ECB’s Wunsch Signals Tolerance for Stronger Euro as Oil Shock and Tariff Pressures Collide
The European Central Bank finds itself navigating one of its more uncomfortable policy junctures in recent memory. A surging euro, a Middle East-driven oil spike, and an unpredictable U.S. trade regime have converged in the first weeks of March, leaving policymakers with few clean options.
Key Takeaways
- ECB’s Wunsch backs a stronger euro as part of a push to expand the currency’s global role
- Oil prices surged 13%+ in early March amid Middle East conflict, complicating ECB rate decisions
- U.S. tariffs are forecast to shave 0.7 percentage points off euro area GDP growth through 2027
- The ECB holds its deposit rate at 2.00%, with no clear path forward on cuts or hikes
Pierre Wunsch, ECB Governing Council member and governor of the National Bank of Belgium, made the situation no simpler when he stated that the ECB must prepare for a stronger euro — particularly if European officials follow through on plans to expand the currency’s international role. The acknowledgment was notable: Wunsch openly conceded the trade-off, recognizing that elevating the euro’s global standing could push the currency higher, even as its recent appreciation already stokes concern among exporters and policymakers alike.
The euro hit $1.20 earlier this year for the first time since 2021 — a level that rattled European manufacturers already squeezed by weakening demand. As of March 5, the currency had retreated to approximately $1.1582, partly as markets priced in a more hawkish Federal Reserve and factored in escalating geopolitical risk from the Middle East.
An Oil Shock With Uncertain Staying Power
Brent crude surged more than 13% on March 2, reaching roughly $82 per barrel, as conflict in the Middle East intensified fears over supply disruptions. Analysts have warned that a prolonged closure of the Strait of Hormuz could push prices past $100 per barrel — a scenario that would materially alter the inflation outlook across the euro area.
Wunsch addressed the spike directly, advising against a hasty policy response. The ECB should not “rush” to react, he said on March 2, but must remain prepared to “run models” if the shock proves durable. The framing was deliberate: not dismissing the risk, but resisting the impulse to front-run events that remain fluid.
Other council members have been more categorical. François Villeroy de Galhau, governor of the Banque de France, said he sees “no reason at this stage” to hike rates in response to oil prices — a signal that the hawkish shift some investors anticipated is far from consensus.
The inflation picture has already shifted. The ECB’s headline projection for 2026 has been revised upward to 1.9% from an earlier estimate of 1.7%, while GDP growth is forecast at 1.2%. Against that backdrop, major investment banks including Morgan Stanley and Bank of America have pushed their forecasts for the next ECB rate cut from 2026 into 2027, citing renewed inflation risk.
Tariffs, Stagflation, and a Weakening Manufacturing Base
Complicating the energy shock is an ongoing headwind from U.S. trade policy. The ECB projects that U.S. tariffs and associated trade uncertainty will reduce euro area GDP growth by a cumulative 0.7 percentage points through 2027. Manufacturing has borne the brunt — already struggling with the euro’s appreciation undermining price competitiveness, the sector now contends with higher input costs and reduced access to the U.S. market.
Following a U.S. Supreme Court ruling, the U.S. administration enacted a temporary 10% import surcharge effective through July 24, 2026. Pharmaceuticals and aircraft remain exempt under the current U.S.-EU trade arrangement, but the broader uncertainty has weighed on business investment across the continent.
The combination of energy-driven inflation and trade-driven growth weakness has raised the prospect of stagflation — an outcome the ECB has limited tools to address without making one problem worse.
The Euro’s International Ambitions Add Another Layer
Behind the immediate policy noise sits a longer-term strategic question. European officials are actively exploring ways to expand the euro’s role in global trade and finance, targeting privileges long held by the U.S. dollar — particularly in commodity pricing and cross-border settlements. Wunsch’s comments last week reflected that ambition, even as he acknowledged it carries currency appreciation as a likely side effect.
Analysts have noted that the stronger euro is already helping contain imported inflation, which could eventually give the ECB more room to cut rates — provided the energy shock does not persist. That dynamic, sometimes described as “imported deflation,” adds an ironic dimension: the currency strength that worries exporters may be doing some of the ECB’s inflation-fighting work for it.
Policy Paralysis, or Patience?
The ECB’s deposit rate stands at 2.00%, held steady since early 2026. The Governing Council has not pre-committed to any future path. Wunsch himself officially dropped his “slight dovish bias” in December 2025, shifting to a neutral, data-dependent posture he described as a “good place.”
The ECB estimates its neutral rate — the level that is neither stimulative nor restrictive — lies between -0.5% and 1%, suggesting current policy is at minimum neutral and possibly slightly restrictive. That assessment gives the council some room to hold without triggering a growth scare, but it offers little guidance on what comes next.
The March 19 Governing Council meeting will be the first concrete test of how policymakers balance these pressures in real time. For now, the message from Frankfurt is one of deliberate ambiguity: watching, modeling, and waiting.
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