Higher German infrastructure spending will support eurozone growth, but not enough to counter the drag from U.S. tariffs, says Alfred Kammer, director of the IMF’s European department.
The IMF recently cut its euro area growth forecast by 0.2 percentage points for both 2025 and 2026, citing trade tensions fueled by U.S. tariffs. Growth is now projected at 0.8% for 2025 and 1.2% for 2026.
“It’s the tariffs and the trade tensions which weigh on the outlook rather than the positive effects on the fiscal side,” Kammer said at the IMF-World Bank Spring Meetings. Emerging euro area economies are expected to suffer even steeper downgrades.
Germany’s new 500 billion euro infrastructure and climate fund, enabled by loosening debt rules, will help growth but won't fully offset trade-related damage. Economists have called the fund a potential "game changer" for Germany’s sluggish economy.
However, optimism is tempered by fears that U.S. tariffs will further slow global trade and economic activity. While ECB policymakers noted tariffs could help lower inflation, they also warned of increased uncertainty.
Kammer advised the ECB to cut rates just once more this year — a 25-basis-point move — following seven cuts since June 2024. Afterward, he said, rates should be held steady unless major shocks occur.
Market pricing currently suggests two more ECB rate cuts by year-end.