Unpredictable Tariffs by the US

This paper analyzes the potential substantial and far-reaching economic implications for the euro area (EA) if the United States imposes large, unpredictable, and lasting tariffs on EU imports. The direct impact is expected to be inflationary in the US but contractionary on EA aggregate demand and output, while indirect effects, particularly a US dollar appreciation, could transfer inflation to Europe. The authors advise the European Central Bank (ECB) to be prepared to adjust its monetary policy promptly to maintain price stability, noting that the tariffs could result in either excessive disinflation or significant inflationary pressures. The analysis emphasizes the uncertainty surrounding the US trade policy, the role of retaliation, and the weakened state of the WTO framework.