ECB economists found foreign tariffs reduce euro zone growth and inflation, with US trade barriers creating conditions similar to an adverse demand shock. Their analysis reveals demand-reducing effects outweigh any inflation-boosting supply effects.

When US tariffs cut euro exports by 1%, consumer prices drop 0.1% after 1.5 years. Industrial production initially declines then stabilizes. Downstream sectors producing final goods see peak impact 1-2 years later, with output falling 0.3% on average.

Monetary policy can counter these effects, as sectors most affected by tariffs respond strongest to interest rate changes. This relationship holds for 60% of studied sectors representing half of euro area industrial output, confirming monetary tools remain effective against tariff-induced disinflation.