The Fed’s Cuts Are a Moment of Truth for Europe

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About the author: Pierre-Antoine Dusoulier is the founder and CEO of iBanFirst, a financial exchange platform based in Brussels.

The Federal Reserve and the European Central Bank are growing apart. The Fed is cutting, the ECB is holding. The euro is rising, the U.S. dollar is sinking. Parity between the two currencies is becoming a distant memory, as are the banks’ tactics for responding to inflation.

It isn’t the first time the monetary gap has widened across the Atlantic. But the central banks’ increasingly divergent strategies are set to reshape the global economic outlook.

While Europe is navigating a slowdown with slow, near-clockwork precision, the U.S. economy remains in turbulent waters.

The ECB foresees the euro zone growing at a low but stable pace, close to its pre-Covid “normal” of 1.2%. Inflation is expected to stay around its target level of 2%. In this context, any further monetary easing beyond its most recent cut in June will have to wait. Ensuring stability remains the ECB’s foremost concern.

The economic situation in the U.S. is far more uncertain. Growth is resilient but volatile: Forecasts have swung from an optimistic 3% to likely finishing the year around 1.7%. Stubborn inflation is tracking roughly 3% annually.

As the economic situations of the two regions are diverging, so are their ties to independence. Both central banks are meant to retain formal independence to provide a degree of insulation from political influence.

But in the U.S., political pressures on the Fed are mounting, through direct channels like appointments and public statements. President Donald Trump’s appointment of Stephen Miran, an economist who is on leave from his position as a White House economic advisor, to the Fed board this year highlights this trend. Miran’s confirmation sent a clear signal that Trump’s nominees will push the Fed up to fuel the economy in the months ahead.

In the euro zone, maintaining monetary policy independence is more of a shared, collective responsibility. The ECB answers to a group of states with diverging political and fiscal horizons. Pressure is therefore more diffuse. The result is a more cautious ECB, guided more by macro-regional political stability rather than by government demands.

This obsession with stability could make the ECB lose sight of the bigger picture. The European economy is faltering—its average annual GDP growth has been less than 2% for the past 30 years. In the ongoing race for innovation, Europe’s lag is becoming abysmal. Innovative companies are fighting as best they can, but they can’t stay competitive without strong financial support. Revving the monetary engine now seems vital.

At the same time, the euro is under pressure to assume a new role in the global economy. It is taking on a new status as a safe haven. The dollar has fallen 12% against the euro this year. There are multiple reasons for that, including interest rate differentials, capital flows into the European Union, a relative rebalancing of monetary holdings by companies, and banks diversifying their reserves. The result is a modest but real inch toward de-dollarization.

One of my firm’s internal studies, which analyzed €10.68 billion in international payments over the first six months of 2025, showed business-to-business companies clearly starting to de-dollarize their international transactions. The share of payments made in euros on our platform rose from 47% to 50% during this period, with steady monthly progress. Conversely, the dollar’s share of transaction fell from 35% to 30% during that time.

The ECB faces a moment of truth. Its efforts to contain inflation so far show it can cope with the energy and geopolitical shocks of recent years. But what use is a remedy that, in quelling inflation, ends up choking the economy?

Economic growth is at stake here. The Fed’s resolutely pro-business policies—including the rate cut that the Federal Open Market Committee said Wednesday it expects next year—will continue to boost the U.S. economy. But that may come at the expense of the European economy and poses a threat to international trade. We are already seeing this play out: The Fed just revised U.S. growth forecasts for 2026 upward to 2.3%. Meanwhile, Europe is still struggling to fully restart its economic engine.

In the long term, the disparate strategies of the two central banks will become a fundamental source of instability. If the interest rate gap continues to widen, the global system will lose its equilibrium, creating new uncertainty. That in turn will translate into volatility. We will likely end up in a position, once again, where our global economy favors the dollar.

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