Most Eurozone countries hit by the crisis find it hard to recover. Many economic indicators signal that there still are profound problems, if not a crisis. Government debt continues to rise while businesses reduce their credit exposure and struggle to grow and invest. Recession and deflation fears grow. The ECB continues to flood financial markets with low-cost liquidity, but investors do not celebrate it much. After a time of rosy optimism about the monetary union’s future economic development, consumer and business sentiment recently turned bleak – reflecting the dim prospects of the economy.
Is Europe about to repeat the same mistakes as Japan in the 1990s, turning this decade into a lost one. Japan’s economy experienced an economic “boom and bust” cycle that shows remarkable similarities to the Eurozone crisis: exuberance in financial markets, a deep recession, significant monetary easing, recapitalisation of the financial sector, a long period of interest rates close to zero, unconventional monetary policy measures, record high public debt levels, and ambivalent effects on business sentiment and investment.
Matthias Bauer is Senior Economist at ECIPE