The euro zone central bank found in its semi-annual financial stability review released on Wednesday that rising global trade tensions pose risks to the euro zone economy.
The European Central Bank also said that for the 20 euro zone countries, weak growth is now a greater threat than high inflation.
The latest data shows that the euro zone’s economic growth rate reached a two-year high of 0.4% in the third quarter, and the overall inflation rate reached 2% in October.
The ECB said financial markets had experienced a “resurgence in volatility” since its last report in May, noting that further volatility was “more likely than usual” due to elevated valuations and concentrated risks.
“Intensified macro-financial and geopolitical uncertainties, as well as rising trade policy uncertainty, are clouding the outlook for financial stability,” ECB Vice President Luis de Guindos said.
Although the ECB’s press release did not specifically mention Donald Trump’s victory in the US presidential election, countries around the world are bracing for his plan to impose 10% tariffs on all US imports, which also Higher tariffs are proposed for some countries, such as China. If a slowdown in exports prompts the European Central Bank to cut interest rates further and faster, the knock-on effects of these measures could weigh on the euro, economists said.
The Financial Stability Review said: “Intensified global trade tensions and the potential for further strengthening of global protectionist tendencies have raised concerns about potential adverse effects on global growth, inflation and asset prices.”
It has also raised concerns about rising sovereign debt repayment costs and weak fiscal fundamentals in several euro zone members. Other concerns include high borrowing costs, weak growth weighing on corporate balance sheets, and credit risks to small and medium-sized businesses and low-income households if growth slows more than expected.
“Against a backdrop of heightened macro-financial and geopolitical uncertainty, risk sentiment could suddenly and sharply reverse given higher asset valuations and concentrated financial system exposures,” the report noted.
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