ECB Warns of Stability Risks from Global Elections and Geopolitics - Latest Global News

ECB Warns of Stability Risks from Global Elections and Geopolitics

Geopolitical tensions and a series of elections around the world increase the risk that investors will be shaken by negative surprises and threaten financial stability, the European Central Bank has warned.

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(Bloomberg) — Geopolitical tensions and a series of elections around the world increase the risk that investors will be jolted by negative surprises and threaten financial stability, the European Central Bank warned.

So far, markets have taken such threats calmly and are therefore exposed to sudden swings in sentiment in the event of shocks, the central bank said in its semi-annual financial stability report published on Thursday. It was also pointed out that votes in the European Union and at national level increase uncertainty about the development of public finances.

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“The scope for negative economic and financial surprises is large and the risk outlook for financial stability in the euro area accordingly remains fragile,” ECB Vice President Luis de Guindos said in the report. “Sentiment can change quickly, not least given the geopolitical environment and the pricing of perfection, which creates the potential for large market reactions to disappointing news.”

Since Russia invaded Ukraine on the eurozone border in 2022, global threats have only increased, with the Middle East the latest flashpoint. Elections – including Donald Trump’s bid to return to the White House in November and next month’s European Parliament elections – add even more uncertainty.

Despite this backdrop, the chances of a soft landing in Europe have increased as inflation falls towards 2% without causing a deep recession or a rise in unemployment. The European Commission forecast on Wednesday that price growth will weaken faster than previously expected, while prospects for an economic recovery remain intact.

This means that the overall threat to financial stability has decreased compared to the last report six months ago, the ECB said. However, it added that question marks remained large over government policies and economic conditions.

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This is reflected in the views on the path of ECB interest rates. Officials dared not commit beyond a very likely first cut in June, citing the need to remain dependent on incoming data.

“Volatility in financial markets could increase significantly if inflation deviates significantly from consensus expectations, economic growth slows or geopolitical conflicts further escalate,” the ECB warned.

Another problem is public finances. According to the Commission’s forecast, budget deficits, which have increased significantly due to the pandemic and energy support, are not narrowing as quickly as previously expected.

According to the ECB, conditions in financial markets are currently relatively benign, but high debt levels make governments vulnerable to external shocks if they require increases in spending. Meanwhile, the Eurozone’s deep-rooted economic problems make it difficult to cope with these burdens.

“Structural headwinds to potential growth, for example from weak productivity, raise concerns about longer-term debt sustainability, make government finances more vulnerable to negative shocks and increase risks to the financial stability outlook,” the ECB said.

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It also warned that tight financial conditions are testing households and businesses that have so far remained resilient to rising borrowing costs.

“This should not be a cause for complacency as there are still vulnerabilities,” Guindos said. The ECB is particularly concerned about low-income households and companies with poorer credit ratings.

These challenges are exacerbated by recent turmoil in the property sector, the ECB said, although it expects the downturn to “remain orderly”.

On a positive note, the ECB said that even as corporate insolvencies in several countries rose above pre-pandemic levels, “defaults and interest rates on non-performing loans have remained relatively low.”

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