BBC News - ECB warns of political uncertainty risk to eurozone

Political uncertainty is putting the eurozone's financial stability at risk, according to the European Central Bank.

The Brexit referendum and the US election both ratcheted up what it calls its "composite indicator of systemic stress".

It says the 19 countries that use the euro could be hit by trade wars, higher inflation and rising US interest rates.

In a worst-case scenario, the ECB says, this could reignite the 2009 eurozone debt crisis.

It also warned that some stock markets could be heading for sharp falls. "Valuation measures... are in some regions hovering at levels which, in the past, have been harbingers of impending large corrections."

The bank is also worried about political uncertainty within the eurozone, with a constitutional referendum in Italy on 4 December and elections in France and Germany next year.

Resilience

In its latest twice-a-year Financial Stability Report, the ECB said: "Higher political uncertainty may lead to more domestically focused, growth-hindering policy agendas.

"This, in turn, could delay much-needed fiscal and structural reforms."

And it pointed out that the euro area banking sector was still suffering from a high level of bad loans, high operating costs and excess capacity.

However, it added that the euro area's financial system had shown resilience in the face of repeated bouts of market turbulence during the past six months.

ECB vice president Vitor Constancio said the bank was maintaining its economic projections, with the baseline forecast indicating slow but steady growth in the coming years.