagarde said the solution to any trade war could be further trade integration with others, which "could more than offset losses incurred from unilateral tariffs, including retaliation".
She stressed, however, that any estimates of the cost of a trade war were subject to considerable uncertainty and that the ECB would be vigilant and ready to act to protect price stability.
Lagarde welcomed Germany's massive spending plans to boost its military and infrastructure, downplaying the surge in bond yields that ensued.
"My suspicion is that markets are seeing it as a growth increase in the future financed over the course of a long period of time," she said.
"Is there a little inflation anticipation associated with that? Probably, but not that significant according to our calculation."
