Lack of growth threatens revival of Eurozone debt crisis, ECB warns

A weak growth outlook and looming U.S. tariffs on European imports threaten to reignite concerns over debt sustainability in the eurozone, the European Central Bank warned on Wednesday.
“Elevated debt levels and high budget deficits, coupled with weak long-term growth- potential and policy uncertainty, increase the risk that fiscal slippage will reignite market concerns over sovereign debt sustainability,” the Bank said in a semi-annual Financial Stability Review.
The new FSR was the first since a tumultuous spring of elections in Europe, which brought heavy defeats for much of Europe’s political center at the hands of more radical parties, chiefly on the right. In France, the eurozone’s second-largest economy, the government of Prime Minister Michel Barnier is having to resort to emergency legal provisions to pass a budget that will bring down the 2025 deficit next year from over 6 percent of gross domestic product this year.
Low growth is a particularly thorny issue for countries, like France and Italy, where public finances are already stretched. With market interest rates having settled into a higher range than before the pandemic, overall debt servicing costs are rising: the bonds that countries issued at dirt-cheap levels in the 2010s are maturing every year, and have to be replaced with new ones paying much higher rates. That means that governments either have to raise taxes or find economies elsewhere to pay the rising interest bill.
The ECB noted that the combination of low growth and high interest rates was also a problem at the corporate level, with the number of businesses going bankrupt on the rise across various sectors and countries, albeit from modest levels.
The result of the U.S. elections has complicated an already-bleak outlook for the European economy, which policymakers see growing a meager 0.8 percent this year and 1.3 percent next year. The Bank will revise its forecast at its next monetary policy meeting in December.
The risks to that forecast have risen substantially since the election of Trump earlier this month, which has ushered in an uncomfortable two-month waiting period for a Europe that doesn’t know how many of his campaign promises and threats will be implemented next year.
On the campaign trail, U.S. President-elect Donald Trump threatened to impose tariffs of 20 percent on all European goods exported to the U.S. The ECB fears that such a move could plunge the eurozone into a prolonged period of economic slowdown, although private-sector economists have suggested that the exchange rate could easily adjust to soften the blow.
“The outlook for financial stability is clouded by heightened macro-financial and geopolitical uncertainty together with rising trade policy uncertainty,” said ECB Vice President Luis de Guindos in the FSR.