E.C.B. Sees a Healing Euro Zone but Warns of Risks

FRANKFURT — Tensions in the euro zone have eased noticeably since the summer, the European Central Bank said Friday, but it warned that the situation remained fragile in part because commercial banks were still in a weakened state.

“There is a risk in spite of the recent improvements,” Vitor Constâncio, the vice president of the E.C.B., said at a press briefing Friday.

In its annual report on financial stability, the E.C.B. noted a number of indications that the euro zone is starting to heal. For example, borrowing costs for troubled countries have dropped substantially, and banks in Portugal and Ireland have regained access to money markets.

Countries including Spain and Italy have been able to increase their exports because labor costs have fallen, improving their competitiveness, the E.C.B. said. While that is positive, it came about partly because of high unemployment and falling wages.

“This adjustment has had a heavy cost,” Mr. Constâncio said. “But at least we can say the adjustment occurred.”

Unemployment will start to fall by 2014 as the stressed countries begin to grow again, Mr. Constâncio said.

The E.C.B. attributed the ebbing of fear in the euro zone to a combination of central bank policy, improved competitiveness at some countries and progress by political leaders toward creating a more durable euro zone. Mr. Constâncio said it was impossible to separate out how much each of those factors contributed.

The E.C.B. gave itself credit for some of the improvement, including its promise to buy government bonds as needed to contain countries’ borrowing costs. It also lauded the decision by euro zone leaders this week to give the E.C.B. overall authority for regulating banks.

Mr. Constâncio emphasized that, even though the E.C.B. has direct control only over about 150 of the biggest banks as part of the so-called banking union, it sees itself as overseer for the whole banking system, with the power to assume oversight of any bank it chooses. Mr. Constâncio said that political leaders understood this.

The E.C.B. “has legal competence over all the banks,” he said. “This is a very important idea.”

Banks, and falling bank profits, were the major weaknesses identified by the E.C.B. in the report. European bank shares are currently valued at much less than the value of their assets, the report said.

“It really is a very negative judgment by the stock market,” Mr. Constâncio said.

Article source: http://www.nytimes.com/2012/12/15/business/global/15iht-ecb15.html?partner=rss&emc=rss