Investing.com - The stability of the euro area could be tested by rapid changes in global trade policy, the European Central Bank warned on Wednesday.
In its May Financial Stability Review, the ECB flagged that "escalating trade tensions" could adversely affect companies and households in the 20-member currency area -- and contribute to "credit risk for banks and non-banks".
A sharp uptick in global frictions over tariffs has also raised the risk of an economic slowdown, the ECB added.
“Rising trade frictions and related downside risks to economic growth are weighing on the outlook for financial stability," said ECB Vice President Luis de Guindos in a statement.
Shortly after U.S. President Donald Trump’s administration announced new tariffs on steel and aluminum earlier this year, the European Union -- which includes several euro area countries -- and the U.S. began discussions.
Analysts at Goldman Sachs have noted that the talks have so far made "little progress", with both sides at odds over the size of U.S. tariffs. But there is still time for both parties to bridge this gap before the end of Trump’s 90-day pause to elevated "reciprocal" tariffs in July, they added.
At a much-anticipated event on April 2, Trump announced sweeping reciprocal duties on most countries, including a 20% levy on the EU. Trump later moved to delay the tariffs, arguing that it was necessary to give White House negotiators more time to forge dozens of trade agreements with individual nations.
The ECB also highlighted ructions in stock and bond markets following Trump’s early April announcement, calling the sell-off "unsettling".
"While risky assets had fully recovered their initial losses by mid-May, markets are still highly sensitive to tariff-related news," the ECB said. "Equity markets in particular remain vulnerable to sudden and sharp adjustments as valuations are still high and concerns over risk concentrations persist."
So far, Trump has unveiled a trade deal with Britain, while the U.S. and China said they would postpone and lower their respective tariffs for a 90-day period ending in August.
The fate of the EU’s tariffs, however, remains uncertain. Brussels has published a list of billions of euros’ worth of U.S. imports that will be hit if the Trump administration’s 20% reciprocal tariff on the bloc snaps back into effect in July.
"The euro area is a very open economy, and trade frictions will affect those companies that rely on foreign trade, with potential knock-on effects for households if trade-related corporate vulnerabilities are exposed and result in lay-offs," the ECB said.