High German infrastructure spending will drive European economic growth over the coming years, but it will not be enough to outweigh the expected drag from US tariffs, according to Alfred Kammer, director of the International Monetary Fund’s European division.
The IMF cut growth outlook for the Euro region last week, and downgraded the US, UK and many Asian countries due to President Donald Trump’s volatile tariff policies.
The agency reduced its Euro area growth forecast for the next two years by 0.2 percentage points, reducing it to 0.8% in 2025 and 1.2% in 2026.
“It’s tariffs and trade tensions that focus on the outlook rather than positive financial effects,” Kammer told CNBC’s Carolin Roth in an interview last week at IMF-World Bank Spring Meetings.
“What we see is that we have meaningful downgrades to Europe’s developed economy…and over the last two years, countries in the emerging euro region have doubled.”
The negative impact of tariffs is slightly offset by Germany’s recent infrastructure spending bill.
The exemption passed to Germany’s long-standing debt regulations lifted the rise in defence spending and allowed the creation of a 500 billion euro ($548 billion) infrastructure and climate fund. The move has been described by economists as a potential “game changer” for the biggest economic downturn in the eurozone.
But optimism is shaking down by US tariffs, which are widely expected to undermine global growth and trade flows.
Several European Central Bank policymakers told CNBC last week that inflation paths appeared to be positive, but tariffs could potentially lower inflation to the bloc – their wider outlook is now significantly uncertain.
IMF Kammer said the ECB should cut interest rates by one quarter point this year despite growth risks.
The ECB has so far reduced its rate by seven times in a quarter-point increment since June 2024. The latest move in April saw the key rate, which is a deposit facility, reach 2.25%.
“The ECB has very clear recommendations. What we’ve seen so far has been a huge success in its disinfection efforts and we expect to be able to achieve our 2% inflation target in the second half of 2025, as monetary policy is working,” Kammer told CNBC.
“Our recommendation is that there is another 25 base point cut in the summer. The ECB should then retain a policy rate of 2% unless there is a major shock and there is a need to readjust monetary policy,” he added.
The overnight index swap price on Monday pointed to market expectations for two more quarter cuts this year.
