European countries have lost momentum in reducing their high public debt levels, leaving them “vulnerable to adverse shocks” from geopolitical tensions and persistently high interest rates, the European Central Bank has warned.
Many European governments have not fully reversed the support measures introduced to shield consumers and businesses from the economic impact of the coronavirus pandemic and energy price shock caused by Russia’s full-scale invasion of Ukraine, the central bank said in its twice-yearly financial stability review.
“Any reassessment of sovereign risk by market participants due to high debt levels and lenient fiscal policies could raise borrowing costs further and have negative financial stability effects, including via spillovers to private borrowers and to sovereign bondholders,” it said.