French ECB Governing Council member Francois Villeroy de Galhau warned today that mounting economic uncertainty from escalating trade tensions is posing risks to financial stability, particularly increasing credit risks for some financial institutions.

While he emphasized the resilience of French banks, he noted that leveraged hedge funds could come under significant liquidity pressure.

Writing in his annual letter to President Macron, Villeroy assured that both Bank of France and ECB are “fully mobilised” to safeguard financial stability and ensure adequate liquidity.

Speaking to journalists, Villeroy said the recent US announcement of sweeping “reciprocal” tariffs only adds to the case for further monetary easing. “We still have room to cut rates,” he stated.

Dutch ECB Governing Council member Klaas Knot warned today that the escalating trade war constitutes a “negative supply shock” and should be considered “stagflationary” in nature.

Knot also cautioned that as time progresses, the economic impact is more likely to “more inflationary rather than deflationary”.

ECB’s priority, he said, is to monitor how and when these tariffs start to meaningfully affect economic activity and corporate decision-making.
However, next week’s policy meeting would be too soon to revise projections.

Knot also noted that despite the growing market stress, financial market functioning has so far been “preserved”. He credited the hedge fund sector’s proactive deleveraging for this resilience, saying they were well-prepared for the turbulence and capable of meeting margin calls—unlike in past market episodes.

ECB Vice-President Luis de Guindos struck a cautiously hopeful tone on Europe’s ability to manage rising global trade tensions, suggesting that markets tend to overreact in the short term but eventually recalibrate.

Speaking at an event in Spain, de Guindos noted that despite the sharp volatility triggered by the US tariff escalation, market liquidity remains intact.

Despite the pressure, de Guindos said he was “relatively optimistic” about Europe’s ability to weather the storm, calling the situation a “wake-up call” to pursue greater economic and military autonomy.

De Guindos stressed the importance of negotiating with the U.S. “with a cool head”.

Separately, Greek ECB Governing Council member Yannis Stournaras offered a more cautious view, warning that a renewed surge in inflation or rising inflation expectations could disrupt ECB’s path to monetary policy normalization.

“Tariffs imposed on one country’s imports would affect other countries participating in the global chains, even if no countermeasures were imposed,” Stournaras added.

Greek ECB Governing Council member Yannis Stournaras warned that the US reciprocal tariffs were “worse than expected” and a source of “unprecedented” global policy uncertainty.

In an interview with the Financial Times, he characterized the tariffs as “definitely a deflationary measure” for the Eurozone.

“A notable adverse impact on growth could lead to activity being much weaker than expected, dragging inflation below our targets,” he added.

While conceding it’s difficult to quantify the exact fallout, Stournaras projected a potential hit of between 0.5 to 1 percentage points to Eurozone growth.

He refrained from speculating on whether the threat justifies a 50bps rate cut but underscored the seriousness of the downside risks.