*By Chr. Christodoulou-Volos
As the European Central Bank (ECB) maintains its main interest rate at 2%, strategic pause reveals more than a conventional monetary policy manual - it reveals how deeply the global geopolitical, and in particular US trade policy, now shape its economic prospects. While traditional indicators, such as inflation trends and GDP growth, remain in the center of interest rates, the current climate reflects a broader interdependence: trade negotiations, especially those with the US, emerge as central decisive agents of the EU.
This involvement between commercial diplomacy and monetary policy raises complex questions. The ECB is now in a phase of "careful waiting", marking flexibility and recognizing existing uncertainty. While the recent decision to maintain interest rates steadily comes after eight reductions in the last year, which was mainly aimed at reducing inflation and supporting fragile growth, the institution remains between competitive pressures: the risk of rejuvenating inflation from potential new duties and financial duties.
A pause that reflects prudence, not paralysis
The current stance of the ECB cannot be perceived as indecision. On the contrary, it reflects the realistic attitude of a central bank moving between emerging inflationary pressures and the stagnation of economic growth. While inflation has fallen from the high rates of 2022, it remains above 2% in some Member States. As a result, the makers are cautious about triumphing.
Future reductions remain on the table, though carefully. Any further relaxation is likely to be moderate - somewhere between 25 to 50 base points - and depends not only on the hypotonic inflation but also on the financial situation of the eurozone. More indicative is that an increase in interest rates is considered only under one particularly unfavorable scenario: a collapse of trade talks between the US and the EU that will lead to "eye -to -eye" duties that will increase costs throughout Europe and possibly boost inflation.
The geopolitical coating
What is striking is how trade negotiations are now clearly affecting monetary expectations. The ECB does not work in the vacuum. The possible reappearance of US protectionism, either through re -elected officials who support higher duties or through changes to strategic trade alliances. It forces European policy -making managers to model economic results far beyond the EU borders.
If duties range between 15-20%, as some provisions indicate, the consequences for the eurozone could be significant. The highest cost of raw materials, the transatlantic supply chains and retaliation from Brussels could have an impact on areas such as steel, aluminum, automaker and pharmaceutical industry. Such developments could both increase inflation (through production costs) and suppress it (by limiting demand), underlining the unpredictable effects of commercial friction.
However, despite these dangers, a more moderate effect seems more likely. Observers predict a compromise similar to the US-Japan model, where duties stabilize about 15% and incorporate pre-existing tariffs. If this happens, immediate shock to inflation will be limited, allowing the ECB to extend the current maintenance of interest rates and avoid preventive tightening.
Sectoral
Of particular concern is the unequal distribution of tariff impacts between industries. Branches such as the automotive industry, semiconductors and medicinal products are at the forefront of any future trade conflict. European manufacturers that are largely dependent on cross -border inflows could face both logistical and financial pressure. The chain implications will not only disturb the supply chains, but will also challenge the ECB's forecasts for inflation, which are currently favorable.
In addition, the United States is pushing Europe not only for tariff concessions but also for investment commitments, reflecting a recent agreement with Japan, which has pledged $ 550 billion to US -based funds. Such expectations add yet another layer of complexity, forcing European companies and policy makers to balance fiscal priorities, industrial policy and commercial diplomacy - which depend on monetary stability.
Monetary policy in a post-ado-world world
The ECB's careful stance also reflects a changing global monetary environment. Unlike the era of zero or negative interest rates that has set much of the past decade, today's basic level is structurally higher. The ECB is not prepared to return to extremely loose policies unless it is absolutely necessary. Even the EU moderate countries agree that interest rates, if that happens, will be mild, targeted and deliberate.
In this context, monetary policy is no longer just about inflation targeting. It also concerns the management of expectations, maintaining institutional credibility and avoiding the impression that it is reacting to political instability. As a result, the ECB performs a very delicate act of balancing: it maintains inflation in orbit, supports growth and does not react too much to external disorders that may ultimately be parody or even politically guided.
Conclusion
The current cessation of the ECB's interest rates is not just a technical monetary decision, it is a reflection of the wider realities of a changing world. As trade relations between the US and the EU are evolving and as sectoral tensions increase in the midst of geopolitical uncertainty, the ECB is forced to weigh external developments carefully and internal data.
What emerges is a monetary policy that is much more global, much more political and much more limited than in previous decades. While the targets for inflation and financial data remain the basic variables, are increasingly shaped by decisions taken in Washington, Beijing and other world capitals. In such an environment, the ECB's flexibility may prove its largest possible point, but only if it remains alert against the growing grid of forces now affecting financial control.
*Associate Professor of Economics at the University of Neapolis Paphos
