From climate change to cyber attacks: Incipient financial-stability risks for the euro area

The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. On the w

Publishing date: 06 February 2020
Authors: Zsolt Darvas Guntram B. Wolff Marta Domínguez-Jiménez

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This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 6 February 2020 between ECON and the President of the European Central Bank. The original paper is available on the European Parliament’s webpage (here).

Copyright remains with the European Parliament at all times.

• First, the assessment of risks in the housing market should be more nuanced. Current housing markets relative to those pre-crisis seem to be far less driven by mortgage credit, and the size of the construction sector has not increased. This is possibly good news for financial stability because a house price correction would transmit less into mortgage defaults and corrections to economic activity.

• Second, there should be greater emphasis on changes in market expectations of interest rates, which can have substantial effects on asset prices. This could be particularly relevant if interest rate changes are not driven by real-economy developments.

• Third, the financial system relies on a safe asset as a reference. We show that the supply of safe sovereign assets in the euro area has fallen dramatically, driven by deteriorating sovereign credit ratings and reduced supplies of bonds from the safest countries. More safe assets would support financial stability.

• Fourth, though climate risks to financial stability must be taken seriously, risk weights on green assets should not be reduced since they still contain normal financial stability risks. Instead, risk weights for brown assets should be increased.

• Fifth, the ECB does not consider cybersecurity and hybrid threats in its assessment. These threats are significant risks for financial institutions and at the more systemic level.

• Policies to address financial-stability concerns include macroprudential measures. In this respect, we discover discrepancies between EU countries: countries with the same levels

of house-price overvaluation have adopted very different macroprudential measures. Some countries might thus have done too much, while others have done too little.

• When it comes to preventing the next recession or reducing its impact, we argue that EU policymakers need to be better prepared to use discretionary fiscal policy earlier and more forcefully, in particular because the ability of monetary authorities to react to the next cyclical downturn is very limited.

About the authors

Zsolt Darvas

Zsolt Darvas is a Senior Fellow at Bruegel and a part-time Senior Research Fellow at the Corvinus University of Budapest. He joined Bruegel in 2008 as a Visiting Fellow, and became a Research Fellow in 2009 and a Senior Fellow in 2013.

From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.
Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Public Policy and Economics at the Willy Brandt School of Public Policy. From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, Business Insider ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.
Marta Domínguez-Jiménez

Marta Domínguez Jiménez was a Research Analyst at Bruegel. Her research focuses primarily on monetary policy, financial systems and international trade and capital flows. She has published on these issues for Bruegel, in academic journals and European Parliament and Commission reports, among others.

She holds a bachelor from the University of Oxford, where she specialised in international macroeconomics and monetary economics, and a Master's from the College of Europe in Bruges. Before joining Bruegel, she was an Analyst within the Markets division of Citigroup in London, where she worked on the structuring of bespoke fixed income products and developing systematic quantitative investment strategies.

Marta is fluent in Spanish and English, and proficient in German and French