Escalating trade tensions 'significant concern' for financial stability, warns ECB
Escalating global trade tensions have emerged as a "significant concern" for global growth and financial stability, the European Central Bank has warned.
In a special feature published by the bank on Tuesday, it said trade openness has largely stagnated in recent years as a result of heightened scepticism towards globalisation.
"The recent escalation of trade frictions between major economies – especially between the United States and its trading partners – has fuelled trade policy uncertainty and emerged as a critical concern for businesses and policymakers alike," six staff economists wrote.
"This increased uncertainty has the potential to redirect trade flows, reconfigure value chains, deter investment and dampen economic growth."
US President Donald Trump's trade war has unnerved global markets, with many multinationals and export-heavy businesses already feeling the sting of the President's punitive levies.
Ongoing trade tensions have also had a downward impact on the US dollar, which has fallen against almost every other major currency.
"In addition to trade policy uncertainty, the implementation of trade restrictions tends to reduce external demand, increase prices and raise production costs," the note said.
"Trade restrictions hinder technological advancement, stifling innovation, productivity and economic growth."
It also warned that adverse geopolitical developments unrelated to trade policy itself may also aggravate trade-related tensions, altering the volume of global trade as well as the relative shares of imports and exports between trading partners.
The ECB recommended that 'financial institutions should also take a number of proactive steps to cope with risks stemming from trade tensions.'
The report, which was prepared by economists Pauline Avril, Paul Bochmann, Stephan Fahr, Aoife Horan, Cosimo Pancaro and Riccardo Pizzeghello, echoes comments from ECB Vice President Luis de Guindos, who last week cautioned that the recent turmoil on tariffs could upend the region's financial system.
"The risks to growth resulting from trade tensions, combined with higher defence spending, may limit the fiscal space available to shield the economy from adverse shocks, address structural challenges associated with climate change, digitalisation and low productivity," Mr de Guindos said in a speech.
The European Central Bank will publish its biannual Financial Stability Review, on Wednesday May 21.
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