Europe urgently needs single capital market and banking union - Kazaks

RIGA - Europe urgently needs to take long-delayed political decisions to create a single capital market and banking union, as Europe's problem is not lack of money, but lack of a single financial market that would allow resources to be directed to the necessary areas, Bank of Latvia President Martins Kazaks told LETA.

Consumer price inflation in the euro area continued to fall, retreating to 2.2 percent in March, he explained. Commodity price inflation remained at 0.6 percent. Services price inflation fell to 3.5 percent. Kazaks said that the euro area economy remained weak. Although the labor market is strong and unemployment is low, it is gradually cooling down and wage growth is slowing, which will ease pressure on prices in the future.

Kazaks explained that inflation dynamics so far are broadly in line with the European Central Bank's (ECB) forecasts. Inflation was approaching the 2 percent target, which last week allowed the ECB Governing Council to cut the deposit rate by 0.25 percentage points to 2.25 percent for the seventh time in a row.

Kazaks explained that the rate cut supports borrowers by supporting consumption and investment.

"Unfortunately, uncertainty in the global economy has increased and the main reason for this is the tariff wars. This is hampering trade, consumption and investment, holding back economic growth around the world," Kazaks said, noting that current forecasts for the euro area this year still promise around 1 percent growth, but this is slow and the risks are definitely to the downside. A recession is not currently a base case scenario, but with the potential for such large changes in geopolitics and global trade, its probability is high, he pointed out.

The impact on the economy comes with a delay, while financial markets react instantaneously, Kazaks stressed. The epicenter of the volatility is the US, where financial markets have experienced a roller-coaster ride in recent weeks.

"So far, markets have been relatively robust, but there are lasting negative consequences with such sharp price movements, especially if they are prolonged. Financial markets are very complex, different financial instruments are highly correlated and these correlations are difficult to identify, so the risks of a financial crisis are now a key source of potential concern to keep a close eye on," Kazaks explained.

It is also important to invest in Europe's security by strengthening our military industry and supporting Ukraine. The sooner this is done, the sooner confidence in security will improve and the sooner the fiscal support effect on the economy will kick in, Kazaks said.

"It is important to immediately create a single market for services across Europe, including the long-delayed political decisions to create an efficient and functioning European capital markets and banking union," said Kazaks, pointing out that Europe's problem is not a lack of money, but the lack of a single financial market that would allow these resources to be channeled into the areas the economy needs.

Such decisive action, he explained, would strengthen the resilience of the European economy, boost its growth and reduce the vulnerability to negative shocks.