Donohoe confident financial stability risk can be addressed

European leaders are aware of potential risks in the non-banking sector that need to be tracked but are confident that these can be dealt with, the Minister for Finance and head of the Eurogroup, Paschal Donohoe, has said.

Speaking in Washington following a joint meeting between the Eurogroup and the US treasury secretary, Janet Yellen, he said there was no reason for complacency but that great improvements had been made in recent years in understanding and regulating these risks.

The meeting Ms Yellen took place on Friday on the margins of the annual conference of the International Monetary Fund (IMF) in Washington.

Also on Friday, the IMF in a regional briefing on Europe said that as financial conditions tightened, “financial stability risks are resurfacing; regulators should closely monitor vulnerabilities, such as, for example, by stress-testing banks’ exposures to weakening household and firm balance sheets”.

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“Central banks should continue raising policy rates for now, including in the euro area. And a tighter monetary policy stance might be needed in 2023 unless the deterioration in economic activity materially reduces medium-term inflation prospects.”

The IMF urged that “fiscal tightening” should proceed in 2023. It also said that fiscal policy needed to continue to address the cost of living crisis but should do so “more efficiently”

“In many European countries, governments have taken measures to dampen the pass-through of higher energy prices to households and firms to limit their economic and social costs. However, such measures should be temporary and will have to become more targeted to make sure their fiscal costs remain manageable and — this is crucial — to make sure that energy prices encourage lower energy consumption.”

Asked about the sacking of UK chancellor, Kwasi Kwarteng, Mr Donohoe said it was not the place of the Eurogroup to give advice to the new UK chancellor Jeremy Hunt on taking office but would offer friendship and co-operation to the UK.

“We will continue to work closely with the new chancellor as we have with all other chancellors up to this point.”

The IMF forecast that headline inflation would run at about 6 per cent next year in advanced European economies and 12 per cent in emerging economies.

It said that, on foot of the impact of the Russian invasion of Ukraine, “the European outlook has darkened with growth set to drop and inflation to remain elevated”.

Asked at a press conference following the Eurogroup meeting on Friday about the potential for financial stability risks in the euro zone area, Mr Donohoe said these had been a theme of all the IMF meetings and of work within the EU before then.

“We have made great strides and huge improvements in how we regulate our banking sector. That has given us a degree of confidence as to where we stand from a financial stability perspective.”

“We have no reason to be ever complacent but we do have reasons to be confident in the regulatory measures in place and our ability to track what is happening within the banking sector.”

“In the non- banking sector, we are aware of issues and potential risks that we need to track there but we equally confident about the ability to both understand these issues, to mitigate them and respond back if they develop.”