A number of experts discussed, on Tuesday 14 July, the main risks weighing on the financial stability of the euro area, at the presentation of the new annual report by the European Stability Mechanism (‘ESM’), organised by the Brussels think tank Bruegel. The participants said that, despite the resilience of the European economy, geopolitical tensions and fiscal fragilities called for increased vigilance.
The ESM identified two main risks: on the one hand, a worsening of tensions in the Middle East, likely to trigger a new energy shock, and, on the other, a sharp correction of US financial markets.
“In the adverse scenario where those two shocks hit simultaneously, the euro area may deviate from what the European Commission puts forward as their baseline outlook. The euro area could go into recession, with GDP contracting by 0.4% next year. Inflation would increase significantly again, reaching 3.7% next year before peaking at around 5%”, said the ESM’s chief economist, Rolf R. Strauch.
The Deputy Director General for Market Operations at the European Central Bank (ECB), Cornelia Holthausen, broadly agreed with that assessment, while nevertheless considering it necessary to widen the analysis to emerging risks, notably cyberattacks, vulnerabilities in the non-bank financial sector and artificial intelligence.
“If everyone uses the same AI tools, or if these different AI tools are fed by the same type of data and analysis, everyone is going to do the same thing at the same time. And, of course, that amplifies shocks”, Ms Holthausen pointed out.
To see the report: https://aeur.eu/f/mvs (Original version in French by Bernard Denuit)