European finance ministers and central bankers will gather in Vienna this week to discuss a key test for the euro zone’s expanding economy — whether it can cope with interest-rate hikes.

The debate reflects the currency bloc’s relatively solid economic health after a decade of crises and recessions, but also marks a new challenge. The European Central Bank’s plan to gradually unwind years of extraordinary monetary stimulus comes with the risk of destabilizing asset markets such as stocks and real estate if they’re bloated by cheap money.

Higher interest rates could also cause problems for national governments, which have increased borrowing in the past decade. Total debt in the euro area stands at about 84 percent of gross domestic product this year, compared with 65 percent in 2007, according to the International Monetary Fund.Some countries have already sounded the alarm. The Bundesbank reckons that German homes are overvalued by as much as 35 percent in major cities. France is concerned about high levels of corporate debt. Italy’s populist government worries that the nation’s bond market could be hit by speculators when the ECB pulls back.

Source: Bloomberg

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