Bundesbank warns about US tariff risk recession

Germany's central bank has warned that escalating trade tensions with the United States could push Europe's largest economy into a contraction.

In response to US President Donald Trump's tariffs imposed on Europe this week, which the president sees as key to reviving US manufacturing and jobs, the European Union on Wednesday announced import taxes on a range of US products, set to take effect on April 1.

Bundesbank President Joachim Nagel told the BBC on Thursday that while the EU's response to US tariffs was appropriate, an escalating trade war would harm all parties and threaten to tip Germany, the bloc's largest economy, into recession.

"We are in a world with tariffs, so we could expect maybe a recession for this year, if the tariffs are really coming," Nagel said.

"I hope that there is the understanding within the Trump administration that the price that has to be paid is the highest on the side of the Americans."

The Bundesbank expects German growth to remain weak but positive, at around 0.2 percent if tariffs are avoided, he added.

Nagel backed the EU's countermeasures to Trump's 25 percent steel tariffs, while warning that "there are only losers" in trade disputes.

The Bundesbank chief dismissed Trump's tariff policy as "economics from the past" and "definitely not a good idea".

While acknowledging the risk of a global trade war from escalating tariffs, Nagel said it was a "necessity" for the EU to react "because if something is working against you, you can't accept a policy like this".

Nagel suggested that once Washington recognizes the cost will be "highest on the side of the Americans", all parties could work toward a different solution.

"I hope that, in the end, good policy will succeed," he said.

As Europe's manufacturing powerhouse, Germany relies heavily on exports, with automakers including BMW, Mercedes, Volkswagen, and Audi commanding significant shares of the US market.

Nagel rejected suggestions that Germany was the "sick man of Europe", citing its "strong economic basis" and "strong small and medium sized companies".

"But nevertheless, when you are exposed to an export-oriented model, then you are more exposed in a situation when tariffs are going up and there are so many uncertainties, so many unknowns," he added.

He said Germany could overcome such challenges "over the next couple of years".

The head of Germany's BGA trade federation, Dirk Jandura, warned this week that US products like bourbon and orange juice would cost more for consumers.

Nagel described Germany's recent economic policy change, which allows increased borrowing for defense and infrastructure spending, as an "extraordinary measure" for an "extraordinary time".

"The whole world is facing tectonic changes, which makes the current situation very different from those seen in the past, hence the fiscal change," he said.

The Bundesbank chief said the policy shift would give Germany fiscal space for recovery in the coming years, noting it provided a "stability signal to the market".