FRANKFURT, Germany — The European Central Bank (ECB) has announced a reduction in interest rates by 0.25 percentage points as economic growth shows signs of weakening. This decision is fueled by concerns over the political instability in France and the potential for new U.S. import tariffs under incoming President Donald Trump. The rate-setting committee convened at its Frankfurt headquarters on Thursday and lowered the benchmark interest rate from 3.25% to 3%.
Bank President Christine Lagarde expressed optimism regarding ongoing efforts to reduce inflation toward the ECB’s target of 2%. “The disinflation process is well on track,” she stated during a news conference following the announcement. Managing inflation remains the primary focus of the bank, but Lagarde noted that a slower economic recovery is anticipated based on updated forecasts from its last projection in September.
With inflation decreasing significantly to 2.3% from a peak of 10.6% in late 2022, the ECB is now facing challenges related to sluggish growth rather than primarily focusing on controlling consumer prices. The eurozone is predicted to experience a 0.8% growth rate this year and 1.3% next year, according to the European Union’s executive commission forecasts.
Raising the ECB’s benchmark rates typically leads to reduced inflation by making borrowing more expensive and, consequently, curbing spending, which helps relieve price pressures. However, if rates remain elevated for extended periods, it can hinder growth. The ECB has now lowered its benchmark interest four times from its highest level of 4%.
The recent rate cuts are intended to bolster growth as indications suggest that the recovery from the pandemic is losing momentum in the 20 countries that use the euro. Concerns surrounding the possibility of Trump implementing new tariffs after his inauguration on January 20 have created apprehension in the European business community, given that exports play a vital role in driving growth and employment.
Lagarde subtly acknowledged the potential impact of trade tensions without specifically naming Trump. She highlighted that trade conflicts could pose risks that might negatively influence euro area growth by stifling exports and weakening the global economic landscape.
Political issues within Europe also pose threats to stability. French Prime Minister Michel Barnier’s resignation on December 5 followed a failed confidence vote, plunging France into a governmental vacuum with no clear parliamentary majority to address the nation’s significant budget deficit. Elections are not scheduled until June, and while Barnier’s government collapse has not led to an immediate financial crisis, it has increased uncertainties surrounding economic recovery.
In addition, Germany’s ruling coalition disintegrated in November, with new national elections expected on February 23. This will likely result in weeks of negotiations before a new government is established, leaving the two largest economies in the eurozone in a period of political uncertainty for months to come.
This instability has eroded the confidence crucial for businesses to borrow, invest, and expand. A purchasing managers’ index survey conducted by S&P Global showed a reading of 48.3 in November, indicating a slowdown in economic activity, with any score below 50 suggesting contraction. Similarly, the Sentix investor confidence index dropped 4.6 points to -17.5 after the U.S. election.
Furthermore, an increasing number of major corporations in Germany have begun announcing job cuts, exacerbating the bleak outlook. Notable companies such as Bosch are set to eliminate 5,500 positions, with 3,800 in Germany; ZF Friedrichshafen plans to cut 14,000 to 15,000 jobs; and Ford Motor Co. will reduce its workforce by 4,000 positions in Europe, including 2,900 in Germany. Additionally, ThyssenKrupp plans to cut 11,000 jobs, and Volkswagen is negotiating to potentially shut down up to three plants in Germany amid contentious discussions with employee representatives.
The ECB governs interest rate policy for the 20 of the 27 EU member states that utilize the euro as their currency.
