ECB now fears for the US economy: High spillover risks for the eurozone

Brussels – Is the United States a reliable partner? The European Union wants to believe so, even if some doubts remain. If on a political level it gives credit to the Trump administration, from an economic and financial point of view the European Central Bank instead questions everything: “Risks of adverse spillovers from US Treasury markets are high, given concerns about US fiscal fundamentals and the evolving
role of the dollar in financial markets” said ECB Vice-President, Luis De Guindos, at the presentation of the Financial Stability Review Update. 

The US economy is not doing so well; quite the contrary. This negative trend is worrying, given the US’s weight in the global economy. It is no coincidence that De Guindos warns that even for the EU and its eurozone, “fiscal slippage or adverse spillovers from external fiscal shocks could lead to global repricing of sovereign risk, which could be amplified by leveraged trading strategies.” In short, American difficulties could affect the public debt of countries and their ability to honour it.

The United States thus raises the prospect of “contagion effects” on eurozone economies, with Italy’s being among the most exposed. Italy has the second-largest public debt (136.4 percent of gross domestic product), which is projected to grow, and instability in the US could have significant repercussions. “Market concerns about stretched public finances could create strains in global bond markets with repercussions for euro area financial stability,” warns de Guindos, who looks on with cryptocurrency concerns in the United States, on which incumbent President Donald Trump is relying heavily. “Crypto markets continue to expand and show greater interconnectedness with the traditional financial system, with signs of rising speculative leverage.”