By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member José Luis Escrivá said on Tuesday that the recent increase in sovereign risk premia and long-term government bond yields was a healthy development that could encourage governments to address fiscal imbalances, provided market adjustments remained orderly.

Speaking at Banco Santander's International Banking Conference in Madrid, Escrivá, who heads the Banco de España, said financial markets were beginning to price risks more appropriately after several years characterized by low volatility, elevated valuations and compressed risk premia.

"We have seen an increase in sovereign risk recently, both in terms of premia and in terms of higher interest rates in the long term of the curve," he said.

"I think this is basically, again, healthy because when you examine, and also within Europe, you realize that there are developments on the fiscal side that require correction sooner or later."

Market discipline could help encourage governments to undertake necessary fiscal adjustments, he said, recalling how increases in Belgian and Austrian sovereign risk premia during the previous financial crisis had served as warning signals.

"This was basically a warning signal, a wake-up call," he said, adding that it had prompted governments to adjust their fiscal policies.

Such developments should not be viewed with particular concern as long as they remained orderly, he indicated.

Escrivá said markets had spent a prolonged period insufficiently pricing various risks, creating the potential for imbalances that could eventually trigger dysfunctional market developments.

Turning to artificial intelligence, Escrivá said the scale of investment associated with the technology's development was unprecedented compared with previous technological revolutions.

While he was optimistic about the potential long-term productivity gains, the sheer size of the investments inevitably entailed risks that financial markets needed to price appropriately.

Escrivá also stressed the importance of ensuring that Europe's banking system could support economic growth and investment, arguing that growth and productivity were among the continent's most pressing challenges.