Christine Lagarde warns of potential US trade policy shifts, calls for economic reforms at Davos

DAVOS: European Central Bank (ECB) President Christine Lagarde has cautioned that Europe must be prepared for potential shifts in US trade policy, citing the possibility of selective tariffs under the Trump administration.

Speaking at the World Economic Forum in Davos, Lagarde emphasised the need for European economic reforms and defended the ECB’s cautious approach to monetary policy.

She warned that while the US economy is running at full capacity, the idea that the US could significantly reduce imports from Europe to boost domestic manufacturing is “questionable” and added that replacing European imports with domestic production would take time, given the current economic circumstances.

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Push for European Competitiveness

Lagarde highlighted that Europe’s economic strength lies in its large consumer market, but internal barriers remained a challenge. She called for “action, action, action” to address these issues, citing the need for reforms on productivity and innovation amid demographic challenges.

At the same time, she reaffirmed the ECB’s commitment to measured, data-dependent rate reductions, resisting market speculation over the pace and magnitude of the cuts. While markets are pricing in multiple ECB rate cuts this year, Lagarde avoided committing to a timeline, saying that “gradual moves” are likely but that decisions will remain data-dependent.

Acknowledging the divergence in interest rates between the ECB and the US Federal Reserve, she attributed it to “a different economic setting” between the two regions. “The ECB is taking a more cautious approach, with inflation in Europe stabilising and economic growth forecast at 1% in 2025.”

Lagarde flagged energy prices as a key variable in future monetary policy decisions, suggesting that further declines in oil and gas costs could have a significant impact on inflation dynamics. She remained cautious about giving forward guidance, stating that “we will apply the method and take all the data as it comes.”