(Bloomberg) -- European Central Bank President Mario Draghi warned European Union leaders that an escalating trade war between the U.S. and the world’s biggest economies may have a larger impact than policy makers and investors currently expect.
Rising tensions could erode confidence to an extent that is difficult to gauge, Draghi told the 27 heads of government from the bloc at a summit in Brussels on Friday. The complexity of intertwined global supply chains could magnify the impact on the world economy, he said, according to a person familiar with the discussion, who asked not to be named as the debate wasn’t public.
Draghi’s latest comments come days after U.S. president Donald Trump threatened to deal what could be a damaging blow to the German economy by imposing a 20 percent tariff on car imports from Europe. The risk prompted the EU to react with a joint statement on Friday, vowing an unwavering response “to all actions of a clear protectionist nature.”
The ECB has repeatedly warned about the threat protectionism poses to growth, but Draghi’s assessment contrasts with a relatively sanguine approach by some financial-market participants. Citigroup special economic adviser Willem Buiter said in an interview with Bloomberg Television on Friday that fears of a trade war are overblown and the economy could be in for a boost within months as those concerns fade.
Europe already faces challenges including populism and divisions between member states in areas such as migration and the deepening of euro-area integration. Draghi told leaders that uncertainty and lower confidence are having a negative, visible impact on private investment already, and urged them to complete institutional overhauls of the currency bloc, including a joint financial backstop for the resolution of ailing banks.
“Make sure that it works and that it works soon,” Draghi said.
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