Economic Outlook Is Clouded by Unthinkable Policies

Policymakers are grappling with “exceptionally high” uncertainty, Christine Lagarde, the president of the European Central Bank, said on Wednesday, just hours after the European Commission announced tariffs on U.S.imports in response to levies imposed by the Trump administration.

Later, Canada announced a new round of retaliatory tariffs on U.S.imports.The unpredictability of trade policy and geopolitics, which is likely to mean more large economic shocks, will make it harder for central bankers to keep inflation at their 2 percent target, Ms.

Lagarde said.There was a somewhat bewildered mood among some of the E.C.B.officials, economists and analysts at an annual gathering held in Frankfurt, where Ms.

Lagarde delivered her speech.Participants reflected on the rapidly shifting economic environment stemming from the escalating trade tensions and a substantial increase in military spending planned by European countries, particularly Germany.Under different circumstances, this year’s conference could have seemed like more of a celebration: Inflation in the eurozone slowed to 2.4 percent in February, near the central bank’s target, and policymakers have been able to cut interest rates six times since the middle of last year.Instead, President Trump’s imposition of sweeping tariffs, and his shifting policies on military aid to Ukraine, are unnerving European leaders.

In response, European officials are proposing to borrow more to fund defense and infrastructure investments, significantly altering the region’s fiscal situation.The conference began with one speaker emphasizing the importance of preparing for war in order to avoid war.“Established certainties about the international order have been upended,” Ms.

Lagarde said.“Some alliances have become strained while others have drawn closer.

We have seen political decisions that would have been unthinkable only a few months ago.”When introducing a panel, François Villeroy de Galhau, the governor o...