ECB’s Nagel Warns Economic Fragmentation Risk Is Escalating

(Bloomberg) - European Central Bank Governing Council member Joachim Nagel sees the threat of a further fragmentation of the global economy, which could present central banks with new challenges in the form of higher or more volatile inflation.

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"The first signs of geoeconomic fragmentation are becoming increasingly evident – and unfortunately, we may be on the brink of significant escalation," the German central bank chief said on Monday in Tokyo. "This is a concerning development, and we should all strive to restore cooperation and free trade."

If international tensions should intensify, this could lead to greater inflationary pressures or increased volatility in consumer-price growth and central banks might have to react with higher interest rates, Nagel said. "We can and will do what is necessary to maintain price stability."

The Bundesbank president has repeatedly warned the re-election of Donald Trump augurs a protectionist era and threatens to fragment the global economic order.

The Republican has, among others, pledged to impose 60% tariffs on China and as much as 20% on everyone else, raising fears of full-blown trade wars.

Earlier this month, ECB Vice President Luis de Guindos also cautioned that the global economy faces potentially detrimental shocks because of Trump's return to the White House, with output weaker, price pressures stronger and established trade flows disrupted.

Last week, Nagel argued that the envisaged levies risk derailing the German economy and could cost it 1% of output.

On Monday, Nagel said that "even if we do witness a significant increase in geoeconomic fragmentation leading to greater inflationary pressures, central banks have all of the tools necessary to handle a situation like this."

He warned that for the ECB "a noticeable reduction in global integration would mean that it would have to set interest rates higher to keep inflation at bay."

At same time, he's still optimistic that the fallout on prices won't be that severe.

"While we can be quite sure about the direction of this impact, its magnitude seems minor," he said. "Accordingly, global integration would have to decrease substantially to cause a noticeable rise in inflationary pressures. And, so far, we have not seen this."

Nagel is among the more hawkish members of the ECB Governing Council, which is expected to lower borrowing costs for a fourth time in this easing cycle at its final meeting of the year next month.

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