There are now clear signs that the euro area is about to embark on the long-awaited recovery according to the latest euro area quarterly review. Both business and consumer confidence are improving and some hard data have also begun to point upwards. The world economy is gathering momentum. Corporate balance sheet constraints have eased. At the same time, financial conditions are supportive to growth. That is not to say that risks have evaporated, but they are more balanced than a few months ago.
Balance sheet constraints in the corporate sector have been a major source of economic weakness in the downturn but the analysis presented in the report concludes that debt and balance sheets should no longer pose a substantial drag on the recovery. Recent indirect evidence - including tentative signs of a pick-up in debt and equity financing as well as lower spreads on corporate bonds - suggest that balance sheet constraints have eased in the corporate sector. While household debt has continued to expand during the downturn, its level remains sustainable for the euro area as a whole and it is unlikely to pose a serious brake on consumption in the future. Finally, occasional market concerns about the health of the euro-area banking sector have diminished in recent months. Euro-area banks are generally profitable and well capitalised. They are therefore well placed to support the recovery in economic activity.
The report analyses the impact of economic and monetary union (EMU) on trade and foreign direct investment (FDI). When it was launched, the euro was expected to boost trade flows within the euro area and to foster cross-border FDI. The evidence presented in the report shows that these expectations are being fulfilled: EMU has already contributed significantly to enhanced cross-border integration in the euro area. All existing empirical studies point to a positive impact of EMU on trade. There is no doubt that the cumulated impact is already substantial and it is likely to be even larger in the coming years. The analysis of recent FDI flows shows that the euro area has become a more attractive place for foreign investment since the launch of the euro. The euro has stimulated primarily cross-border investment within the euro area but it has probably also fostered investment from non-EMU countries into the euro area.
The next Quarterly Report is scheduled to be released in December.