Weak domestic demand and impairment of monetary policy transmission Let me start with the financial crisis, which entered a particularly acute phase following the collapse of Lehman Brothers in September 2008. The ensuing severe recession across the euro area increased unemployment and, combined with falling real estate prices, caused large losses in many national banking sectors.
The financial crisis was exacerbated by the banking-sovereign nexus, sometimes called the diabolical loop. The large overhang of public debt in some countries, in part a result of the support provided to their banking systems, resulted in a marked widening of sovereign spreads.