Latvia central bank chief says tariff chaos gives Europe chance to become superpower

The trade war unleashed by the United States has handed Europe a rare opening to finish the integration projects it has postponed for more than a decade, according to one of the European Central Bank's most outspoken policymakers. Mārtiņš Kazāks, governor of the Bank of Latvia and a member of the ECB Governing Council, told CNBC on the sidelines of the IMF-World Bank spring meetings in Washington that the current turmoil should be treated as a catalyst rather than a threat.

"With all this uncertainty and vulnerability, this is also the time of opportunities for Europe," Kazāks said. "It's a time for Europe to grasp all the aspects of being an economic superpower and becoming a really fully-fledged political and geopolitical superpower, and this requires doing all the decisions that in the past, were not carried out fully," after the global financial crisis. He named three specific gaps: a capital markets union, a fiscal union and a single market in services.

The integration agenda left unfinished

Kazāks's list is familiar to anyone who has tracked European policy since 2008. The capital markets union was launched in 2015 to diversify funding away from banks, but progress has stalled on securitisation frameworks, insolvency harmonisation and a true single rulebook for supervision. A fiscal union, meaning a central budget with borrowing capacity and transfer mechanisms, has been debated since the euro crisis but remains blocked by northern member states unwilling to mutualise debt. The single market in services, meanwhile, is still riddled with national barriers in professional qualifications, digital services and regulated professions, depressing cross-border productivity.

What distinguishes Kazāks's intervention is the explicit link to geopolitics. He argues that economic depth is a prerequisite for strategic autonomy. Without deep capital markets, European firms remain dependent on US dollar funding. Without fiscal capacity, the union cannot finance common defence or industrial policy at scale. Without a services single market, the digital and green transitions lose their most dynamic sector. The tariff shock, in his reading, raises the cost of inaction above the political pain of reform.

Monetary policy in the dark

The ECB cut its deposit facility rate by 25 basis points at its April meeting, but Kazāks was clear that the governing council is flying blind. "Decisions would be taken from meeting-to-meeting because of this very poor visibility," he said. The phrase signals that the council has abandoned any pretense of a pre-committed path. Inflation is moving toward target, but the transmission of tariffs into import prices, exchange rates and wage negotiations is impossible to model with confidence.

This marks a shift from the forward guidance framework the ECB rebuilt after the pandemic. In 2023 and 2024, the council signalled its reaction function clearly: data dependence meant reacting to realised inflation and wage data. Now the data itself is contaminated by policy noise. A US tariff announcement can move the euro-dollar rate by two cents in a day, rewriting the import price outlook overnight. The council's next meeting is 5 June; by then the 90-day pause on reciprocal tariffs announced by President Trump in early April will be halfway through, and the EU's retaliatory list will be poised to activate.

Financial markets holding, for now

Kazāks offered a surprisingly calm assessment of market functioning. "So far it seems to be relatively orderly ... but if one looks at the spillovers to Europe, the financial markets are working more or less fine, we haven't seen spreads exploding or anything like that," he said. Sovereign spreads between Italian and German ten-year bonds have widened modestly since early April but remain below 150 basis points, well inside the levels seen during the 2022 fragmentation scare. Corporate bond issuance has continued, and equity volatility indices have not spiked.

The caveat was immediate. "But in terms, however, of the macro scenarios, this uncertainty is extremely elevated in the sense that, given the possible outcomes, the multiple scenarios and their probabilities are very similar with the baseline [tariff] scenario," he added. In plain language: the range of plausible outcomes, from a negotiated settlement to a full-blown trade war, is so wide that any single forecast is almost meaningless. The ECB's own staff projections, published in March, assumed a baseline of limited tariff escalation. That assumption now looks fragile.

IMF downgrades and the recession warning

The IMF's World Economic Outlook, released on 22 April, cut its 2025 global growth forecast to 2.8%, down half a percentage point from January. The United States was marked down to 1.8%, a 0.9 percentage point reduction. For the euro area, the fund sees 0.8% growth this year, rising to 1.2% in 2026. Kazāks was blunt: those numbers are "on the optimistic side," and the risk of a global recession is "not trivial."

His scepticism is grounded in the mechanics of the IMF's modelling. The fund assumes the 90-day tariff pause holds and that financial conditions do not tighten sharply. It also assumes monetary policy easing continues as projected. If any of those assumptions break, if the US proceeds with universal tariffs in July, if European banks tighten credit standards pre-emptively, or if the ECB pauses rate cuts because inflation proves sticky, the 0.8% figure evaporates. The IMF's own downside scenario puts euro area growth near zero.

Political will versus institutional inertia

Kazāks's call for "political will, political guts" lands on a fragmented European landscape. The European Council's strategic agenda for 2024-2029, adopted last June, mentions capital markets union and a savings and investments union but stops short of fiscal union. The European Commission's Competitiveness Compass, presented in January, proposes a single market for services but relies on voluntary coordination. The European Parliament's new term has yet to produce a coherent position on own resources or treaty change.

National capitals are the real constraint. Germany's debt brake remains constitutionally entrenched; France's deficit procedure limits fiscal space; the Netherlands and Austria oppose any mutualisation that resembles a transfer union. The tariff shock has not yet produced a Franco-German initiative comparable to the 2020 recovery fund. Until it does, Kazāks's superpower language remains aspirational.

The July deadline and what comes after

The 90-day pause on US reciprocal tariffs expires in early July. The EU's retaliatory countermeasures, approved in April, are calibrated to hit politically sensitive US exports, bourbon, motorcycles, agricultural products, and will trigger automatically unless the Council decides otherwise. The European Commission is simultaneously negotiating a critical minerals agreement and a broader trade framework with Washington, but progress is slow.