ECB’s Muller Warns Tariffs, German Spending May Boost Inflation

European Central Bank policymaker Madis Muller has issued a stark warning: U.S. trade tariffs and aggressive German fiscal spending threaten to derail the Eurozone’s fragile disinflationary path. As the ECB navigates its next policy moves, the interplay of global trade tensions and domestic stimulus is creating a high-wire act for monetary policymakers—and investors.

The Tariff Threat: A Dual-Edged Sword

Muller’s recent comments highlight how U.S. tariffs—particularly on Chinese imports—and potential EU countermeasures are reshaping inflation dynamics. While falling energy prices and a strengthening euro have eased near-term pressures (headline inflation dipped to 2.2% in March 2025), trade disruptions are introducing “Knightian” risks—those too uncertain to quantify.

The ECB’s staff projections for 2025 now factor in a 0.9% GDP growth rate, down from earlier forecasts, as tariff-induced trade frictions weaken demand. . Meanwhile, the ECB warns that geopolitical tensions, such as the Ukraine crisis, could further complicate commodity markets.

The central bank’s April rate cut to 2.25% (from 2.5%) reflects this tension. While policymakers aim to support demand, Muller cautions that fragmented global supply chains could reignite price pressures. U.S. tariffs on EU steel and aluminum, for instance, have already driven up input costs for European manufacturers, even as energy prices ease.

German Fiscal Expansion: A Wildcard for Inflation

Germany’s fiscal policy adds another layer of uncertainty. The ECB notes that Berlin’s potential relaxation of budget rules—fueled by defense spending and infrastructure projects—could boost domestic demand, pushing inflation higher. This contrasts with the rest of the Eurozone, where fiscal policy remains broadly neutral.

The ECB’s staff estimates that even a modest fiscal stimulus could add 0.3 percentage points to 2025 inflation. This is a critical concern: if Germany’s economy overheats while the rest of the Eurozone stagnates, the ECB’s “one-size-fits-all” monetary policy could face its toughest test yet.

The Policy Tightrope: Rate Cuts vs. Inflation Risks

The ECB’s “meeting-by-meeting” approach to rate cuts reflects this balancing act. While markets now price in further reductions to between 1.5% and 1.75% by year-end, policymakers are wary of overstimulating an economy already facing supply-side pressures.

Muller’s emphasis on “meaningfully less restrictive” policy language signals a shift from outright hawkishness but stops short of full easing. The ECB’s April statement noted that services inflation—a key indicator of underlying price pressures—remains stubbornly elevated, even as energy costs retreat.

Investment Implications: Navigating the Crosswinds

For investors, the takeaway is clear: the Eurozone’s inflation trajectory hinges on two key factors—trade policy outcomes and German fiscal restraint.

• Equities: Sectors exposed to trade volatility, such as autos and industrials, face headwinds. The German DAX index, which holds heavyweights like BMW and Siemens, may struggle if tariffs disrupt supply chains.
• Bonds: The ECB’s cautious stance supports peripheral debt, but German Bunds could come under pressure if fiscal expansion spooks investors.
• Currencies: A weaker euro—a potential side effect of rate cuts—might boost export competitiveness but could also import inflation through higher import prices.

Conclusion: A Fragile Equilibrium

Muller’s warnings underscore a critical reality: the ECB’s ability to guide inflation to 2% by year-end depends on containing both external trade risks and domestic fiscal overreach. With growth now projected at just 0.9% in 2025—and Deutsche Bank recently cutting its forecast to 0.5% due to tariff impacts—the central bank has little room for error.

Investors should remain cautious. While rate cuts may support equities and bonds in the short term, the Eurozone’s exposure to global trade wars and fiscal experimentation means volatility will persist. As Muller himself noted, the path ahead is “fraught with uncertainty”—a sentiment that should guide portfolio decisions in this precarious environment.