Trade War Could Push US Into Recession, Eurozone GDP May Decrease 0.25%

France's central bank governor, François Villeroy de Galhau, has warned that the ongoing trade war could push the United States into a recession. Speaking at the Atlantic Council in Washington, he emphasized that while the impact on the eurozone would be less severe, all countries, including those in the eurozone, would feel the effects. The trade tensions, he noted, have already created significant uncertainty, affecting confidence, investment, and output.

Villeroy de Galhau highlighted that the recent escalation in trade disputes, coupled with increasing unpredictability, poses a major negative shock to the global economy. He specifically pointed out that the U.S. could face an economic downturn, a scenario that was unimaginable just a few months ago. The governor also mentioned that while the eurozone might experience a milder impact, it could still see its GDP decrease by at least 0.25% by 2025.

Addressing concerns about inflation, Villeroy de Galhau downplayed the risks, stating that the net impact of the trade war could even lead to lower prices. He asserted that there is currently no inflation risk in Europe and that the overall effect of the trade war on prices is likely to be downward. He also expressed concern about further attacks on central bank independence and credibility, which could exacerbate recent financial market turmoil.

In response to recent attacks on the Federal Reserve by U.S. President Donald Trump, Villeroy de Galhau praised Fed Chairman Jerome Powell for his handling of the situation. He commended Powell for demonstrating the behavior expected of a central banker, adding that Powell's leadership has helped stabilize financial markets.

The trade war has had a significant impact on France's economy, with the government adjusting its growth forecasts in response to the uncertainty. The French government has decided to lower its economic growth projection for 2025 from 0.9% to 0.7%, with further adjustments possible depending on the outcome of negotiations with the U.S. Despite the economic slowdown, the government has pledged not to raise taxes in 2025.

Economic analysts in France have expressed concerns about the impact of the trade war on the country's economic recovery. The French central bank had previously lowered its growth forecast for 2025 to 0.7%, and other economic observers have predicted a further slowdown, with job losses and rising unemployment rates. The French government is taking a dual approach to mitigate the impact, seeking diplomatic solutions while strengthening internal market defenses to maintain investor confidence.

France's economy is heavily reliant on exports to the U.S., particularly in sectors such as aerospace, luxury goods, wine, and cognac. The imposition of tariffs by the U.S. has led to a significant reduction in French exports to the U.S., with estimates suggesting a loss of around 8 billion euros in the aerospace sector alone. This has had a severe impact on employment and production in these industries.

French economists have criticized the U.S. trade policies, arguing that they are counterproductive and will ultimately harm the U.S. economy. They point out that the tariffs will not achieve the intended goal of reindustrialization and will instead exacerbate economic inequalities. Additionally, the tariffs are seen as a misguided attempt to address trade deficits, which are more related to financial imbalances than to industrial issues.

In the long term, the trade war is expected to accelerate the process of de-Americanization of the global economic system. Countries affected by the tariffs are likely to reduce their dependence on the U.S. and focus more on domestic markets, leading to a shift in global economic power dynamics. This trend could have far-reaching implications for international trade and economic cooperation.