ECB's Luis de Guindos: "Trade war, market volatility and high debt - risks in the euro zone"

A global trade war, volatility in financial markets and high debt levels are the three major risks facing the euro zone economy, according to the vice president of the European Central Bank (ECB), Reuters reports.

Luis de Guindos said last week, ahead of the ECB's financial stability report to be released in the coming days: "The risks to growth resulting from trade tensions, combined with increased defense spending, could limit the fiscal space available to protect the economy from adverse shocks, to address structural difficulties associated with climate change, digitalization and low productivity."

According to Eurostat data, the euro zone economy grew by 0.3% in the first quarter of 2025, compared to the previous three months, in which it expanded by 0.2%. The data seems to point to a good development of the euro zone economy, despite the US tariffs that led to increased volatility in financial markets, but the region still faces trade barriers that could affect the development in 2025, given its high dependence on trade.

The ECB's biannual report on financial stability is expected to be published on May 21. It will show how the global turmoil after the election of Donald Trump as US president could affect the economies of the 20 countries in the euro zone, Luis de Guindos said.

While the volatility in financial markets since the beginning of April, when the US tariffs were announced, has largely subsided, potential risks have not diminished, Reuters notes.

"As with equity market risk premia, credit spreads appear to be out of sync with the very high levels of geopolitical and political uncertainty," the ECB vice-president said, adding: "There is a risk that investors are underestimating the likelihood and impact of adverse scenarios."

In his view, trade tensions will weigh on eurozone growth, as confidence is eroded, and even if there is a political solution, companies and households are likely to cut spending as a precaution.

Governments will likely increase defense spending, but debt levels are already high and the costs associated with debt repayment could put pressure on public finances, even before countries address other structural difficulties, concluded Luis de Guindos.