Notably, the euro area is still working its way through a “balance sheet recession”, where a situation of severe debt overhang sets the conditions for a sharp downturn, which in turn creates the need for substantial deleveraging and prolongs the length of the slump.
This is the product of a pre-crisis period where, misreading the signs of declining productivity growth, firms, households and in some cases governments accumulated excessive debt on the basis of overly optimistic real income expectations.