Escalating global trade tensions pose a risk to the euro zone economy, the bloc's central bank found in its semi-annual financial stability review on Wednesday.
The European Central Bank also said weak growth now poses a greater threat than high inflation in the 20-nation euro zone.
The latest figures recorded economic growth in the euro zone at a two-year high of 0.4% in the third quarter, while headline inflation reached 2% in October.
The ECB said financial markets have seen a “resurgence of volatility” since issuing its previous report in May, noting that further volatility is “more likely than usual” due to stretched assessments and concentration of risks.
“Escalating global trade tensions and the potential for strengthening protectionist trends around the world raise concerns about the potential negative impact on global growth, inflation and asset prices,” the Financial Stability Review said.
While Donald Trump's victory in the US presidential election was not specifically mentioned in the ECB's statement, countries around the world are bracing for his plan to impose sweeping 10% tariffs on all imports into the US, which also proposes much higher rates. For some countries. Like China. Economists say the indirect impact of implementing these measures could affect the euro, if a slowdown in exports prompts the European Central Bank to cut interest rates further and faster.
Speaking to CNBC, European Central Bank Vice President Louis de Guindos said a Trump presidency would increase uncertainty about the European outlook.
“I think it's very important to emphasize that the inflation development has been positive. But at the same time, the growth outlook is not very good,” de Guindos told CNBC's Annette Weisbach on Wednesday. He added that according to European Commission forecasts, euro zone growth will be less than 1% in 2024 and slightly more than 1% in 2025.
“In terms of activity, we have a very fragile situation. Consumers are not increasing consumption.”
“On top of that, there are a lot of uncertainties. There are geopolitical risks, the situation in Ukraine, the situation in the Middle East, and, you know, policies that the new US administration might implement in the future, it's another layer of uncertainty regarding the future of the European economy.”
The report also notes concerns about rising sovereign debt servicing costs and weak financial fundamentals in several eurozone member states. Other concerns include higher borrowing costs and weak growth affecting corporate balance sheets, as well as credit risks faced by small and medium-sized businesses and low-income households, if growth slows more than expected.
“In the context of rising macro-financial and geopolitical uncertainty, there may be a sudden sharp reversal in risk sentiment, given rising asset valuations and concentrated risk exposure in the financial system,” the report said.
