It was March 2015 when Otmar Issing, an early board member of the ECB and the bank’s former chief economist, poured me a cup of coffee. Like two war veterans, we sat on the 60th floor of the Messeturm in Frankfurt, gazing out at the smoke plumes marring the city’s skyline. Issing had seen something like it before—just as I had.
“It looks like a war zone,” he said. And he would know—he’d witnessed such scenes as a young boy during World War II. I, in turn, saw the same thing in the early 1990s during the war in my homeland, Bosnia-Herzegovina. My house and the entire neighborhood were engulfed in flames.
Issing found it tragic that the euro was the reason for those plumes of smoke. The euro was meant to bring Europeans closer together. And yet, there we were, watching black smoke rise—smoke caused by discontented Europeans who had come from all corners of the eurozone to Frankfurt to protest. The opening of the ECB’s new headquarters was the catalyst.
Today, when ECB board members look out their windows, they don’t see black smoke. But the plumes are still there—this time, in invisible form. The American trade war is to blame. “There are decades where nothing happens, and there are weeks where decades happen,” Lenin is said to have remarked. The weeks since April 2, when US President Donald Trump launched a destructive trade war, feel like such a time—equivalent to decades of developments unfolding all at once.
The first effects are already visible in the United States—and they are far from what Trump promised. It’s only a matter of time before the eurozone’s economy begins to feel the impact as well. How, when, in what form, and how severe it will be—much of that remains uncertain. But that there will be consequences is beyond doubt.
That’s why the ECB, against the backdrop of those invisible smoke plumes, decided this month to cut interest rates in the eurozone for the seventh consecutive time. The central bank aims to support the monetary union’s economy as the fallout from America’s chaotic policies becomes more palpable. Economic forecasts have worsened due to the trade war, and the ECB expects that, alongside slower growth, inflation in the eurozone could also decline further. Listening to the press conference afterward, it was clear that April’s rate cut won’t be the last. Financial markets are pricing in at least two more cuts this year.
One of the effects already visible in the eurozone is the strengthening of the euro. Since early April, the European currency has gained nearly five percent against the dollar. That’s quite remarkable: typically, in times of global turmoil, the dollar becomes more valuable. The fact that we’re seeing the opposite now says a lot about how quickly confidence in the United States is eroding.
What I’m most curious about, however, is how the ECB will interpret this. A strong currency can be seen as a positive sign—it may reflect increased confidence. But more importantly, a strong currency contributes to a more resilient, innovative, and competitive economy. Exactly the kind of economy the eurozone wants to be. So, in the coming weeks, we should pay close attention to what ECB officials have to say about the euro’s recent appreciation. In the past, they’ve often expressed dissatisfaction with a rising euro.
I hope to hear a different tone now. If we still act like it’s a bad thing, that will say a lot about how they want to strengthen the eurozone’s economy: through the theoretical—some might say wishful-thinking—Draghi approach (as outlined in Mario Draghi’s report), or through a proven model, such as the one used for decades by a country like the Netherlands.
Edin Mujagić is an economist, manager of the Hoofbosch Investment Fund, and author of the book Turning Point 1971. He writes a monthly “ECB Watch” column for Investment Officer on the monetary policy of the European Central Bank.