The eurozone's financial system stability remains shaky, as revealed by the European Central Bank (ECB).
Commonly, a faltering economy, escalating interest rates, and geopolitical pressures contribute to this fragility, according to the ECB Vice President Luis de Guindos. He mentioned during a semiannual Financial Stability Report presentation that the weak economic outlook and high inflation are burdens that make it difficult for individuals, corporations, and governments to meet their debt responsibilities.
It's imperative to stay vigilant, acknowledging that the complete impact of tighter financing conditions on the real economy has yet to emerge.
The ECB has been incrementally raising key interest rates as a means to combat inflation since mid-2022. Presently, the deposit rate, influencing financial market trends, stands at 4.00%. This level is the highest since the inception of monetary union in 1999 and has resulted in noticeably more expensive loans.
Given these increased financing costs, the evaluation of the eurozone's financial system stability is under scrutiny. The ECB, recognizing its vulnerability, emphasized the importance of continuous assessment and potential interventions to safeguard the financial system, as stated by President Christine Lagarde at a recent press conference.
The real estate industry is already feeling the consequences. Mortgage interest rates are on the rise, making homeownership less affordable. Real estate prices are consequently falling. In the realm of commercial real estate, the decline in demand for office space post-pandemic is also being observed.
The base article provides an overview of the eurozone's financial system stability. Yet, its fragility is influenced by various factors. Let's examine the impact of economic instability, rising interest rates, and geopolitical tensions on the eurozone:
Economic Instability
The eurozone's economy is experiencing sluggish growth, with real GDP forecasted to grow by a meager 0.9% in 2025 and 1.3% in 2026. The manufacturing sector is facing challenges due to low demand and high energy prices, while the services sector is showing resilience. Germany and France, the two largest economies in the eurozone, have contracted in the fourth quarter of 2024. Italy's economy has remained stagnant, while Portugal displayed some growth.
Rising Interest Rates
In an attempt to support economic stability, the ECB cut interest rates in December 2024, decreasing the deposit facility rate to 3.00%, the main refinancing rate to 3.15%, and the marginal lending rate to 3.40%. These cuts aim to encourage growth and alleviate inflationary pressures.
The ECB's monetary policy easing efforts include preparing to lower rates by another 25bp in January and are expected to make at least four additional rate cuts in 2025.
Geopolitical Tensions
Geopolitical tensions serve as potential threats to the eurozone economy, including the likelihood of trade wars and volatile energy prices.These factors can impact exports and manufacturing output, exacerbating economic slowdowns.
The ECB is prioritizing data quality improvements to better assess banks' resilience under adverse economic conditions. This includes enhanced scrutiny of banks' internal projections and on-site inspections for unreliable data.
The ECB is taking essential measures to address these challenges, starting with stress testing, enhancing labor market support, and improving data quality. These initiatives aim to support economic stability, stimulate growth, and mitigate the risks associated with these challenges.
