Flexibility of the labor markets in terms of protection of workers, not jobs, then becomes a crucial factor behind the speed and sustainability of the adjustment process. In Europe’s bank-based financial systems, the strength of the banking sector has major implications for real sector dynamics.
Emerging markets now have to rely once again on domestic demand, always a difficult task because of the temptation to overstimulate. That task has become more difficult because of the abundance of liquidity sloshing around the world as a result of ultra-accommodative monetary policies in industrial countries.