And it is the combination of the uncertainty derived from the war (and more in general from geopolitical tensions) with the increase of inflation and the rising interest rates that has generated, ultimately, a general deterioration of the economic outlook with, for example, one-year ahead recession probabilities having increased markedly, in both the euro area and other major advanced economies. This challenging financial stability outlook is well laid out in the Warning on vulnerabilities in the EU financial system that the European Systemic Risk Board issued last September. Indeed, the ESRB has alerted of the heightened uncertainty and the increased probability of tail-risk scenarios materialising. In particular, the ESRB has warned of three severe systemic risks :  1/3  BIS - Central bankers' speeches  (i) first, the deterioration in the macroeconomic outlook combined with the tightening of financing conditions, leading to negative consequences in terms of balance sheet stress for non-financial corporations and households, especially in sectors and Member States that are most affected by rapidly increasing energy prices. (ii) second, a possible sharp fall in asset prices, leading to large mark-to-market losses, amplified market volatility and liquidity strains. In addition, the increase in the level and volatility of energy and commodity prices has generated large margin calls for participants in these markets and this has created liquidity strains for some participants. (iii) and third, the potential deterioration of asset quality and the profitability outlook of credit institutions.
National differences will not entirely disappear While monetary policy is determined by developments in the euro area as a whole, there will inevitably be some differences in the performances of individual countries and also regions within the euro area. Since the start of the year, the focus of attention in the media has rightly switched more towards looking at the euro area as a whole, but this also provides a natural benchmark against which to compare national developments. That is why some attention has been directed towards the differences that exist in some areas between euro area countries, particularly differences in economic growth and inflation rate differentials. The latter is true for the Netherlands, which currently has an inflation rate which is about 1 percentage point higher than that of the euro area. 1  BIS Review 123/1999  There are a number of reasons why such differences will occur. These may broadly be considered under two headings. First, there are a number of reasons why, over relatively short periods of time, there may be clear differences in economic performances. Second, national rates of output growth and inflation may also differ within a single currency area over longer periods of time as a result of more structural factors. Short-term divergences among euro area countries Considering the short-term factors, with regard to price developments, there are various “country-specific” factors of a very temporary nature. Among these, government policies are perhaps the most obvious.