The ECB’s recent last call to public finance austerity and reform rigor has been relayed by its last Financial Stability Review update on November 27. Though admittedly austerity has been and still is a short-term recessive drag on the mostly stressed peripheral euro economies, it remains an important factor to be born in mind when looking at the medium term since it can help reconstitute the necessary conditions for stable and sustained economic growth. Stress indicators (see ECB’s Liquidity Risk Indicator – LRI – and Systemic Stress Composite Indicator – SSCI – in my chart below) have lately come back to pre-crisis levels signalling an “alleviation of financial market tensions”.
Major challenges to financial stability still remain and the ECB lists: (i) economic and financial shocks that affect asset valuations and bank profitability, eroding confidence in the euro area financial sector, (ii) renewed tensions in sovereign debt markets as a result of delayed national reforms, unforeseen bank recapitalisation needs or a rise in global bond yields, (iii) global financial market turbulence, with asset mispricing and low market liquidity, (iv) bank funding challenges in stressed countries that force banks to deleverage excessively.
Corrective (and painful) actions still get delayed by myopic political non-sense when it comes to address the fundamental trade-off between a full speed recovery out of recession and austerity programs of public spending rigor. Ultimately, households and businesses want a decent, though perhaps unpopular, solution to everyday’s little hassle. Who cares?