This is well sluggish economic growth or at least the threat of disappointing economic growth which constitutes the main cause for the financial markets’ sharp decline since the start of 2016. According to ECB President Mario Draghi, the priority still consists of generating a near 2% annual inflation for the euro area. As inflation expectations fall, it pushes up real interest rates which therefore have a negative effect on demand and investment, Draghi explained.
For her Fed counterpart Janet Yellen, this is the uncertainty in China and emerging markets which increases financial markets’ volatility and poses risks to US economic growth whereas IMF chief Christine Lagarde considered that the slowdown of emerging markets’ economy withdraws a destination for advanced economies’ investments and customers for their products as well.
In order to address these hazards, Jens Weidmann and François Villeroy de Galhau, respectively Germany’s and France’s central bankers, reminded that “the US stock market is capable of mitigating around 40% of a specific State risk” thanks to equity finance of which the volume is twice Europe’s. Once again, this is investment in the real economy – businesses – which is the best protection against market risks and the most optimal source of long-term economic growth.