ECB says Trump budget plans could fuel market tensions

Donald Trump’s spending proposals run the risk of exaggerating the US government’s budget deficit and causing market anxiety, the vice president of the European Central Bank warned on Monday.

At a banking conference in Frankfurt, Luis de Guindos stated that the United States already has a public debt ratio that is about 100% of GDP and a budget deficit that is nearly 7%.

“The elected president (Trump) has promised to reduce taxes and perhaps not to cut down on public spending,” de Guindos said. 

According to de Guindos, the strategy might “create concerns in markets” and cause the deficit to increase.
Trump still hasn’t announced his choice for Treasury Secretary since clinching the presidency earlier this month.

However, the president-elect has appointed businessman Vivek Ramaswamy and the richest man in the world, Elon Musk, to head a brand-new department of government efficiency.

Musk has pledged to take $2 trillion (1.9 trillion euros) out of the government budget, while the incoming administration asked the two to reduce “wasteful expenditures” and red tape.

Alongside Trump’s spending plans, officials in Europe are worried that the incoming president’s pledge to increase import duties will hinder commerce and negatively impact the economy.

“The growth outlook is clouded by uncertainty about economic policies and the geopolitical landscape, both in the euro area and globally,” de Guindos said.

“Trade tensions could rise further,” with resulting risks for economic activity, de Guindos noted.

This context compounded “structural issues of low productivity and weak potential euro area growth”, he added.

As inflation in the eurozone has eased back towards the ECB’s two-percent target, the central bank has begun lowering interest rates. 

At its last meeting, policymakers settled on a quarter-point cut, which put the bank’s benchmark deposit rate at 3.25 percent.

While inflation had slowed, “economic activity has been weaker than expected”, de Guindos said.

Compared with a year ago, “the balance of macro risks has shifted from concerns about high inflation to fears over economic growth”, he said.

Weak growth prospects would strengthen the case for the ECB to continue cutting rates. The bank holds its next rate-setting meeting on December 12.