By Simon Miller

The European Union’s economy is showing signs of stability according to the European Systemic Risk Board (ESRB).

At its fifth regular meeting, the Board said that there had also been an improvement in the situation of financial markets, “notably in response to the measures adopted by central banks, the agreement on the fiscal compact and the progress made in fiscal consolidation and economic reforms in many countries”.

However, it added: “At the same time, an environment of uncertainty and fragility in segments of the EU financial system persists. The key systemic risk remains the mutual negative feedback loops between three main risks, namely: (i) persistent uncertainties on sovereign debt; (ii) pressures on bank funding and excessive and/or disorderly bank deleveraging in some countries; and (iii) subdued growth prospects.”

The ESRB said it was crucial that countries made further progress towards restoring sound fiscal positions and implementing the structural reform agenda in order to strengthen their growth potential, increase employment and enhance competitiveness.

In addition, banks strengthen their resilience further, said the Board: “The soundness of banks’ balance sheets is a key factor in exiting from current dependence on central bank support measures and facilitating an appropriate provision of credit to the economy.”

Commenting on the eurozone, Didier Saint-Georges, member of Carmignac Gestion’s Investment Committee noted: “The banking sector is still being very overcautious (reserves deposited with the European Central Bank (ECB) as a safety net have increased by 50% in just one year), while the euro remains overvalued. So, while the ECB did manage to prevent the eurozone’s sudden demise, the prospect of a lengthy recession looms large, and the self-destructive fiscal fast that this region, still in recovery, is inflicting upon itself is only making matters worse.”

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