The European Central Bank (ECB) has projected that the Eurozone could face a substantial economic impact totaling €158 billion by 2027 if trade agreements are not reached between the European Union (EU) and the United States (US).

On Thursday, the ECB lowered interest rates and released its economic forecasts for the Eurozone covering the years 2025, 2026, and 2027, under three potential scenarios based on the evolution of trade relations between the EU and the US.

In the worst-case scenario, where no commercial agreement is established between Washington and Brussels, the growth of the Eurozone is expected to be severely hindered.

The ECB assumes that US tariffs will revert to the levels announced on April 2nd during a 'Freedom Day' declared by former President Donald Trump.

The ECB also anticipates that the EU would retaliate by imposing new tariffs on US imports.

In this scenario, US tariffs on China would remain at 125%, increasing to 145% when factoring in penalties related to fentanyl trafficking, maintaining pre-agreement levels reached during prior trade negotiations.

The ECB calculates that if these conditions hold, the effective US tariff on goods and services would rise to 28%.

Under these assumptions, the ECB's forecasts suggest that GDP growth in the Eurozone would decline to 0.5% in 2025, 0.7% in 2026, and 1.1% in 2027. Accumulatively, this scenario would reduce the GDP of the Euro area by one percentage point—approximately €158 billion—compared to a base scenario projected by the ECB.

Despite forecasts of a sharp increase in tariffs, the central bank indicates that a high-intensity tariff war would not have a considerable effect on inflation.

The ECB's projections estimate inflation rates of 2% in 2025, 1.5% in 2026, and 1.8% in 2027.

In the base scenario, regardless of whether the worst fears materialize, the ECB projects inflation in the Eurozone to remain steady around 2% for the current fiscal year and decrease to 1.6% for the following year, reflecting a downward revision of three-tenths compared to forecasts made in March.

The ECB expects economic expansion of the Eurozone to be at 0.9% for the current year, with subsequent growth rates of 1.1% in 2026 and 1.3% in 2027, largely consistent with three-month-old estimates.

The institution expects that the trade policy of the Trump administration will moderate exports from the Eurozone as well as GDP growth.

For these calculations, the ECB presumes that the US tariffs imposed on the EU will remain at their current level of 10%, following a delay in the implementation of new tariffs now scheduled for July 9th.

These tariffs, combined with expected lower growth resulting from tariffs on third countries, are anticipated to hinder Eurozone exports during the projection horizon.

The ECB notes that the uncertainties surrounding trade policy are expected to dampen exports, particularly due to the projected negative impact on capital goods investment abroad.

The institution estimates that the impact on the Eurozone's GDP between 2025 and 2027 would be around 0.7 percentage points, which is three-tenths lower than the initial severe scenario.

In a more moderate scenario, the ECB posits that by the third quarter of 2025, the EU and US could reach an agreement to eliminate bilateral tariffs.

In this case, the White House would further reduce tariffs on Chinese imports while Beijing would eliminate all retaliatory tariffs imposed on the US. Tariffs between the US and the rest of the world would remain consistent with the base scenario, leading to an effective US tariff rate of 13% on goods and services.

Under this assumption, the ECB projects that trade policy uncertainty would decrease after the third quarter of 2025, returning to levels seen before 2018. Should these conditions materialize, Eurozone growth could improve by 0.3 to 0.4 percentage points above the base scenario forecast, leading to an expansion of 1.2% in 2025, 1.5% in 2026, and 1.4% in 2027. Inflation projections would also be slightly higher over the next two years under this scenario.

The ECB's decision to publish various economic analyses has been described as unusual, reflecting ongoing concerns about growth and inflation.

Analysts believe this uncertainty explains the ECB's cautious approach regarding future guidance and its preference for a meeting-by-meeting basis for policy decisions.

As a result, many analysts consider it unlikely that the central bank will lower interest rates in its upcoming meeting on July 24th.

Some experts suggest that the central bank may indeed contemplate reducing interest rates to 1.5% by the end of the year, with the current deposit facility rate set at 2%.

There are indications that the ECB would mobilize to support the economy more aggressively should the threat of a significant tariff increase on EU products, as suggested by Trump, come to fruition.

However, legal challenges regarding existing tariffs, ongoing trade discussions between the EU and US, and potential impacts on American consumers may render such scenarios improbable.