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The multifaceted euro area crisis has since late 2009 exposed serious shortcomings in the common currency’s institutional architecture, the fiscal sustainability of some Member States and structural economic performance and competitiveness of these and others. At the same time, the crisis have since 2010 summoned an unprecedented political will among Member State governments, the European Central Bank and other European institutions to – through new common institutions, concerted fiscal consolidation and deep structural reforms – overcome the worst economic crisis since the Community’s foundation.
The combined effects of euro area crisis stabilization measures has since mid-2012 ushered in a period of relative financial market calm and gradually stabilizing macroeconomic performance. Sovereign bond spreads have narrowed and Target2 imbalances declined since the introduction of the ECB’s Outright Monetary Transactions (OMT) program, while the coordinated fiscal consolidation among the euro members has reduced their aggregate general government deficit to an estimated 2.9% in 2013. Pre-crisis external deficits in particularly Greece, Italy, Portugal and Spain has similarly via a combination of import-contracting recessions and gradually improving export competitiveness been largely eliminated, pushing the euro area as a whole to a recent record 2.1% current account surplus in the 12 months ending in Q2 2013.
All told, European policymakers’ have successfully managed to move the euro area crisis away from its earlier “acute phase”, which saw the very survival of the common currency habitually questioned. Instead, today the main risk facing the euro area is “chronic stagnation” similar to the experiences of Japan after its big crisis in the early 1990s. In Japan, adverse demographic developments, a lack of expeditious government action to recapitalize the banking system and liberalizing structural economic reforms saw the economy languish for two decades. It is to this challenge – a more serious version of a similar pre-crisis policy challenge – of averting regional stagnation that euro area policymakers must now turn.
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