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On Thursday, January 30, 2025, Luis de Gundas, Vice -President of the European Central Bank (ECB) at a press conference on a decision in Frankfurt, Germany.
Alex Kraus/Bloomberg via Getty Images
The European Central Bank said on Wednesday that the financial markets could be “fundamental change of the regime” as investors are allegedly overestimated how risky US assets actually are in connection with trade tariffs.
In its latest financial stability review, the Central Bank discussed the recent surge of market instability from the back of world trading tensions due to the US tariff policy.
The markets react significantly to frequent updates around the US and its trading partners. Stocks first collapsed If the US president Donald Trump announced the wide tariffs before bounce When he announced a temporary 90-day pause on his duties.
“During the turmoil, the market functioning – which can be considered as an opportunity for rapid financial assets, without moving prices,” the ECB is noted in the financial markets of the eurozone. “This was despite some atypical shifts from some traditional safe shelters such as the US and US dollar.”
Although it could be related to technical factors, the ECB may have also had broader triggers.
“These steps can also reflect the perception of a more fundamental regime change, and investors seemed to be overestimated by the risk of US assets, perhaps that will lead to wider shifts in the world’s capital flows,” the ECB said. “It can have potentially far -reaching consequences for the global financial system.”
Vice -President ECB Luis de Gundas offered CNBC on Wednesday that down the risk of correction of the market. The two key things that need to be taken into account now are an increased assessment and strong uncertainty, he said Annette Weisbach CNBC.
“The markets are very benign against this scenario. They believe that, you know, the growth will be low, but we are not going to join the recession, inflation is reduced, and the monetary policy will go by example,” De Gundas said.
There may still be risks, and various issues such as what could happen to trade and financial policy and regulation by the US government are incomprehensible, he said.
“And these elements create volatility. I think the volatility, perhaps you know, a consequence of these two elements … assessment and uncertainty.”
In his report, the Central Bank noted that he had previously warned of “vulnerabilities provided by high estimates that are not supported by the basics”, saying that “this risk source was partially materialized.”
The “mutual” tariff ad Trump became a trigger for this, said the ECB.
The uncertainty of the “game name”
Taking a broader view, de Hindas said that the uncertainty related to the US trade, financial and regulatory policy became “the name of the game” in the financial markets and the world economy. He now was that this uncertainty and any possible steps of politicians meant for Europe and financial stability in the eurozone.
Looking at inflation and economic growth, de Gundas once again confirmed that the tariffs would be “detrimental” for growth, while the impact on prices was less clear.
In the short term, the tariffs would increase the prices for imported goods, while at the same time depressing the demand that it could offset the higher costs, he said.
Long consequences may look completely different.
“(In) the long run, when tariffs and distortions of trade lead to fragmentation, which will be harmful to the supply chain, and this can increase the cost of corporations. And it can be inflation,” De Gundas said.
Earlier this week, the European Union issued its latest economic forecasts, reducing its gross domestic product 2025 forecast Both for the EU and for the euro area up to 1.1% and 0.9% respectively. This is compared to preliminary EC estimates by 1.5% for the EU and 1.3% expansion for the eurozone.
The heading’s inflation is expected to slow down below 2% of the ECB target in 2026.
