Draghi Tells EU Leaders of Four Risks to Rosy Europe Outlook

(Bloomberg) -- European Central Bank President Mario Draghi briefed German Chancellor Angela Merkel and other heads of government gathered in Brussels on the main risks to the favorable economic outlook and put a trade spat at the top of the list of worries, according to a person familiar with the discussion.

In a presentation to the bloc’s leaders, Draghi said investment is rising to levels not seen in at least a decade, private sector debt is falling, and capital ratios of healthy banks are almost 50 percent higher than at the start of the crisis. Still, it’s his job to worry and Draghi had the following caveats to his otherwise rosy outlook:

  • Trade protectionism, and a weakening of the multilateral institutions that resolve disputes, are the biggest potential risks. Tariffs and retaliatory measures would undermine confidence.
  • With monetary policy still loose, a potential push to deregulate the financial industry could create a toxic mix.
  • A potential repricing of assets in the U.S. would have have a domino effect. A warning shot was fired in the beginning of the year, when U.S. markets tumbled for a week. The fact that the rout didn’t spread beyond equities shouldn’t be a cause for complacency.
  • Getting fiscal policy all wrong. Increases in public spending could lead to overheating in the U.S. and in the EU. U.S. tax cuts could potentially do more harm than good, throwing economies into a pro-cyclical overdrive.

©2018 Bloomberg L.P.