The European Central Bank is widely expected to kick off its 2025 meetings with another interest rate cut on Thursday, as traders aim to gauge how far the central bank is willing to diverge from a stalled Federal Reserve.
Money markets on Wednesday were pricing in 35 basis points worth of rate cuts for the January meeting, indicating the euro zone’s central bank will cut by at least a quarter-percentage point. That would take the deposit facility, its key rate, to 2.75% marking its fifth trim since it began easing monetary policy in June 2024.
Market pricing then suggests follow-up cuts at the ECB’s March and June meetings, with a fourth and final reduction bringing the deposit facility to 2% by the end of the year.
Expectations for a swift pace of easing this year have solidified, even after headline euro area inflation increased for a third straight month in December. A slight uptick in the rate of price rises was expected due to effects from the energy market, while business activity indicators for the bloc show continued weakness in manufacturing and tepid consumer confidence. Economists polled by Reuters are expecting fourth-quarter growth figures to show GDP expanding just 0.1%, down from 0.4% in the third quarter.
While this week’s ECB rate move is near guaranteed, several key questions remain that its president, Christine Lagarde, will likely be quizzed on during her post-announcement press conference — and many of those relate to the U.S. and its new leader.
One concern is whether the ECB is comfortable with the increasing distance between its own monetary policy path and that of the world’s biggest central bank, the Federal Reserve, which is set to hold rates on Wednesday. Markets are pricing in just two quarter-point rate cuts from the Fed this year, as projected by Fed members in December.
Lagarde acknowledged that divergence in an interview at the World Economic Forum last week, telling CNBC that it was the result of different economic environments. While the euro area has fallen into stagnation, the U.S. economy has continued to grow at a solid clip in the higher interest rate environment, and many investors are optimistic on the 2025 outlook despite Trump uncertainty.
“We have to look at a differentiation here through the lens of growth and the spare capacity that is building up in the U.S. We have an economy that’s performing strongly and rapidly … We can’t say the same thing when we look at the euro zone,” Sandra Horsfield, economist at Investec, told CNBC’s “Squawk Box Europe” on Wednesday.
“That divergence does mean that inflationary pressures are more likely to be sustained for some time in the U.S.,” she said, leading her to forecast one more Fed cut followed by a pause, and a greater scope for cuts in Europe.
Currency drag
The ECB has repeatedly stressed that it is willing to move ahead of the Fed and that it is focusing on its domestic picture of inflation and growth. However, a major impact of policy differentials is in foreign exchange, with higher rates tending to boost a domestic currency.
This reinforces expectations that the euro could be pulled back to parity with the greenback and suggests even further strength for an already-mighty U.S. dollar in 2025. That matters for the ECB, because a weaker currency increases the cost of importing goods, even if the central bank’s bigger concerns right now relate to domestically-generated services and wage inflation.
Lagarde downplayed the impact of this effect, telling CNBC the exchange rate “will be of interest, and … may have consequences.”
However, she also said she was not concerned about the import of inflation from the U.S. to Europe and continues to expect price rises to cool toward target. The ECB president added that bullishness around the U.S. economy was a positive “because growth in the U.S. has always been a favorable factor for the rest of the world.”
Trade question
While a weaker euro could be a factor that spurs the ECB to cut rates with slightly more caution, there is also the possibility that Trump sparks a global or even Europe-focused trade war which further slows euro zone growth and creates the need for even more cuts.
The U.S. president has not re-proposed his idea of sweeping, universal tariffs on imports to the U.S., and is currently zeroed in on duties targeting China, Mexico and Canada. However, in a speech at the World Economic Forum, he accused the European Union of treating the U.S. “very unfairly” on trade, pledging: “We’re going to do something about it.”
Trade wars could disrupt global supply chains and stoke inflation, warranting higher interest rates at the ECB, said George Lagarias, chief economist at Forvis Mazars.
“Inflation and rate risks are definitely on the upside” for the euro zone, he told CNBC by email.
“EU company selling price expectations have flattened and show an upward tendency. This is a leading indicator to the ECB’s own projections … and the Fed will likely be on a more hawkish path, so significant divergence from the ECB could risk flight of capital towards the Dollar,” he added.
On the possibility that the ECB could enact a bigger half-point rate cut, he said: “If we do see a sharp rate cut, it would mean that the board seeks to protect growth in the core of the euro zone, and make sure that political uncertainty in France and Germany or a loose fiscal policy in Italy do not cause a precipitous rise in borrowing rates.”
Bas van Geffen, senior macro strategist at RaboResearch, also said he was “less optimistic when it comes to the inflation outlook than the ECB is, or markets appear to be,” forecasting a fall in rates to 2.25% this year.
“When the ECB incorporates Trump tariffs in their baseline scenario, we would expect higher inflation forecasts on their part too,” he told CNBC.
THE SPRAWLING al-Hol camp in north-eastern Syria is part of a network of prisons holding tens of thousands of detainees and family members from Islamic State’s jihadist “caliphate”, which was smashed by America and its allies in 2019. Western securocrats have long worried that prisoners might break out and wreak bloody havoc, in Syria and abroad. Such fears have intensified given the turmoil after the fall of Syrian dictator, Bashar al-Assad, in December.
There could scarcely be a worse time for the Trump administration to order, as it did on January 24th, an immediate halt to almost all aid work—at al-Hol and around the world—pending a 90-day review to ensure foreign assistance aligns with America First principles. The only exceptions were aid for Israel and Egypt (mostly military) and “emergency food aid”. Waivers could subsequently be issued on a case by case basis.
America is by far the world’s largest aid donor, spending $68bn in fiscal 2023, the most recent year. The US accounts for about 40% of all humanitarian assistance provided by governments. The announcement of an abrupt cutoff of much of this money hit humanitarian agencies like an earthquake. American-funded projects wobbled and some risked collapse.
The affected work included the distribution of antiretroviral drugs for people infected with HIV under a scheme known as PEPFAR, credited with saving some 26m lives since 2003; medical services for Rohingya refugees in Bangladesh; mine-clearing in South-East Asia; reconstruction of bombed-out energy infrastructure in Ukraine; pro-democracy work in Russia’s near-abroad; and much more.
“Every dollar we spend, every program we fund, and every policy we pursue must be justified with the answer to three simple questions: Does it make America safer? Does it make America stronger? Does it make America more prosperous?” the state department said.
Among the casualties were groups working at al-Hol, home to about 40,000 Islamic State (IS) fighters and their relatives, among them European women who married combatants and bore their children. The Kurdish-dominated Syrian Democratic Forces (SDF), which controls north-eastern Syria, is in charge of security at the camps. But aid workers speak of a free-for-all within. Women loyal to IS hold sway with guns and train a new generation of ideologues. The perimeter is pierced by tunnels, allowing weapons in and inmates out. Killings are commonplace. Children are sold as fighters. “It’s more an IS base than a prison,” says a Western researcher.
Blumont, the American firm that manages al-Hol (and a smaller camp called Roj) under a state department contract, says its teams left the camps when they received the stop-work order, and arranged for other groups to provide “very much reduced basic services”. Some humanitarian groups said they were issuing termination letters for their staff. On January 27th Blumont received a 14-day waiver and said its staff returned the next day.
Amid chaos and an outcry that countless lives were at risk, Marco Rubio, the secretary of state, later widened exemptions to include “life-saving humanitarian assistance”. This includes “medical services, food, shelter, and subsistence assistance, as well as supplies and reasonable administrative costs.” Programs would not be funded if they involved abortion, family-planning, transgender surgeries or other aid deemed not to be life-saving.
Even with this concession, aid groups say confusion abounds. “Does work on clean water count as life-saving aid?” asked an official in one large ngo. Some projects were being closed because of the uncertainty. The status of PEPFAR is unclear.
Waivers apparently still need to be issued case-by-case. Whether the government has the staff to process them quickly is another question. Few of the state department’s political appointees have yet arrived. USAID, the main American development agency, has furloughed hundreds of senior staff and contractors. One spoke of a “sad and apocalyptic” atmosphere.
The state department says the full halt was necessary because “it is impossible to evaluate programs on autopilot”, arguing that those running them have little incentive to give details if the money keeps flowing. It claims to have already saved about $1bn, halting things such as the delivery of condoms to Gaza, sex education globally and clean-energy programmes for women in Fiji. The department offered no details to support its $1bn estimate.
Al-Hol offers just one example of how stopping work suddenly for such dubious reasons is an avoidable act of self-harm. “Without aid, it’s difficult to maintain the security of the camps,” says Ali Rahmoun, a spokesman for the Syrian Democratic Council, the political wing of the SDF. “The jihadists won’t just be a problem for Syria but for the region and even Europe.”
Americans would be in danger, too. Shamsud-Din Jabbar, a 42-year-old US army veteran, rammed his Ford pickup into a crowd in New Orleans on New Year’s Day, killing 14. He was killed by police. In his vehicle they found IS’s black flag. ■
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The German economy shrank by 0.2% quarter-on-quarter in the three months ending in December, according to preliminary data released by Germany’s statistics office Destatis on Thursday.
The figure is adjusted for price, calendar and seasonal variations.
Analysts polled by Reuters had been expecting the gross domestic product (GDP) to decline by 0.1%.
Household and government consumption expenditures increased, but exports were “significantly lower” than in the previous quarter, Destatis said.
“After a year marked by economic and structural challenges, the German economy thus ended 2024 in negative territory,” it added.
Thursday’s figures compare to a 0.1% rise of the country’s GDP in the third quarter of last year. Germany’s economic performance has long been sluggish, with quarterly GDP readings mostly hovering around the flatline in the past two years. The economy has however managed to avoid a technical recession.
On an annual basis, the German economy contracted in both 2023 and 2024, by 0.3% and 0.2% respectively.
Some respite is expected in 2025, with the German government on Wednesday revealing its forecast of 0.3% growth for the year — still a notably downward revision from it’s previous estimate of 1.1% growth.
“The diagnosis is serious,” Robert Habeck, economy and climate minister, said during a press conference Wednesday, according to a CNBC translation.
He added that the German economy has been stagnating for a long time. He pointed to both internal and global political uncertainty as factors leading to the cut to expectations, and added that the outgoing government had been unable to fully implement its growth plans as its term was ending early.
A federal election in Germany is slated for Feb. 23, which is earlier than originally planned due to the break up of the country’s ruling coalition late last year.
Habeck also said that there were structural issues weighing on the German economy, echoing comment made by the Finance Minister Jörg Kukies last week.
“The structural weaknesses of our economy absolutely have to be addressed,” Kukies told CNBC. “It’s really important that we embark on a path of economic growth.”
This is a breaking news story, please check back for updates.
TO GET a sense of what Donald Trump’s first week did to the federal government, talk to people who work in it. “I’ve been with the government for over 10 years, I lived through the first Trump administration, and nothing compares to this,” says one Treasury employee. Some workers are busy scrubbing their personal social media for items that could be interpreted as disloyal. Others are scrubbing up their resumes, anticipating that they will soon be looking for new work. Those who plan to stay expect their jobs to get worse, as colleagues flee or are not replaced. Everyone is “in absolute panic mode”, says another senior civil servant.
As a candidate, Mr Trump promised that he would “shatter the deep state”. Since taking office, it has become more clear what he meant. In a barrage of executive orders, Mr Trump has asserted that he can do just about whatever he likes to the federal government. He has, he claims, “sole and exclusive authority” over the executive branch, to include hiring, firing and all spending decisions. In effect, Mr Trump is claiming he is not merely a president, putting into action laws enacted by the legislature. He is claiming to be something closer to a king, able to withhold or redirect expenditure as he sees fit.
On January 27th Mr Trump revealed quite how far he intends to push. He decreed that all grants and loans that the federal government makes—excepting disbursements for Social Security, Medicare, and some other vaguely defined categories—would be suspended the following day, even though Congress had approved them. This apparent usurpation of Congress’s role under Article I of the constitution was “sweeping and vast” and “really, really illegal”, says Eloise Pasachoff of Georgetown University law school. The memo laid out no legal justification for the freeze and on the evening of January 28th, a federal judge stopped it temporarily. The next day, the administration rescinded its memo; what happens next is unclear. A parallel freeze of all foreign aid created similar chaos.
In the meantime Mr Trump has launched an extralegal power grab almost as ambitious against the federal bureaucracy—the over 2m civil servants who actually implement federal policy. He has directly fired dozens of senior staff, including senior immigration officials, Department of Justice prosecutors and others he and his appointees have identified as being hostile to his goals. These included more than a dozen inspectors general (watchdogs who investigate departmental efficiency and wrongdoing). In the case of the inspectors general, the president is required by law to give 30 days notice and an explicit reason to justify firing. He did neither.
These decisions came on top of a complete hiring freeze across most departments (the military, immigration authorities, as well as jobs related to social security and veterans healthcare are exempt). He also reinstated an unimplemented order from his last term allowing his administration to redesignate any career civil service job as a political job, and thereby remove the usual job protections and sack whomever he wants. He has also pledged to shut down all “diversity, equity and inclusion” jobs, known as “deiA”, in government. To top it off, he banned all work from home.
The aim is transparently to get federal workers who do not like Mr Trump to leave. On January 28th, an email went out from the Office of Personnel Management (opm) offering every single federal employee “deferred resignation”. Essentially, the terms were: agree to leave this financial year and you can work from home until then. The touches—including instructions to reply with the word “RESIGN” by February 6th—implied the influence of Elon Musk, the billionaire head of Mr Trump’s “Department of Government Efficiency”, or “doge”. Since the opm is not actually a corporate hr department, the offer is unlikely to withstand scrutiny. Federal tech employees report that outsiders, many seemingly junior employees of Mr Musk’s companies, have come into offices to take over government it systems and do “code reviews”.
Were Mr Trump to make these changes stick—a questionable prospect—it would amount to “probably the most fundamental alteration of the civil service system since 1883” says Don Moynihan, of the Ford School of Public Policy at the University of Michigan (a verdict many in the White House would love). The president appears to have little interest in the idea that most government officials should be non-partisan specialists whose expertise is deployed to keep the public safe, among other benefits. Under Mr Trump’s plan, decisions about hiring and firing would be made by his political appointees.
According to Max Stier, of the Partnership for Public Service, a charity which works to improve government, Mr Trump is “tearing apart the civil service” so as to recreate “the spoils system” of government that persisted until the end of the 19th century. That was a model whereby new presidents came in and immediately distributed jobs to their pals as a reward for supporting their election campaigns.
Will he succeed? This seems unlikely, says Larry Jacobs, of the University of Minnesota. “Mr Trump’s orders, he says, are “impressively sweeping and breathtaking in their institutional arrogance” but he argues that much of what Mr Trump is trying to do will probably be undone by the courts or Congress. He points out that even after Mr Trump appointed sympathetic new members in his last term, the Supreme Court often overruled him. Congress has ceded much power to the presidency, but controlling the federal purse is a prerogative it is unlikely to yield readily.
Yet it could take years for challenges to work their way through the courts. The damage done in the meantime could be considerable. Employees who find other jobs after being pushed out will not necessarily return just because a court says their dismissal was wrong. Talented new hires will not join. And with government lawyers cowed by fears of firing, all manner of illegality could reign. Mr Stier worries about things like the Internal Revenue Service and the Department of Justice being used to punish Mr Trump’s enemies, without civil service lawyers able to say no.
Even the best-case outcome is not good. In the last Trump administration, hiring freezes caused parts of government to shrink and jam up (see chart). Some of this may have been intended: the issuing of green cards and citizenship applications ground to a halt thanks in part to cuts at the State Department. But queues also lengthened for basic government services like getting passports, or tax refunds.
The “swamp”, as Mr Trump might call it, may feel like a lot of busybodies in Washington dc pushing around bits of paper. It is certainly true that it can often be slow, rule-bound and unaccountable. But a system based more on political loyalty than on merit is one primed for failure. Bureaucrats make sure that foods are not poisonous; that cars do not explode when they crash; and that toxic waste is not dumped into the wilderness. “The federal government is very vulnerable,” says Paul Light, a political scientist at New York University. Mr Trump, he says, risks becoming “the president of ‘I didn’t give a shit and a lot of people got killed.’” Uneasy lies the head that wears a crown. ■