Europe’s macroeconomic outlook has brightened, but markets may be underestimating the potential for sudden instability from geopolitics, the European Central Bank’s deputy president said on Thursday.
“We’re talking about an election cycle that’s going to happen in Europe as well as the United States. And at the same time, we’re talking about geopolitical risks. As you know, markets underestimate the potential impact. “I think there’s a lot to be said about the geopolitical risks that exist,” Luis de Guindos told CNBC’s Annette Weisbach.
He said markets are good at adjusting financial and economic risks but struggle to incorporate the other dimension of geopolitical risk, which is often an all-or-nothing proposition. He said that it is considered.
Stock markets in Europe and the United States have soared to record highs this year, weathering the impact of ongoing wars in the Middle East and Ukraine and a slew of upcoming elections in which half of the world’s adult population heads to the polls.
The ECB released its latest financial stability report on Thursday, saying financial stability in the euro area had improved due to an improved economic outlook and lower inflation.
Rising geopolitical risks pose “substantial downside risks,” the ECB warned in a report. He added that risks remain historically “high” given rising debt servicing costs, signs that bank profits are peaking, and continued weakness in commercial real estate.
The report attributes the rise in financial markets to analysts’ expectations that major central banks will cut interest rates this year.
“There are increasing signs that pricing is aimed at perfection. [are] “The market reaction to disappointment could be significant,” the report said.
De Guindos said the ECB had not factored in any concrete results regarding the election results, but the overall picture suggested the possibility of further fragmentation of the global economy.
The ECB Vice-President referred to the tariff hikes and protectionist measures taken by some countries. “This will lead to fragmentation in terms of trade and growth, which will reduce the potential growth rate of the global economy,” he said. “This is important in addition to the risk factors posed by Ukraine and the Middle East.”
DeGuindos warned that a sudden market correction poses “potential vulnerabilities.” “That’s a risk that we have to consider as we look to the future.”
“And that is a factor that cannot be ignored, and we cannot overlook this potential impact that could impact risk aversion, risk attraction, commodity prices, growth, and overall global economic growth.”
