Central Bank of Cyprus (CBC) governor Christodoulos Patsalides on Tuesday warned that the Eurozone economy remains weak and risks falling behind its global competitors unless it moves decisively towards deeper economic integration and enhanced competitiveness.

Speaking at the 21st Annual Economist Conference, Patsalides acknowledged that the Cypriot economy remains remarkably resilient.

However, he underlined that the Eurozone as a whole is growing at a rate of around one per cent, which he described as “low”.

“It is obvious that the Eurozone and the European Union in general must redefine themselves and become more competitive,” Patsalides said.

He added that numerous studies, including the Draghi report and others, have put forward proposals on how to achieve this.

He pointed to key areas where progress is needed, including the completion of the Banking Union, the establishment of a Capital Markets Union, the strengthening of the single market, and the development of an effective venture capital ecosystem to boost innovation and start-ups.

“These are important initiatives,” he said, stressing that the European Union must proceed if it wants to play an international role.

Patsalides pointed out that there is now a tangible momentum to advance the Capital Markets Union, which he views as 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 exists and there is also planning on the part of the European Commission.”

He referenced specific proposals, such as the Single Market for Investments and the so-called ‘28th regime’, an additional European legal framework designed to overcome national fragmentation in financial regulation.

“Fragmentation is a real problem in Europe,” he warned. “We have 20 different legal frameworks. It is important to have initiatives that overcome this fragmentation, aiming at the enlargement of capital markets in Europe.”

The governor also highlighted the gap in financial depth between Europe and the United States.

He stressed the need for stronger capital markets and a more powerful banking sector, along with larger banks.

“We encourage mergers, acquisitions and consolidation in general so that our banking sector becomes more competitive,” he said.

Patsalides added that the upcoming Cypriot Presidency of the EU Council in 2026 could help promote this agenda, including initiatives to deepen capital markets integration.

Turning to the domestic front, the governor mentioned that the Cypriot economy remains strong.

He stated that the current growth rate is around two per cent, unemployment is at historically low levels, public finances have recorded surpluses for several years now, and debt-to-GDP is very close to the Maastricht criteria.

He added that inflation “has decreased almost to zero.”

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, alongside a strong banking system boasting very high capital and liquidity ratios, among the highest in the Eurozone.

However, he cautioned 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 vigilant.”

Regarding international markets, Patsalides acknowledged concerns about the high levels of asset valuations, particularly in the US.

“Valuations are quite 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 of a market correction at some point, adding that the question is whether this correction will be “small or large”.

The CBC chief also warned that the high levels of public debt in developed economies constitute a long-term risk.

“EU public debt amounts to 88 per cent of GDP, while it should be below 60 per cent,” he said.

He added that in the US it is also very high and there are risks on both sides of the Atlantic.

What is more, Patsalides confirmed that significant progress is being made in the development of the digital euro, which he described as an important project.

He said that the ECB Governing Council approved the transition to the second phase of preparations last Wednesday, which concerns the operational aspects of the digital euro’s creation, systems, pilot application, and design.

He stated that the legislative framework may be completed by the end of the Danish EU Presidency, with some elements continuing during the Cypriot Presidency.

Patsalides explained that they expect that during the Cypriot Presidency they will enter the 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,” that could serve as the basis for creating other regulated digital tools, such as bonds.

“The market is moving very fast,” he stressed, underlining that crypto assets must be properly regulated and supervised.

Finally, the CBC governor said that “the creation of the digital euro will form the basis for other safe currencies and ultimately for other kinds of safe digital assets”.