The European Central Bank issues a warning about the potential impact of trade tensions on the financial stability of the euro zone.

• The Financial Stability Review, published on Wednesday, revealed that the euro area economy faces a risk due to the increasing global trade tensions.
• The report expressed concerns about the potential negative effects of increased protectionism on global growth, inflation, and asset prices.
• In the euro zone, the European Central Bank stated that weak growth poses a greater risk than high inflation.

The Financial Stability Review, published on Wednesday, revealed that the euro area economy faces a risk due to the increasing global trade tensions.

In the euro zone, the European Central Bank stated that weak growth poses a greater risk than high inflation.

In the third quarter, the euro zone recorded its highest economic growth in two years at 0.4%, while headline inflation reached 2% in October.

Since the release of its May report, the ECB stated that financial markets have experienced a "resurgence of volatility," with further fluctuations being "more likely than usual" due to stretched valuations and risk concentration.

The Financial Stability Review stated that global growth, inflation, and asset prices may be negatively affected by increasing global trade tensions and the potential strengthening of protectionist tendencies worldwide.

The ECB does not mention Donald Trump's victory in the US presidential election, but countries worldwide are preparing for his plan to impose 10% tariffs on all imports to the US, with higher rates for some countries, such as China. Economists predict that implementing these measures could negatively affect the euro if a slowdown in exports leads the ECB to cut interest rates more aggressively.

According to CNBC, ECB Vice President Luis de Guindos stated that the Trump presidency will add more uncertainty to the European outlook.

While the evolution of inflation has been positive, the growth outlook is not very good, according to De Guindos, who spoke to CNBC's Annette Weisbach on Wednesday. According to European Commission forecasts, euro area growth will be below 1% in 2024 and a little above 1% in 2025, he said.

"The consumption rate is not rising among consumers, resulting in a delicate activity situation."

"Additionally, there are numerous uncertainties, including geopolitical risks, the state of Ukraine, the Middle East, and the potential policies of the new U.S. administration, which add to the uncertainty about the future of the European economy."

The report highlights rising sovereign debt service costs and weak fiscal fundamentals of several euro zone member countries, along with high borrowing costs and weak growth affecting corporate balance sheets, credit risks for small- and medium-sized companies and lower-income households if growth slows more than expected.

The report suggests that in a climate of heightened macroeconomic and geopolitical instability, there may be a sudden and sharp shift in risk sentiment, due to the high valuations of assets and the concentrated risk exposures within the financial system.