Increased infrastructure investment in Germany is poised to stimulate economic growth across Europe in the upcoming years, yet this positive effect may fall short of compensating for the adverse impact of U.S. tariffs, according to Alfred Kammer, director of the International Monetary Fund’s European department.
Last week, the IMF revised its growth projections for the eurozone downward, subsequently adjusting expectations for the U.S., U.K., and numerous Asian economies, attributing much of this to the unpredictable tariff strategy implemented by President Donald Trump.
The organization has lowered its growth estimates for the euro area for the next two years by 0.2 percentage points, now forecasting a growth rate of 0.8% for 2025 and 1.2% for 2026.
“The influence of tariffs and ongoing trade disputes weighs more heavily on the outlook than the fiscal enhancements,” Kammer stated in an interview with Finance Newso’s Carolin Roth during the recent IMF-World Bank Spring Meetings.
“We observe a considerable downgrade for advanced economies in Europe, with emerging euro area nations facing an even steeper decline over the same two-year span,” he added.
Kammer indicated that while the detrimental effects of tariffs will continue to loom, Germany’s newly passed infrastructure spending initiative is expected to mitigate some of these challenges, fostering growth within the euro area for the designated period.
The recent exemptions from Germany’s long-standing debt regulations have facilitated increased defense expenditure and the establishment of a significant €500 billion ($548 billion) fund dedicated to infrastructure and climate initiatives. Economists have characterized this maneuver as a potential transformative shift for Germany’s tepid economy, the largest in the eurozone.
Despite some positive developments, the prevalence of U.S. tariffs has injected an element of uncertainty, with expectations that they will suppress overall global growth and trade dynamics.
During discussions last week, several European Central Bank policymakers conveyed to Finance Newso that while the trajectory of inflation appeared encouraging—potentially benefiting from tariffs’ ability to further reduce inflation—the broader economic outlook has become significantly less stable.
Kammer advised that the ECB should implement one additional interest rate cut of 25 basis points this year, even in light of prevailing growth risks.
So far, the ECB has enacted seven reductions, each by a quarter percentage point, beginning in June 2024. The most recent reduction in April brought the deposit facility rate to 2.25%.
“We have a very straightforward recommendation for the ECB. The disinflation efforts thus far have been highly effective, and monetary policy has achieved significant success… we anticipate that the 2% inflation target will be sustainably met in the latter half of 2025,” Kammer relayed to Finance Newso.
“Our recommendation calls for one more cut of 25 basis points in the summer, after which we advise the ECB to maintain the 2% policy rate unless unexpected shocks arise that necessitate adjustments to monetary policy,” he noted.
Market indicators on Monday signaled expectations for two additional quarter-point reductions later this year.
