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Lessons learnt from seven years of stagnation in the Eurozone

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CPB Policy Brief 2015/09, 5 June 2015

Three lessons may be drawn from seven years of financial crisis.

Read the accompanying press release.

First, to prevent is better than to cure, and this applies particularly in the case of excessive debt problems. Second, the individual economies within the eurozone should be sufficiently robust to withstand shocks. This means having a flexible economic structure and public finances with a healthy foundation. Third, more attention must be paid to the balance between national and supranational policy frameworks. As a result of the financial crisis, the European frameworks for banking supervision and budgetary and monetary policies already have been modified, substantially. Whether this will prove to be sufficient to accommodate new large shocks without leading to another great recession warrants further investigation.

The eurozone economy today is as large as it was at the beginning of the financial crisis, seven years ago. This long period of low growth will likely lead to permanently lower income levels, because investments are lower and the long-term unemployed are losing their working skills. However, it seems less likely that growth will remain at this low level in the longer term. After all, over the long term, factors such as demographics and technological development will dominate. Balance sheet problems will probably solve themselves without outside intervention, albeit at a slow pace and at high costs.

It is, however, too early to conclude that this period of very low growth has definitely passed. To reduce this downward risk in the eurozone structural reforms should be implemented where necessary. To reduce the negative impact of reforms in the short run it can be sensible to utilize the space available within the Stability and Growth Pact (SGP). Likely candidates for reform are the labour and product market reforms and measures that help to address balance sheet problems. In the current situation, this also applies to moving up public investments that would have a positive net present value, both in individual Member States and on a European level. The Juncker Plan has been set up for this purpose. It is still too early to assess the effects of the quantitative easing by the European Central Bank.

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