The European Central Bank (ECB) warned on Thursday that geopolitical tensions and policy uncertainty pose risks to the euro zone's financial stability in a year of many elections around the world.
In its semi-annual financial stability assessment, the ECB said the situation had improved since its last assessment.
“The short-term risk of a deep recession with rising unemployment, which was a big concern six months ago, is much lower from today's perspective,” ECB Vice-President Luis Deguindos said.
The Frankfurt-based agency said the economic outlook was supported by inflation at 2.4% in April, far from the 2% target.
Central banks in the 20 euro-using countries said expectations that the ECB would soon start cutting interest rates had also boosted investor confidence.
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But Mr DeGuindos warned that the outlook remained “fragile”.
“Geopolitical tensions are a significant source of risk not only to the financial stability of the euro area, but also to global financial stability,” he said.
The ECB said rising tensions could affect energy supplies, accelerate inflation and undermine economic confidence.
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He added: “As countries with more than half the world's population send their citizens to the polls in 2024, global economic policy uncertainty remains high.”
Tough fiscal conditions continue to weigh on the euro area's more vulnerable households, businesses and governments, the report said.
The report also noted that the real estate market, especially the commercial sector, continues to be sluggish.
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