Eurozone economic growth may remain under pressure despite Germany’s recent fiscal stimulus, due to the negative impact of rising U.S. tariffs, according to Alfred Kammer, Director of the IMF’s European Department.
U.S. Tariffs Threaten Eurozone Growth Despite German Fiscal Stimulus
While Germany’s fiscal measures are designed to stimulate domestic demand, Kammer warns that the broader Eurozone outlook has become more uncertain. “The drag from U.S. tariffs could overshadow the positive effects of German fiscal policy,” Kammer said in an interview with CNBC.
Global market optimism has been shaken by the introduction of new tariffs from the United States, which many analysts expect to slow global trade and economic momentum. European Central Bank (ECB) policymakers have echoed these concerns, noting that while inflation trends remain favorable, external risks are increasing.
Several ECB officials told CNBC last week that tariffs could contribute to lowering inflation further in the Eurozone. However, they acknowledged that the broader economic outlook has become “significantly more uncertain.”
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IMF Advises Limited ECB Rate Cuts in 2025
Amid ongoing growth concerns, Kammer advised the ECB to proceed cautiously with further monetary easing. Despite market pricing suggesting two additional 25-basis-point cuts this year, the IMF recommends just one more.
“We have a very clear recommendation for the ECB,” Kammer said. “What we saw so far is a huge success in the disinflation effort. Monetary policy has worked, and we expect to sustainably hit the 2% inflation target in the second half of 2025.”
The ECB has implemented seven 25-basis-point rate cuts since June 2024, with the latest move in April bringing the key deposit rate to 2.25%.
“Our recommendation is to make one more 25-basis-point cut in the summer and then hold the rate steady at 2% unless major economic shocks require a recalibration of policy,” Kammer added.
The IMF’s cautious stance highlights growing concern over external economic shocks. As global trade tensions escalate, especially between the U.S. and major economies, Eurozone policymakers face increased difficulty in balancing inflation control and economic stability. With Germany’s stimulus offering only limited insulation, the region’s reliance on export-driven growth could be further tested in the coming months. Additionally, the uncertainty surrounding U.S. trade policies and their long-term impact on European markets makes it even more challenging for the ECB to navigate this turbulent economic landscape.
This presents a significant challenge for policymakers who must strike a delicate balance between fostering growth and maintaining inflation targets. The continued unpredictability of global trade relations and shifting tariffs adds complexity to the ECB’s decision-making process, as it attempts to navigate the region’s economic future.
As of Monday, overnight index swaps showed that markets are still expecting two more ECB rate cuts in 2025, indicating a potential divergence between investor sentiment and IMF guidance.
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