Low growth and high obligation hazard Eurozone crisis, ECB warns

The Eurozone risks another obligation crisis if the bloc cannot boost growth, lower community obligation and fix “policy uncertainty”, the European Central lender has warned.

In its annual budgetary Stability Review, published on Wednesday, the ECB sounded the alarm over a potential profitability of “trade concerns over sovereign obligation sustainability”.

It pointed to “elevated obligation levels and high distribution deficits” as well as tepid growth and uncertainties caused by recent “election outcomes at the European and national levels, notably in France”.

Spreads between French and German 10-year sovereign debt — a gauge of investors’ concerns — hit 0.78 percentage points this month, close to the 12-year high reached in the run-up to this summer’s parliamentary election.

“Headwinds to financial expansion from factors like frail productivity make elevated obligation levels and distribution deficits more likely to reignite obligation sustainability concerns,” the ECB warned on Wednesday.

However Italian spreads against German obligation — an indicator of investor worries across the bloc — are at much tighter levels than they were during the Eurozone crisis.

During that crisis, which began more than a decade ago, Greece narrowly avoided a default as concerns about its budgetary stability fuelled trade unrest over the ordinary money. This only subsided after then-ECB president Mario Draghi pledged to do “whatever it takes” to prevent a collapse of the money area.

By its nature, the ECB’s budgetary Stability Review focuses on risks to the region but its warnings about budgetary risks are more outspoken than in previous editions.

The ECB said sovereign capital hazard premiums could be pushed higher by macro-budgetary shocks, pointing to “frail” fundamentals in several member states and maturing sovereign obligation being “rolled over” at higher gain rates.

It added the combination of low growth and high government obligation in the 20-country money bloc could make it more challenging for governments to pay for higher defence needs and investments to fight climate transformation.

In an indication of the region’s frail growth prospects, the European percentage last week downgraded its 2025 growth approximate for the Eurozone to 1.3 per cent and warned the region is set to fall further behind the US.

The ECB is also concerned that stake and steady earnings markets are exposed to rising risks of “sharp adjustments”, pointing to “high valuations and hazard concentration” that had already resulted in “several pronounced but shortlived spikes in volatility”.

It added that “recent trade corrections have not dissipated concerns over the overvaluation of ownership markets or the potential for an AI-related property worth bubble.”

In a potential economic slump, lender equilibrium sheets could also receive a hit as Eurozone consumers and companies are already struggling with higher rates, the ECB said.

The threat of higher losses on commercial real estate “could be significant for person banks and property funds”, it added.