By Michael S. Derby 

Deutsche Bundesbank leader Jens Weidmann said Wednesday that rising trade tensions around the world have the potential to slow growth markedly, in comments that also expressed continuing concern with the European Central Bank's stimulus efforts.

"A full-blown trade war between the United States and the European Union could cost both sides dearly," Mr. Weidmann said in a speech in New York at the Council on Foreign Relations.

"The potential adverse effects might be considerably larger than in the case of the current trade spat with China," and even there, things are looking worrisome. Mr. Weidmann said in the current China-U.S. squabble, "the measures that have been adopted or brought up could cut the output of both countries by more than a half percent over the medium term. World trade would be reduced by 1.5%."

Mr. Weidmann said those who think tariffs can bring something positive, as the Trump Administration does, are wrong.

"Proponents believe that higher tariffs can solve several problems at once: They claim that raising tariffs can reduce current-account deficits, protect jobs and even make people better off," he said. This belief is mistaken, he added, because "tariffs increase the prices of imported goods, and this weakens the purchasing power of consumers."

Mr. Weidmann also expressed concern about the European Central Bank's push to stimulate its economy, most notably via purchases of bonds. He said that in contrast with the U.S. Federal Reserve, the ECB must buy sovereign debt from nations with disparate local economies, fiscal policies and credit risk levels. He worries that the purchases suppress market signals about the health of an individual nation's bond markets.

The official said the ECB wasn't out of additional stimulus efforts if it deemed them necessary. But he said traveling this road would raise complicated cost-and-benefit questions.

Mr. Weidmann also commented on the negative yields seen in German government debt and attributed to a mix of factors, including structural changes in the economy that have led to a lower overall level of interest rates, as well as the influence of central-bank purchases on long-term government debt.

The German central banker also said it isn't time to surrender the idea that low unemployment can drive up inflation over time. "While the pass-through of wage changes has diminished since the 1970s, it has been broadly stable lately," he said.

"Indeed, a 1% rise in wage costs would ultimately push up consumer prices by around 0.3%," he said. It is a slow process, Mr. Weidmann said, but he added that "a slow firming of inflation shouldn't really be a surprise."

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

October 16, 2019 15:47 ET (19:47 GMT)

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