Europe’s top financial watchdog has warned that President Trump’s war with Iran and his tariff policies are pushing the global economy toward a major financial crisis.
The European Central Bank, in a sweeping assessment of global financial stability, said Trump’s escalating conflict with Iran and his volatile trade policies are stress-testing the resilience of the world financial system at a moment when government debt is ballooning, and asset prices are already overstretched.
ECB vice-president Luis de Guindos, delivering a damning verdict before leaving his post at the end of May, said the war in Iran, codenamed Operation Epic Fury, was putting the financial system “to the test.”
“While the full impact of the war is unclear at this stage, the repercussions for the global economy and financial stability are becoming graver the longer it lasts,” he said.
The bank also warned that Trump’s retreat from multilateral cooperation was compounding the damage. “Uncertainty surrounding the commitment of the U.S. administration to multilateral cooperation is also increasing the risk that policy shocks will disrupt the international order,” it said.
“Tariff announcements, pauses, and reversals have become a structural feature of the global environment.”
In April last year, Trump shattered traditional alliances by imposing sweeping tariffs on dozens of nations, but the Supreme Court later struck down the move, saying he had overstepped his authority.
The ECB flagged a particular concern about the migration of lending into opaque areas of finance such as private credit, and warned that rising borrowing costs could leave more debtors unable to service their debts.
“A more persistent disruption of energy supply and notably weaker growth could trigger a reassessment of sovereign risk by market participants,” the ECB said. “The growing presence of more price-sensitive investors like hedge funds in euro area sovereign bond markets could amplify any abrupt repricing of sovereign risk.”
“The potential for these highly interconnected risks to materialize simultaneously, possibly amplifying each other further, increases the risks to financial stability,” it continued.
Markets, the bank added, appeared too optimistic. “There is a fair risk that financial market sentiment could deteriorate, as downside risks related to geopolitical, fiscal and macro-financial developments appear underestimated.”
The White House has been contacted for comment on the ECB findings.
