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For nearly four years now, the state of the euro area has been defined by the sovereign debt crisis. And indeed, one might get the impression that this is a crisis without end. However, I have good news for you. The end of the crisis is slowly getting closer and closer. Most importantly, the euro area as a whole has finally left recession. By now, we have seen three consecutive quarters of positive growth, and looking ahead, the outlook for this year and next year is also quite encouraging. Projections by the ECB suggest that euro-area GDP will grow by just over 1 per cent in 2014 and by 1½ per cent in 2015.
And this recovery is not only driven by the "core euro-area" countries such as Germany. Some of the crisis-hit countries have also finally embarked on the path to recovery. And those which have not can at least see the light at the end of the tunnel.
It seems that the efforts to implement structural reforms are gradually bearing fruit. Competitiveness has improved in most peripheral countries over the past few years. Almost everywhere, unit labour costs have fallen substantially. Improving competitiveness in turn drives exports higher. All peripheral countries – except Cyprus – are projected to see some export growth this year. These achievements are reflected in current accounts increasingly reverting to positive balances.
Even after taking into account the issue of deflation, we can still see the end of the crisis coming closer. However, we have not reached it yet. There may still be some obstacles that could block the way – some of them we can already see, others we cannot see.
A known obstacle, for example, that could yet block our way is the prolonged period of very low interest rates. Still I maintain that the current status of monetary policy is certainly adequate. Nevertheless, when interest rates stay very low for a very long time, we may experience unwanted side-effects. One of these side-effects is the search for yield. Investors may eventually increase the risk of their investments to make up for the shortfall in yields caused by low interest rates. And, indeed, it seems that investors already began their search for yield. In corporate debt markets, for instance, valuations are already somewhat stretched. And in the global low-interest rate environment, ambitious valuations may well spread to other market segments.
In this regard, the strong recovery in the property markets of some euro-area countries should set us thinking. I think we all remember vividly what happened after the bubble in the American housing market burst in 2007.
A prolonged period of low interest rates could also set the wrong incentives. It could encourage banks to postpone necessary balance sheet adjustments. And it might induce governments to postpone necessary structural reforms and the consolidation of public finances.
In my view, this could be the biggest threat to the recovery process. The improved outlook together with low interest rates could lead to complacency and reform fatigue. We cannot let this happen. We cannot let it happen because there is still a lot to do to put the euro area back on a solid footing and to truly bring an end to this crisis. Reform at the national level must continue and, looking to the future, reform at the European level is equally important.