ECB's Villeroy: Trump Election Spells More Risks for World Economy

The potential re-election of Donald Trump as the US President in 2024 has raised concerns among global economic leaders, with Francois Villeroy de Galhau, the governor of the Bank of France and a member of the European Central Bank's (ECB) Governing Council, warning of increased risks for the world economy. In an interview with La Repubblica, Villeroy highlighted the implications of Trump's protectionist policies and fiscal pledges on global trade dynamics, inflation, and financial stability.


Trump's proposed tariffs on Chinese and other foreign goods, if implemented, could significantly disrupt global trade dynamics and market access. These tariffs, including a 10% universal tariff on imports from all foreign countries and a 60% tariff on imports from China, are likely to inhibit global trade, lower growth for exporters, and weigh on public finances for all parties involved. Firms may pass import costs onto customers, raising inflation in the US, which would force the US Federal Reserve to act with tighter monetary policy. Higher inflation would weigh on domestic demand, especially as it would call for a restrictive monetary policy response, with a negative impact on growth.


In response to Trump's protectionist policies, other countries may impose retaliatory measures, further disrupting global markets and interest rates. China may impose tariffs on US goods, targeting sectors like agriculture and manufacturing, which could impact US exports and employment. The EU might retaliate with tariffs on US products, affecting industries like automotive and chemicals. These retaliatory measures could lead to a tit-for-tat trade war, inhibiting global trade, lowering growth for exporters, and weighing on public finances for all parties involved.

Trump's immigration policies, such as mass deportation, could significantly impact the US labor market and inflation rates. The Pew Research Center estimates that 8.3 million unauthorized workers could be affected, exacerbating the labor shortage in the US. The Peterson Institute for International Economics estimates this could add more than two percentage points to the US inflation rate next year, 0.2 percentage points in Europe, and 0.6 percentage points in China. This surge in inflation would force central banks to hit the brakes on the cycle of interest rate cuts, potentially slowing economic growth.

Trump's fiscal pledges, including increased spending and tax cuts, could significantly expand the US deficit, potentially adding $7.75 trillion to the debt by 2035. This could lead to higher long-term interest rates, as investors demand greater returns to compensate for the increased risk. A divided Congress might help maintain fiscal responsibility, but Trump's plans are seen as more costly and likely to be enacted, posing a serious threat to US Treasury market stability and global financial stability.

In conclusion, the potential re-election of Donald Trump as the US President in 2024 presents significant risks to the global economy. His proposed tariffs, immigration policies, and fiscal pledges could disrupt global trade dynamics, raise inflation, and exacerbate financial instability. Central banks, including the ECB, will need to monitor these developments closely and adjust monetary policy accordingly to mitigate the potential negative impacts on the world economy.