FRANKFURT – When President Trump provoked a trade war for the first time, the fear in Europe was that the biggest influence would be psychological. The executives would be confused and they would postpone or cancel their expansion plans.
That seems to be exactly that: European factories are producing less goods, automobile exports are declining and surveys show business managers on the continent are nervous.
Soon, that will affect economic growth in the region. At least that's what the European Central Bank expects.
On Thursday, the Bank lowered its projections for economic growth in the 19-country euro-zone and warned that a possible escalation of the dispute – which threatens to hit the European car industry – could cause further headaches.
Mario Draghi, president of the bank, said in a press conference that increasing protectionism, emerging market vulnerabilities and financial market volatility had "become more important". He added that the reduced projections were "mainly due to a slightly weaker contribution from external demand."
He spoke after a meeting of the Central Bank's rate-setting committee, which The key interest rates remained stable on Thursday and did not change their monetary policy. The Governing Council of the European Central Bank has outlined a plan to reduce emergency measures and shows no signs of a change in course despite a large number of new risks.
According to Draghi, in its growth forecasts the bank has only considered protectionist measures that have come into effect so far. A possible escalation could make it even worse.
"Apart from the effects on prices, tariffs, quotas, traded volumes and so on, what will be the effect of an extended trade war on confidence?" Said Draghi.
The economic review published by the European Central Bank's internal economists comes despite some bright spots in the Eurozone, which confirms the Bank's determination to further restrict stimulus.
The French economy looks brighter. Unemployment in the eurozone is 8.2 percent lower than a decade ago. Wages in the common currency area are rising after years of meager growth.
But the list of risks is growing. The The economy of Turkey, an important trading partner, is slowing down and the country's central bank has had to increase Interest on Thursday strong. Talks with Great Britain on a friendly divorce with the European Union are deadlocked. And German auto exports slumped in July, probably because buyers are unsure of the trade war, analysts say.
Trade is the biggest concern for European companies. At the moment there is an uncomfortable cease-fire in trade between Europe and the US. Trump and Jean-Claude Juncker, European Commission President, agreed after a July meeting not to impose punitive tariffs on each other while trying to negotiate a comprehensive trade agreement.
But European political leaders and business managers are nervous that the American leader may become restive if the talks do not produce quick results – and probably not. The European Commission follows a methodological approach and inhibits the need to obtain the assent of its 28 Member States.
"There's really nothing the union can do to accelerate its trade decisions," said Mujtaba Rahman, managing director in London for the Eurasia Group, a political consulting firm.
United States tariffs for steel and aluminum imports remain, raising prices and disrupting complicated supply chains. The Department of Commerce continues to examine whether foreign-made cars pose a threat to national security, a process that creates the legal basis for the 25 percent tariff on car imports that Mr. Trump has threatened.
Mr. Trump seems to hope that people guess, but companies hate insecurity. As long as the Damocles sword of Trump tariffs hangs over the Eurozone, companies will be reluctant to buy new machines or expand their operations.
You are right to be worried. Oxford Economics in London estimates that a full-blown trade warfare, including car tariffs, would shrink the European economy by more than 1 percent and cost 1.6 million jobs. Such a severe downturn would certainly cause the European Central Bank to reverse the course, but it would not be able to prevent substantial pain.
"A transatlantic trade war would have serious economic implications for the economies of Europe and the US," Oxford Economics said in a report in August. "There would be no winners."
The meeting of the ECB Council on Thursday comes almost exactly 10 years after the collapse of Lehman Brothers. With regard to the impact of this event, the central bank is still struggling with the consequences – the pending stimulus measures have their origins in this era.
The European Central Bank's plan to restore normalcy involves a drastic reduction in purchases of government bonds and other assets, a kind of monetary incentive. The purchases will fall to 15 billion euros or about 17.5 billion dollars per month after September and end after December. The bank has signaled that from the end of next year onwards, it will raise interest rates from record lows.
The E.C.B. remains on autopilot, "said Carsten Brzeski, chief economist of the German unit of the Dutch bank ING, in a message to the customers.