THE EUROZONE FINANCIAL stability outlook remains fragile as tighter financing conditions, high inflation and geopolitical tensions weigh on the single currency area.

That’s the warning from the European Central Bank, which today released its November 2023 Financial Stability Review.

The ECB has hiked interest rates at a record pace to cool surging inflation over the past year, but consumer price rises are still above the bank’s 2% target.

The review said that if inflation “were to prove more persistent than currently anticipated, this could lead to a further increase in long-term interest rates”.

Higher borrowing costs, meanwhile, are taking their toll on the 20 nations that use the euro, with the European Commission last week lowering its growth forecasts for this year and next.

“The weak economic outlook along with the consequences of high inflation are straining the ability of people, firms and governments to service their debt,” said ECB vice-president Luis de Guindos, in the central bank’s latest Financial Stability Review.

“It is critical that we remain vigilant as the economy transitions to an environment of higher interest rates coupled with growing uncertainties and geopolitical tensions.”

The review warned that a recession was a “possible scenario” due to the deteriorating outlook.

The full impact of higher borrowing costs on economic activity was yet to be felt, and many sectors could face challenges as debt servicing costs rise, it said.

It pointed to real estate markets, which it said were already experiencing a downturn, and added that real estate firms are particularly vulnerable to losses.

Banks – which had so far benefited from higher rates – could face problems as higher borrowing costs lead to falling loan demand, the review warned.

Concerns about euro area stability had been heightened by the outbreak of the Israel-Hamas war, it said.

The review added that there could be higher energy prices due to the conflict in the Middle-East, which would have “serious implications for inflation and potentially for monetary policy”.

It added that “an escalation may also depress consumer sentiment and investor risk appetite, adversely impacting growth prospects in the euro area”.

As well as the potential impact on energy markets, there was also the “potential to spark risk aversion in financial markets and undermine confidence in the real economy,” it said.

Here at home, the Central Bank of Ireland will tomorrow publish its second Financial Stability Review of 2023 to communicate its policy actions to safeguard Irish financial stability.

- © AFP 2023 and with additional reporting from Diarmuid Pepper