Eurozone faces 'an unprecedented confluence of challenges' that makes 'difficult policy choices unavoidable', says European Stability Mechanism
A resurgence of tensions in the Middle East and a sudden repricing of US assets could inflict permanent damage on Europe’s economy, the eurozone’s rescue fund has warned.
The European Stability Mechanism (ESM) said on Monday that although the euro area has shown “remarkable resilience” to previous shocks – including the 2008 financial crisis, the 2020 Covid pandemic, and the 2022 Russian invasion of Ukraine – such resilience “cannot be taken for granted” at a time of high debt and deficit levels and soaring defence spending.
An “adverse scenario”, in which a re-escalation of the recent US-Israeli war on Iran is exacerbated by a simultaneous “abrupt repricing” of US stocks and bonds, could push the eurozone into a recession from which it might never fully recover, the ESM said.
“The adverse scenario affects debt sustainability risks over a longer horizon, through permanent scarring of economic activity, larger deficits and financing needs, and less favourable differentials between growth and interest rates,” said the ESM, which was created to provide emergency financial assistance to countries at the height of the eurozone crisis in 2012.
