(Bloomberg) -- European Central Bank Vice President Luis de Guindos warned that high levels of sovereign debt could prevent governments from addressing long-term economic challenges and consign them to low growth.
Speaking at Euro Finance Week in Frankfurt, Guindos said swelling primary budget deficits that push debt loads higher could result in a lack of spending room to tackle climate change, defense spending, digitalization and sub-par productivity.
“Fiscal slippage or questions around fiscal consolidation paths could trigger further repricing of sovereign risk,” he said Monday. “Current large primary deficits will also make it harder for governments to support the economy if adverse shocks materialize.”
The comments come two days before the ECB’s twice yearly Financial Stability Review, which will assess rising threats to the banks that are the key source of funding for the region’s companies. Investment has lagged of late amid uncertainty around the economic outlook, with Donald Trump’s re-election as US president posing another risk.
“The balance of macro-risks has shifted from concerns about high inflation to fears over economic growth,” Guindos said. “Inflation has moved closer to our 2% target.”
The ECB is preparing for its final monetary-policy meeting of the year next month, with a fourth quarter-point reduction in the deposit rate widely expected and economists as well as investors scouring for clues on the path beyond.
Officials have envisaged further easing but the pace and extent is wide open. Some already worry about inflation undershooting the goal, as it did in the period before the pandemic. Others urge caution given lingering upside risks to consumer-price growth.
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