Lagarde downplays tariff risk, says euro zone firms will adapt

Higher U.S. tariffs will not knock the euro zone off course, ECB’s President Christine Lagarde said, arguing the bloc is on the cusp of a recovery and that the growth hit from new levies will be small.

Speaking in an interview with Fox Business’s “Mornings with Maria,” aired Monday from Jackson Hole, Wyoming, Lagarde said companies will adapt once policy is settled. With “certainty” around the rules, she said, firms will “deal with it,” adding that the tariff move would have only “a small impact” on the GDP.

The economy isn’t thriving, she said, but is “increasingly back to potential,” with growth described as modest yet resilient and supported by firm consumption and investment.

Lagarde also commented on the EU economy at the Fed’s annual symposium

She spoke in Jackson Hole while attending the Federal Reserve’s annual symposium. She said growth is “on its way up” as investment and consumption hold up.

Her remarks signal that the new trade agreement between the EU and the United States is not prompting alarm among ECB officials. Lagarde has previously said that the pact could have possibly been far worse for the EU.

Policy makers left interest rates unchanged in July and look likely to do the same next month. President of Bundesbank, Joachim Nagel, told Bloomberg Television on Friday that there is a “high bar” for any further move after eight cuts to date.

Data released before new levies took effect showed the euro zone squeezing out growth in Q2. In August, activity in the private sector expanded at the fastest speed in over a year as factory output recovered from a 3-year slump. That firmer momentum, ECB officials say, should reduce the risk that inflation drops below the bank’s 2% objective in the medium term.

Current projections have consumer-price gains averaging 2% in 2027, which is the last year covered by the published outlook. Officials do not anticipate major changes when updated quarterly forecasts are presented next month. On inflation, Lagarde emphasized that both the medium-term expectations and latest readings are around 2%.

“There will be more shocks,” she said, “but we are in a good position.” The ECB expects only “a very minor impact on inflation” from the transatlantic deal, she added.

Lagarde highlights the role of foreign labor in supporting output

Lagarde said workers from outside the euro-area countries have helped the bloc in recent years by offsetting reduced working hours and lower wages. Migration into the EU pushed the euro zone’s population to the highest point despite falling births, though governments are moving to curb new migrations due to voter frustration.

Workers from abroad, while only about 9% of the total labor force in 2022, contributed to half of the growth in the last 3 years, Lagarde said in a speech on Saturday at the Federal Reserve’s annual Jackson Hole conference.

Without that contribution, labor markets would likely be tight and production lower, she said. She added that Germany’s gross domestic product would be about 6% below its 2019 level if foreign workers were not present, and that Spain’s strong performance since COVID-19 ended also owes much to foreign labor.

The EU’s population stood at 450.4 million last year, a new high, as net immigration offset a natural decline for the fourth year in a row. But that demographic support has fueled a political backlash. Voters in several countries have shifted toward far-right parties that campaign against immigration.

In Germany, the new government has suspended family resettlement and reunification programs as it tries to pull support from voters.

In the United States, President Donald Trump has increased arrests of people in the country illegally, tightened enforcement against unlawful crossings on the border, and removed the legal status of several hundred thousand migrants since being inaugurated.

Lagarde’s trade and migration comments were both delivered in Jackson Hole, where global central bankers gathered for the Federal Reserve’s yearly symposium.

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