Share markets around the world have risen appreciably from their troughs in early 2003, and in many markets price earnings ratios are well above medium-term averages. A similar return of confidence has occurred in debt markets, where spreads have narrowed to historic lows. Borrowers in emerging market economies can obtain finance on very advantageous terms as investors chase yields.
And, going forward, this diagnosis also makes it clear why the euro area faces extra challenges. We have to find the right balance in what Markus Brunnermeier recently described as the “stimulus versus reform debate” at the European Economic Association conference in Mannheim. 7 As I said on the same occasion, in a similar spirit, we need to bring together two different macroeconomic traditions.