Trump’s Policies Could Spark Global Financial Crisis, Europe’s Watchdog Warns

The European Central Bank, in a recent review of global financial stability released Tuesday, stated that Trump's increasing military conflict with Iran and his unpredictable trade policies are testing the strength of the world financial system.

The bank warned that the risks from these pressures might occur at the same time and worsen each other.

ECB Vice President Luis de Guindos, sharing his thoughts before leaving office at the end of May, said the U.S.-led war in Iran, known as Operation Epic Fury, was placing the financial system under strain.

He noted, "While the full impact of the war is unclear at this stage, the consequences for the global economy and financial stability are becoming more serious the longer it goes on."

The closing of the Strait of Hormuz, a key route for global energy shipments, has sent prices rising globally.

The ECB indicated that the war has introduced a significant layer of uncertainty on top of trade tensions that have shaken global financial conditions since last year.

The bank also identified Trump's trade approach as a systemic risk. It commented that "tariff announcements, pauses, and reversals have become a regular aspect of the global environment."

It added that "uncertainty about the commitment of the U.S. administration to international cooperation is raising the risk of policy shocks disrupting the global order."

In April 2025, Trump imposed broad tariffs on many countries, a decision later overturned by the U.S. Supreme Court, which ruled he had acted beyond his authority. This move unsettled bond markets and caused U.S. government debt yields to rise sharply within days.

The ECB highlighted additional weaknesses developing within the financial system itself. The bank warned that the shift of lending into less transparent areas of finance, especially private credit, was creating risks that are hard to track. It mentioned that rising borrowing costs could leave more borrowers unable to repay their debts.

The bank also expressed concerns about the increasing influence of price-sensitive investors, such as hedge funds, in euro area sovereign bond markets. The ECB remarked that "the rising presence of more price-sensitive investors like hedge funds in euro area sovereign bond markets could worsen any sudden change in sovereign risk pricing."

Regarding overall market conditions, the bank found that investor optimism seemed disconnected from the underlying risks.

"There is a notable risk that financial market sentiment could decline, as negative risks related to geopolitical, fiscal, and macro-financial developments seem underestimated," the report noted.

The White House was contacted for a response to the ECB's findings but did not reply right away, according to The Daily Beast.

The ECB releases its Financial Stability Review twice a year. This latest edition features one of its most direct evaluations of U.S. policy risk in recent history.