The ensuing deflationary pressure has further exacerbated the balance sheet contraction through the Fisher effect on the real value of outstanding liabilities of banks.9 There is a two-way relationship between financial fragmentation and the heterogeneity in economic fundamentals across the euro area. We have observed sharp cross-country dispersion in the cumulated changes in real GDP since the start of the crisis.
In 2012 the level of real GDP was around 20% lower than in 2007 in the country most affected, while it was around 10% higher in the country least affected by the crisis. European labour markets offer a similar, well-known picture.