The Eurozone economy remains weak and risks falling behind its global competitors unless it moves decisively towards deeper economic integration and enhanced competitiveness, says Central Bank of Cyprus Governor Christodoulos Patsalidis
These are important initiatives and the European Union must move forward if it is to play an international role
Although he acknowledged that the Cypriot economy remains remarkably resilient, he underlined that the eurozone as a whole is growing at a rate of around 1%, which he characterized as "low".
"It is obvious that the Eurozone and the European Union in general need to redefine themselves and become more competitive," said Mr. Patsalides. He added that there have been many studies, referring to the Draghi report and others, that make recommendations on how this can be achieved.
He highlighted key areas for progress, such as completing the Banking Union, creating a Capital Markets Union, strengthening the single market, as well as developing an effective venture capital ecosystem to boost innovation and start-ups.
Call for progress in the Capital Markets Union
Mr. Patsalidis stated that there is now tangible momentum to promote the Capital Markets Union, which is considered critical for strengthening Europe's financial base.
"I see progress," he said. "I can guarantee that for the ECB it is an active issue that is constantly on our agenda. The will is there and there is planning on behalf of the European Commission."
He referred to specific proposals, such as the Single Investment Market and the so-called '28th regime'. an additional European legal framework aimed at overcoming national polynomialism in financial regulation.
"Fragmentation is a real problem in Europe," he warned. “We have 20 different legal frameworks. It is important that there are initiatives that overcome this fragmentation, with the aim of expanding capital markets in Europe."
The Governor also pointed to the gap between Europe and the United States in financial depth.
He stressed the need for stronger capital markets and a stronger banking sector. and larger banks.
"We encourage mergers, acquisitions and overall consolidation to make our banking sector more competitive," he said.
Mr. Patsalides added that the upcoming Cyprus Presidency of the EU Council in 2026 could help advance this agenda, including initiatives to deepen capital markets integration.
The Cypriot economy shows resilience amid uncertainty
Referring to Cyprus, the Governor noted that the domestic economy continues to show strong performance.
As he said, the growth rate today is about 2%. Unemployment is at historically low levels. Public finances have been running surpluses for several years now, and debt-to-GDP is very close to the Maastricht criteria. He added that inflation "has come down to almost zero."
Mr Patsalides attributed this resilience to the diversification of the economy, with new sectors such as technology and professional services gaining an increasing share of GDP, as well as a strong banking system with very high capital and liquidity ratios, among the highest in the Eurozone.
However, he warned that the Cypriot economy remains vulnerable to external shocks due to its open nature.
"There is uncertainty, mainly due to geopolitical factors, trade tensions and developments in the financial sector," he said. "The economy must remain focused and alert," he noted.
Market risks and high valuations
For international markets, Mr. Patsalides acknowledged concerns about high levels of asset valuations, particularly in the US.
"Valuations are pretty high," he said. “To some extent this is justified by the evolution of technology and recent developments in artificial intelligence. But historically, they are at high levels."
He warned that there is a risk that at some point there will be a correction in the markets and added that the question is whether this correction will be small or large.
The CBC Governor also warned that high levels of public debt in developed economies are a long-term risk.
"EU public debt is 88% of GDP, when it should be below 60%," he said. He added that in the US it is also very high and there are risks on both sides of the Atlantic.
The digital euro is moving into the implementation phase
Mr. Patsalides confirmed that significant progress is being made in the development of the digital euro, which he described as an important project.
He noted that last Wednesday, the Governing Council of the ECB approved the transition to the second phase of preparations, which concerns the operational part of the creation of the digital euro, systems, piloting and planning.
He said the legislative framework could be completed by the end of the Danish EU Presidency, with some elements continuing during the Cyprus Presidency.
He added that they expect that during the Cyprus Presidency we will enter into informal negotiations between the European Parliament, the Council and the Commission.
He described the digital euro as a "safe asset, a central bank currency in digital form", which could form the basis for the creation of other regulated digital instruments such as bonds.
"The market is moving very fast," he stressed, stressing that cryptocurrencies need to be properly regulated and supervised.
He added that the creation of the digital euro will form the basis for other secure currencies and eventually for other types of secure digital assets.
