“The risks to the German financial system are no lower in 2012 than they were in 2011,” the Bundesbank said in its annual report on financial stability in the largest European Union country.

The report came a day before highly anticipated official data on growth in the 17 European Union countries that use the euro, which could confirm that the region is in recession. The report also provided another example of how the Bundesbank and Europe’s central bank diverged in their views of the state of the crisis and how best to fight it.

Even as countries like Spain suffer a severe credit squeeze, money has poured into Germany because it is perceived as a haven from European turmoil. That has pushed down borrowing costs for German businesses and consumers, producing some worrying consequences, including a sharp rise in real estate prices in urban areas, the Bundesbank warned.

Andreas Dombret, a member of the Bundesbank’s executive board, said it was too early to speculate about a real estate bubble. But at a news conference, he added: “The experiences of other countries show that precisely such an environment of low interest rates and high liquidity can encourage exaggerations on the real estate markets.”

Real estate bubbles were a primary cause of the financial crises in Spain and Ireland.

The downbeat Bundesbank report came a week after Mario Draghi, the European central bank’s president, argued that there were signs, albeit tentative ones, that tensions in the zone had eased.

Countries have begun to bring their debts under control while their labor costs have fallen, making them more able to compete on world markets, Mr. Draghi said.

These and other improvements will lead to what he described at a news conference last week as a “slow, gradual but also solid” recovery.

The Bundesbank acknowledged those improvements but warned that there could be a hangover from the measures the central bank has taken to combat the crisis, which include a record-low benchmark interest rate of 0.75 percent.

“The side effects of short-term stabilization measures could leave a difficult legacy for financial stability in the medium to long term,” the bank said.

On Thursday, the European statistics agency is scheduled to release official figures on third-quarter gross domestic product for the zone. The data is likely to show that the region suffered a fourth consecutive quarter of little or no growth.

Figures released Wednesday reinforced expectations that output might have declined again. Industrial production in the 17 countries using the euro fell 2.5 percent in September from August, according to Eurostat, the European statistics office. That was worse than expected and the weakest monthly performance since January 2009.

German factories, which until recently had managed to avoid the worst of the crisis, were largely responsible for the decline.

In addition, Greece sank deeper into depression in the third quarter, as output fell 7.2 percent compared with figures in the period a year earlier. In Portugal, gross domestic product fell 3.4 percent from a year earlier, the seventh consecutive quarterly decline. Unemployment in Portugal rose to 15.8 percent from 15 percent in the second quarter.

The Bundesbank no longer sets monetary policy but remains a strong influence in the region. It is the largest member of the so-called Eurosystem, the network of 17 national central banks overseen by the central bank. The Bundesbank handles some important tasks for the euro zone as a whole, like administering a system used to transfer large sums of money.

The Bundesbank, with its emphasis on preserving price stability, also served as the template for Europe’s central bank. The Bundesbank has complained that the central bank has exceeded its mandate by effectively becoming lender of last resort for governments.

Some of the Bundesbank’s dismay was on view Wednesday. “The progressive blurring of boundaries between monetary and fiscal policy has increased the longer-term risks and side effects of crisis management measures,” the Bundesbank said.

Low interest rates have encouraged investors to take more risk as they try to earn better returns, the Bundesbank said. Despite a gloomy economic outlook, corporations, not including banks, issued a record 201 billion euros ($255 billion) in bonds from January to October, the Bundesbank said. Investors were willing to accept an average interest rate of just 1.3 percent on the highest-rated corporate debt.

While that is good for companies, it could backfire if interest rates rise again or more companies than expected have trouble repaying their debts.

Low interest rates have also driven up real estate prices in cities, as Germans take advantage of cheap loans to buy property.

On a more positive note, the Bundesbank said that German banks stand on more solid foundations than a year ago. They have been able to raise money from more reliable sources, like deposits. In addition, German banks have increased the amount of capital they hold in reserve, and reduced the amount of money they have at risk in troubled zone countries like Greece, the Bundesbank said.

However, German banks still held almost 59 billion euros in Spanish and Italian government debt, the Bundesbank said. Their total exposure to the two countries, including other kinds of loans, was about 203 billion euros at midyear, the Bundesbank said.

“A substantial escalation of the sovereign debt crisis would, of course, have an adverse impact on the German financial system, too,” said Sabine Lautenschläger, a member of the Bundesbank’s executive board who is responsible for bank regulation.

Article source: http://www.nytimes.com/2012/11/15/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss