Behind a "facade of optimism", European Central Bank officials are growing increasingly concerned that a looming trade war could derail the euro zone's recovery and complicate its exit from years of easy money, central banking sources told Reuters.
There was an eerie calm at the ECB's annual get-together of policymakers and academics at the bank's hallmark policy forum in the Portuguese hilltop town of Sintra.
Just days earlier, President Mario Draghi had pulled off the major feat of announcing the upcoming end of the ECB's 2.6 trillion euro stimulus programme, while keeping the euro and bond yields in check.
Yet conversations with high-ranking officials and policymakers suggested the growing fears of a trade war waged by Donald Trump's U.S. administration against its main trading partners were casting a shadow over the economy and the ECB's own policy path.
"Unwinding ECB accommodation is also a risk. I don't think it's been fully priced in and markets will wake up one day."
The ECB declined to comment.
Extending bond purchases into 2019 was not a realistic option, barring a large economic shock.
"Just look at the leading indicators: they keep surprising on the downside," one of the sources said. "There is a facade of optimism in the forecasts."
Draghi emphasised last week the forecasts did not factor in "the effects of trade measures that have not been implemented yet" - a likely reference U.S. tariffs on steel and aluminium that took effect after the forecasts' cut-off date.
Trump slapped tariffs on steel and aluminium from Canada, Mexico and the European Union, threatened to kill the North American Free Trade Agreement and is studying new tariffs on car imports, a particularly important issue for Germany.
The EU, Canada and Mexico have all responded to the U.S. move, announcing counter-measures and legal challenges at the World Trade Organization.
The exchange rate is a key variable for the euro zone. Much recent growth has come from German exports, and less competitive countries at the edge of the bloc such as Italy, Greece and Portugal can ill afford a stronger euro.
For now, the single currency was close to its lows for the year at around $1.1571, thanks both to Draghi's cautious words and to the Federal Reserve's seventh rate hike since 2015.
But, in a sign of their nerves, ECB policymakers were still checking every small tick of the exchange rate, fearing a repeat of the spike to $1.25 hit earlier this year when Trump stepped up his weak dollar rhetoric.
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)