On Wednesday, the European Central Bank warned in its semi-annual Financial Stability Review that the escalating global trade tensions pose a serious threat to the financial stability of the Eurozone. The report indicated that the increasing trend of global protectionism could further undermine economic growth, affect inflation levels, and lead to heightened asset price volatility.
Weak Economic Growth Surpasses Inflation as the Greatest Threat
The data shows that the Eurozone economy achieved its fastest growth in two years in the third quarter of this year, with a growth rate of 0.4%, and an overall inflation rate of 2% in October. Despite this, the European Central Bank emphasized that weak economic growth remains a greater risk than high inflation, especially with economic growth expected to be below 1% in 2024.
European Central Bank Vice President Luis de Guindos stated, "Despite the positive development of inflation, the overall economic situation remains fragile." Consumer spending lacks significant growth, while geopolitical risks and potential policies of the new U.S. government increase future uncertainties. He also noted that weak growth in the Eurozone has a particularly significant impact in the current environment.
Market Volatility and High Valuation Risks
The report noted that since May this year, financial markets have experienced a "resurgence of volatility," warning that due to high asset valuations and risk concentration, the possibility of further volatility is "higher than usual." If global economic growth slows more than anticipated, high borrowing costs and low growth could impact corporate balance sheets, posing a credit risk particularly to small and medium-sized enterprises and low-income households.
Additionally, rising sovereign debt repayment costs and weak fiscal fundamentals of some Eurozone member states are also seen as significant factors affecting financial stability. "Against the backdrop of high asset valuations and concentrated risk exposures, market sentiment could reverse sharply at any time," the report stated.
Uncertainty in Trump Policies Increases Risks
Although the report did not directly mention Trump's victory in the U.S. presidential election, analysts generally believe that Trump's proposed tariff plan on all imports would have a major impact on global trade and the economy. Economists warn that if exports further slow down, the European Central Bank may be forced to accelerate interest rate cuts, putting greater pressure on the euro.
De Guindos stated, "The policy direction of the new U.S. government is one of the uncertainties facing the European economy in the future." He also emphasized that the European Commission's predicted growth figures are below expectations, making the negative effects of trade tensions and geopolitical risks particularly notable.
Multiple Risks Impact Eurozone's Future
In the context of increasing global macro-financial environment and geopolitical uncertainty, the European Central Bank's assessment indicates that the Eurozone's financial stability faces significant pressures. Trade tensions, economic weakness, debt risks, and high asset valuations could all trigger economic volatility. The report calls for more prudent policies to address this complex situation and mitigate the impact of global uncertainties on the Eurozone as much as possible.
