Christine Lagarde has urged Europe’s political leaders to co-operate with Donald Trump over tariffs and buy more products made in the US, warning that an acrimonious trade war risks wiping out global economic growth.
The European Central Bank chief said in her first interview since Trump won his second presidential term that the EU needed “not to retaliate, but to negotiate” with a president-elect who has threatened a blanket tariff of up to 20 per cent on all non-Chinese US imports.
Lagarde also cautioned that a “trade war at large” was “in nobody’s interest” and would lead to “a global reduction of GDP”. Taking aim at Trump’s claims that he could “make America great again”, the ECB chief said: “How do you make America great again if global demand is falling?”
Trump’s victory has raised concerns among national governments and officials in Brussels, who fear tariffs would wipe out the EU’s large trade surplus with the US and spur the region’s manufacturers to shift production there.
Lagarde said that Europe should deal with a second Trump term with a “cheque-book strategy” in which it offered “to buy certain things from the United States”, such as liquefied natural gas and defence equipment. “This is a better scenario than a pure retaliation strategy, which can lead to a tit-for-tat process where no one is really a winner,” the ECB president said.
The European Commission, which runs trade policy for the EU’s 27 member states, is still considering how it would respond.
Increasing purchases of US exports, including agricultural products, as well as LNG and weapons, are among the options under consideration, according to officials involved in the preparations. The EU is also preparing to allow US companies to participate in initiatives to support joint military procurement with EU taxpayer money, and to align more closely with the White House on its trade and geopolitical policies towards China.
Lagarde has been unusually outspoken for a central banker in voicing her opinion on the US president-elect, saying earlier this year that a second Trump term was “clearly a threat” for Europe. She told the Financial Times this week that the remark was “prescient”.
“Just look at the debates that we are having in many countries in Europe,” she said.
Her counterpart at the Federal Reserve, Jay Powell, has carefully avoided opining on Trump, despite him tweeting during his first term that the US central bank chair was possibly a “bigger enemy” to the American economy than China.
Lagarde said her thinking on how to handle a second Trump term had “changed a bit” over the course of 2024, saying it was also Europe’s responsibility to use the US election result to spur much-needed changes to an economy that was struggling to keep up with its rivals.
“It is up to us now — the Europeans — to transform that threat attitude of ours into a challenge that we have to respond to,” the ECB president said. While she disputed claims that Europe was embroiled in a crisis, the current situation was “a big awakening”.
Lagarde agreed with her predecessor Mario Draghi’s diagnosis that the EU needed to take drastic action to regain its economic competitiveness, after struggling to keep up with the US over recent decades.
“Europe is lagging behind. But I wouldn’t say that Europe cannot catch up,” she said.
Economists believe Trump’s threat to impose significant tariffs on Chinese exports to the US could lead Beijing’s manufacturers to flood European markets with their products, presenting a further threat to domestic competitiveness.
The dumping of cheap products would exacerbate tensions between the EU and China, one of its main trade partners, and place further pressure on a region beset by economic stagnation since the Covid-19 pandemic struck.
The ECB president said policymakers needed to monitor such a “rerouting scenario” for Chinese goods carefully.
During his campaign, the president-elect threatened to impose a 60 per cent tariff on all Chinese imports.
On Monday evening, Trump said he would impose a 10 per cent levy on Beijing from his first day in office, in retaliation for China doing too little to crack down on the manufacturing of substances used to produce fentanyl.
Lagarde talked to the FT earlier on Monday, ahead of Trump’s remarks.
She called on Europe to cut through Trump’s campaign rhetoric and to focus on the details of his proposals so far, arguing it was “interesting” that he had suggested introducing tariffs of between 10 and 20 per cent on non-Chinese imports.
“The fact that you put out a range means that you are open to discussion,” she said, adding that this created the opportunity to “sit at the table and see how we can work together”.
While Lagarde said it was too early to assess the implications of US tariffs on inflation in the Eurozone, overall, she said that “if anything”, the effect was “maybe . . . a little net inflationary in the short term”, pointing to a likely reduction in economic activity and swings in foreign exchange rates. “But you could argue both ways,” she added. “It depends what the tariffs are, what they are applied on and over what period of time.”
For Europe, the incoming Trump administration’s stance on trade and transatlantic co-operation were an “accelerator of a reset that we need”, Lagarde said.
She singled out the long-standing idea to create a single market for capital in Europe — the so-called Capital Markets Union — and urged the EU to “move quickly” with it. The idea was first proposed by the Juncker Commission in 2014, but so far has been held up by domestic opposition in many of the EU27 member states. “I have not seen such a level of understanding and excitement as we have now,” said Lagarde.
She called for capital markets supervision to move from the EU’s 27 national authorities to the European Securities and Markets Authority. “We should have one single supervisor” that “operates like the Securities and Exchange Commission”, Lagarde said, referring to the US’s capital markets watchdog.
Asked about the view that Europe’s economy was so outdated and ossified that the continent was turning into a “museum”, Lagarde quipped that “it’s a pretty attractive museum if you ask me”.
She pointed to a “huge amount of innovation” across the continent, naming the Dutch farming sector as an example: “Did you know that the Netherlands is the second-largest farming product exporter in the world? Look at the size of the country!”
Confronted with a common criticism that Dutch tomatoes are lacking in taste, she responded: “But you eat them.”
Additional reporting by Henry Foy in Brussels