ECB identifies rise of populist politicians in eurozone as risk

The ECB has warned that risks of financial market turmoil have increased amid slower growth in emerging economies, weak bank profitability, and the rise of populist movements across the 19-nation euro region.

“A sharper-than-expected fall in Chinese growth could well lead to a synchronised downturn across other emerging-market economies, particularly commodity-exporting economies,” the ECB wrote in its twice-yearly Financial Stability Review published yesterday.

“Under such a scenario, the financial systems of advanced economies may be challenged by a reduction in consumer and business confidence, and renewed financial market volatility potentially intensified by sudden stops in or reversals of cross-border capital flows,” it said.

Following an oil slump, the central bank has deployed an array of unconventional stimulus to support a recovery in the eurozone and jolt prices out of the deflation-risk zone.

In its report, the ECB highlighted the low profitability of financial institutions and emerging-market weakness as “medium-level systemic risks”.

Higher political uncertainty amid the success of populist parties that want to stop or even reverse structural reforms in the eurozone has also been added as a “potential” risk.

“Rising political risks at both the national and supranational levels, as well as the increasing support for political forces which are seen to be less reform-oriented, may potentially lead to the delay of much-needed fiscal and structural reforms,” the report said.

Presidential elections in the US and the planned referendum in the UK on its membership in the EU could hurt business and consumer confidence, and thus economic growth, the ECB said.

The region’s lenders, faced with a twin challenge of a sluggish recovery and negative rates eating into profit margins, in some countries are still saddled with a crisis-era legacy of soured debts.

They should be ready to expand and merge across borders, according to the ECB.