European flags blow in front of the European Central Bank as the sun rises in Frankfurt, Germany, Sunday, May 26, 2019. (AP Photo/Michael Probst)
FRANKFURT, Germany — The European Central Bank (ECB) said challenges to financial stability in the eurozone have risen amid global trade tensions, and warns that indebted governments such as Italy could run into trouble if they don’t heed rules limiting debt and deficits.
The warning in an ECB report released Wednesday comes as Italy’s populist government is challenging the debt rules, intensifying conflict with the EU’s executive commission.
Italy’s borrowing costs in bond markets rose this week – a sign of international investor concern – as Deputy Premier Matteo Salvini repeated his opposition to the rules after his League party came in first in elections to the European Parliament.
ECB said that “should downside risks to growth materialize, financing costs for vulnerable sovereigns are like to increase and may increase debt sustainability concerns.”
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ECB Vice President Luis de Guindos said the economy’s performance would be key to financial stability. The central bank still expects growth to pick up in coming months after a period of weakness. But it is cautioning that external threats such as trade tensions could undermine that. Weaker growth saps tax revenues that help governments pay off bonds, and undermines bank profits as well.
“The environment is more challenging than six months ago,” De Guindos told journalists at a briefing after the release of the report.
