Higher infrastructure spending in Germany is expected to support economic growth across the euro zone in the coming years – but it will not be enough to counteract the negative impact of U.S. tariffs, according to Alfred Kammer, director of the European department at the International Monetary Fund (IMF).
Last week, the IMF revised its growth forecast for the euro area downward, alongside cuts for the U.S., U.K., and several Asian economies, citing the disruptive effects of President Donald Trump’s volatile tariff policies.
Euro Area Growth Outlook Downgraded
The IMF reduced its euro area growth projections by 0.2 percentage points for each of the next two years, forecasting 0.8 % growth in 2025 and 1.2 % in 2026.
“It’s the tariffs and the trade tensions which weigh on the outlook rather than the positive effects on the fiscal side,” Kammer told CNBC’s Carolin Roth during the IMF-World Bank Spring Meetings.
He noted that advanced economies in Europe are facing a significant downgrade, while emerging euro area countries are experiencing an even steeper downward revision over the two-year period.
Germany’s Spending Bill Offers Limited Relief
Germany’s recent exemption from debt limits has unlocked a 500 billion euro ($548 billion) fund for infrastructure and climate projects, as well as higher defense spending. Economists have described this fiscal move as a potential “game changer” for the sluggish German economy, the largest in the euro zone.
However, Kammer emphasized that while Germany’s investment initiatives will moderately support euro area growth over the next two years, they will not fully offset the broader drag created by the tariffs.
ECB’s Monetary Policy Strategy
Amid the challenging economic backdrop, several European Central Bank (ECB) officials have voiced concerns that the tariffs may further complicate the growth outlook, despite their short-term downward pressure on inflation.
Kammer stated that the ECB should only implement one more 25-basis-point rate cut this year. He emphasized that the disinflationary progress achieved so far must be preserved.
“We have a very clear recommendation for the ECB. The monetary policy effort has been successful. We expect to sustainably reach the 2 % inflation target in the second half of 2025,” Kammer said.
The ECB has already delivered seven consecutive quarter-point cuts since June 2024, bringing its key deposit rate to 2.25 % as of April.
Market Expectations Diverge
Despite the IMF’s advice for only one additional rate cut, overnight index swap pricing on Monday indicated that markets anticipate two more quarter-point cuts before the end of the year.
As uncertainties around tariffs and global trade persist, both fiscal and monetary policymakers are urged to tread carefully in navigating the fragile recovery path ahead.
