ECB should cut in September and take a hard look at the US — Rehn

The European Central Bank should cut interest rates at its September policy meeting, to steer against an economic slowdown that has become more worrying over the course of the summer, one of the bank’s top policymakers said in an interview.
Bank of Finland chief Olli Rehn told POLITICO that the economy risks being further afflicted later this year if the U.S. elections — as seems likely — result in a more vigorously protectionist trade policy next year.
“Recent indications of negative growth risks in the euro area have reinforced the case for a rate cut at the next ECB monetary policy meeting in September, provided that disinflation indeed is on track,” Rehn said.
The ECB’s Governing Council is widely expected to cut the key deposit rate by 25 basis points to 3.5 percent when it meets on Sept. 12, and financial markets are also betting on two more cuts by the end of this year. But policymakers have studiously avoided giving that much guidance, stressing the need for solid proof that inflation is beaten. Preliminary figures for August, due on Friday, should provide welcome evidence of that, judging by numbers published Thursday in Germany and Spain.
While Rehn stuck to this line of so-called “data-dependency,” he stressed that geopolitical tensions and other political uncertainties will also be highly influential. “I didn’t take any stance in favor of a slow or fast pace of rate cuts, but we have to take into account the geopolitical tensions and other political uncertainties in Europe and in the United States.”
The geopolitical risks facing Europe’s economy are many, with two wars in its backyard. Russia’s war in Ukraine has devastated once-active trade between Finland and its former imperial master, jolting it into abandoning the neutrality forced on it after World War II. But it’s a conflict of a different kind that Rehn chose to elaborate on most, namely the trade war in the making between the U.S. and China.
Specifically, the former EU Commissioner for Economic and Monetary Affairs fretted about the pending U.S. elections, where both Vice President Kamala Harris and former President Donald Trump — with differing emphasis — are showing signs of adopting more protectionist trade policies after November.
“It’s important that we in Europe analyze carefully both consequences of a victory of either the Harris camp or Trump camp as well as the composition of Congress,” he said. While it is “likely that economic fragmentation of the world will continue in the case of election of either candidate,” Trump also “seems to be in favor of strong measures which would also concern its allies in Europe,” Rehn observed. 
Trump has indicated he would not only impose additional tariffs on imports from the EU, but also stop funding the defense of Ukraine, leaving Europe to take care of its own security after the biggest land grab in 80 years. Harris, for her part, hasn’t objected to a string of tariff increases on Chinese goods in the last three years.
Whoever wins, Rehn said, Europe needs to be aware and prepared for the consequences, urging the European Commission to take “Europe’s industrial competitiveness as the foundation of its work.” 
The ECB has traditionally frowned upon any protective trade measures, but more recently acknowledged the need for a “carefully calibrated” policy response to defend a level playing field, “given the potentially significant effects on output, inflation and labor markets” if new U.S. tariffs divert a fresh flood of Chinese imports to Europe. Former ECB President Mario Draghi also warned that protective measures may be necessary to safeguard Europe’s long-term competitiveness.
“Europe may face an era of near-shoring, friend-shoring and I would even call it secure-shoring of supply chains, together with diversification of trade,” Rehn said. “In my view, this will not lead to a more protectionist but hopefully to a more competitive and resilient Europe.”
The new emphasis on the security of supply chains is not limited to the EU. U.S. Treasury Secretary Janet Yellen and the new Labour government in the U.K. have both talked up the notion of “securonomics.” But Rehn insisted that the era of free trade is not over. “I think for Europe, it’s important that we maintain our commitment to free and fair trade, and in parallel, we use our instruments in technology and research development as well as meaningful industrial policy to support European industrial competitiveness.”
Embracing a discipline that threatens to embed higher costs in the economy would have consequences for the ECB. The EU has already imposed import duties on Chinese electric vehicles, to neutralize their cost advantage over locally produced ones, and more actions of that kind could mean higher inflation, Rehn said.
Other things being equal, this would force the ECB to keep interest rates higher than it usually would, although trade wars typically generate unforeseen consequences that can have deflationary effects too.
But in this brave new world, the ECB shouldn’t rush to change the way it works, Rehn said, for instance, by changing its inflation target or by abandoning tools it has used in the past.
He pushed back strongly against a Reuters report from last month suggesting that at least half a dozen of his Governing Council colleagues want to make it harder for the bank ever to use large-scale asset purchases again.
“There is plenty of uncertainty around and history has taught us that every economic crisis is different,” Rehn said. “I therefore think it is unnecessary and indeed unwise to limit the ECB’s toolbox in any way.”