Nicosia: The outlook for the euro area remains highly uncertain, influenced by tighter financing conditions, heightened geopolitical tensions, and emerging risks such as climate and cyber threats, according to Christodoulos Patsalides, Governor of the Central Bank of Cyprus (CBC). Speaking at the Economist 20th Annual Cyprus Summit, Patsalides highlighted Europe’s lagging productivity levels compared to the United States and warned that potential trade restrictions could lead to inflationary, recessionary, or worse, stagflationary outcomes.
According to Cyprus News Agency, Patsalides emphasized the European Central Bank’s (ECB) gradual and data-driven approach to monetary policy. If upcoming data and December projections align with their baseline scenario, there could be room to continue lowering rates at a steady pace. He stressed the importance of balancing rate cuts to avoid reigniting inflationary pressures or hindering economic recovery and market confidence.
Patsalides also addressed the ECB’s recent
policy decisions, noting significant progress in the disinflationary process with inflation at 2% in October. He pointed out that while growth in the euro-area economy has been sluggish, the approach to rate cuts must remain cautious and data-informed, given the persistent inflationary risks from potential supply shocks and energy price uncertainties.
Discussing the European banking sector, Patsalides noted its resilience despite economic and geopolitical challenges. Key indicators from June 2024 reflect a positive trend, with the liquidity ratio at 163.2%, the CET1 ratio at 17.5%, and the Non-Performing Loans ratio steady at 1.9%. However, he reiterated that the euro area’s outlook is still clouded by uncertainty, urging banks to align with guidelines addressing climate and cyber risks.
Patsalides highlighted the need for structural reforms to enhance Europe’s competitiveness, emphasizing the establishment of a Capital Markets Union and a common deposit guarantee scheme. He referenced the Draghi Report as
a guiding framework for achieving these goals and underscored the importance of strengthening the European venture capital market, which trails the US significantly.
Frank Elderson, a member of the ECB’s executive board, noted that the ECB has been steadily reducing rates after an unprecedented increase since July 2022. He warned of ongoing economic challenges, including geopolitical tensions and the climate crisis, and stressed the need for a focused approach on price stability.
Jose Manuel Campa, Chairperson of the European Banking Authority, highlighted the resilience of the institutional framework built over the past 15 years but emphasized the need to address digitalisation and climate change challenges. He stressed the importance of assessing financial risks associated with these issues to ensure long-term sustainability.