Furthermore, we saw the emergence of a tail-risk in the euro area, which triggered selfperpetuating dynamics in the economy.1 A “bad equilibrium” of an adverse scenario was possible, triggered by self-fulfilling and reinforcing expectations.2 In this adverse scenario, the expectation of one or several countries exiting the euro would have driven public and private financing costs in these countries at such a high level that they would have had no other option than to actually exit.
It is clear that the root causes of the adverse scenario were associated with substantial losses in competitiveness, lack of fiscal sustainability and financial risks in national banking sectors. But an additional factor became prominent: redenomination risk, reflecting fears of a possible imminent euro area break-up.