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ECB Releases Eurozone Stability Report

By Patrick Higgins  |  29/11/2017 12:10
Per a stability report released by the European Central Bank (ECB) earlier today, threats to the eurozone remain contained despite a plethora of economic uncertainties within the bloc.

With 18 straight quarters of positive GDP growth, many forecasters now starting to see signs that growth has reached the eurozone's periphery once again, an indicator that eurozone convergence may finally be resuming.

In addition to economic reassurances, renewed political stability has also been a boon to the eurozone. Within the last year and a half, the tenuous continued recovery of the eurozone was thrown entirely out of balance with the Brexit referendum, and the possibilities of a Drexit in the Netherlands and a Frexit in France stemming from the two country's national elections. Now, however, with both France and the Netherlands having elected a pro-European president and prime minister respectively, the eurozone finds itself in a much less volatile position. This renewed sense of political grounding has most likely played a huge role in the continued economic restructuring within the eurozone and will continue to be a huge benefit going into the future.

However, many vulnerabilities are still biting at the heels of the eurozone, including continued public debt issues, weak profitability within the banking industry, and the potential overvaluing of risk premia. There are concerns that asset price corrections, as they are referred to in regards to pertaining towards the revision of the overvaluation of assets, will experience a sharp curve in the future due to increased appetite to take more substantial risks within risk premia. This pertains additionally to inflated property values across the eurozone, particularly within Germany, the eurozone's largest economy where it is estimated that property prices are 15-30% overvalued.

Despite the overall positive trends, both economic and political, within the eurozone, it is imperative that both the ECB and the various eurozone-member national banks continue to move cautiously going forward. Much of this economic recovery can be traced back to the ECB's outright monetary transaction (OMT) and long-term refinancing operation (LTRO) programmes, which were set up back in 2011 to contain the contagion of the eurozone economic collapse at that time. Both programmes acted as buffers against rising bond-yields in eurozone countries which could not afford it, as well as providing easy access to desperately needed monetary injections for the eurozone economies.

These programmes set the stage for the massive portfolio of bonds that the ECB has accumulated since, over 2 trillion euros worth, as well as the now-present tapering programme, as the ECB has assessed that the eurozone has recovered enough. This viewpoint has been restated in their latest stability report. It is vital that the ECB continue their economic support, tapering at a slow and steady rate, in addition to the eurozone governments promoting growth programmes and overall European integration, in order to mitigate far-right movements such as the National Front in France and the Alternative for Deutschland movement in Germany. This will assure further eurozone stability.

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